UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-25703
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
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $4,696,087
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
rule 12b-2 of the Exchange Act.) $7,147,788
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 19,967,544
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the form 10-KSB (e.g., Part I, Part II, etc. )
into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
None.
Transitional Small Business Disclosure Format (check one):
Yes ______ No___X___
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TABLE OF CONTENTS
PART I
Item 1 Description of Business.
Item 2 Description of Property.
Item 3 Legal Proceedings.
Item 4 Submission of Matters to a Vote of Security Holders.
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.
Item 6 Management's Discussion and Analysis.
Item 7 Financial Statements.
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Item 10 Executive Compensation.
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and Related Transactions.
Item 13 Exhibits and Reports on Form 8-K.
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INTRODUCTORY NOTE
This Annual Report on Form 10-KSB may be deemed to contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company intends that
such forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Annual Report contains forward-looking statements regarding
the financial condition, operating results, business prospects or any other
aspect of the Company, please be advised that the Company's actual financial
condition, operating results and business performance may differ materially from
that projected or estimated by the Company in forward-looking statements. The
differences may be caused by a variety of factors, including but not limited to
adverse economic conditions, intense competition, including intensification of
price competition and entry of new competitors and products, adverse federal,
state and local government regulation, inadequate capital, unexpected costs and
operating deficits, increases in general and administrative costs, lower sales
and revenues than forecast, loss of customers, customer returns of products sold
to them by the Company, disadvantageous currency exchange rates, termination of
contracts, loss of suppliers, technological obsolescence of the Company's
products, technical problems with the Company's products, price increases for
supplies and components, inability to raise prices, failure to obtain new
customers, litigation and administrative proceedings involving the Company, the
possible acquisition of new businesses that result in operating losses or that
do not perform as anticipated, resulting in unanticipated losses, the possible
fluctuation and volatility of the Company's operating results, financial
condition and stock price, losses incurred in litigating and settling cases,
dilution in the Company's ownership of its business, adverse publicity and news
coverage, inability to carry out marketing and sales plans, loss or retirement
of key executives, changes in interest rates, inflationary factors, and other
specific risks that may be alluded to in this Annual Report or in other reports
issued by the Company. In addition, the business and operations of the Company
are subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BACKGROUND OF THE COMPANY
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 was 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."
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BUSINESS OF THE COMPANY
GTC 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
GTC is currently licensed in every state (except Alaska) 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 and 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.
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(3) service 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. In addition, the Company has recently
obtained licenses in the states of New York, New Jersey and South Dakota to
operate as a Competitive Local Exchange Carrier ("CLEC"). As a result, 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.
INTERNET RELATED SERVICES
The Company provides international PC-to-phone telecommunication services
through its wholly-owned subsidiary CallingPlanet.com, as well as a variety of
Internet related services. These services, available to both consumer and
business users, include prepaid calling cards through the Company's wholly-owned
subsidiary ecallingcards.com web site; Internet Services Provider access through
dial-up(5), Digital Subscriber Line ("DSL")(6), and Wireless T-1(7) methods and
Internet Web Page development and hosting services(8). 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 equal to or less than its
competitors.
------------------------------------
(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.
(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) Modem access via traditional telephone lines.
(6) Digital Subscriber Line ("DSL") utilizes advanced technology to transmit
data over copper lines at speeds up to 1,000 times faster than Dial-Up
service.
(7) 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.
(8) Web Page Hosting services permits customers to market themselves on the
Internet without having to invest significantly in technology infrastructure
and operations staff.
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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 monthly fee of $9.95. 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 $59.95 to
$249.95 depending on speed and service options. A one-time set-up fee of $150
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
assurance 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 $94.4 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 79.2% of the aggregate revenue of all U.S. long distance
interexchange carriers in 1998. Other long distance companies, some with
national capabilities, accounted for the remainder of the market.
Based on published FCC(9) estimates toll service revenues of U.S. long distance
interexchange carriers have grown from $38.8 billion in 1984 to $94.4 billion in
1998. 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 32.1% 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 20.8% in 1998. During
the same period, the market share of AT&T declined from 90.1% to 43.1%.
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.
The Telecommunications Act of 1996 (the "Act"), 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(10) to their networks and establishing
among other things, LEC obligations with respect to
---------------------------------
(9) As published on the FCC's Website located at
www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/SOCC/98socc.pdf.
(10) Customer equipment (i.e. customer's telephone or modem) which connects to
the service provider's equipment.
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access, resale, number portability(11), dialing parity(12), access to rights-of-
way(13), 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.
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 every state
(except Alaska) and the District of Columbia.
The Company plans to market its products and services using six important, but
very distinct, strategies as follows:
Independent Affiliates
The backbone of GTC's overall market and development strategy involves the
pursuit and establishment of strategic affiliations and alliances with major
telecommunication and Internet service companies through partnerships and
co-branding. GTC has already been quite successful in establishing these
alliances with known companies, such as OnLineChoice.com, NewsMax, GetConnected
and GlobalNet2000, in the telecommunication and Internet service industries.
Internet Use
The second 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
www.gtctelecom.com and its wholly-owned subsidiary www.ecallingcards.com
websites. It also markets international calling plans through its wholly-owned
subsidiary www.CallingPlanet.com, as well as co-brand calling cards and
advertise domestic long distance rates on the Internet. Co-branding is done
through joint agreements such as Community Connect Inc.'s online community for
Asian Americans, www.AsianAvenue.com.
Regarding CallingPlanet.com, GTC will focus on marketing through local partners
and vendors in each country. CallingPlanet.com will also target customers who do
not have PC's or Internet connections by encouraging the local partners to open
Kiosks equipped with PC's and Internet hook-up. Through these marketing
partners, CallingPlanet.com's goal is to be a household name worldwide and the
planet calling area.
GTC will leverage the use of the Internet to promote product lines and enhance
business processes.
Company Sales Force
The third method of marketing utilizes the Company's own sales force and
independent sales agents. A sales force will be developed that consists of
properly trained professionals from within the industry who are looking for an
opportunity to sell at rates that are lower than the industry standard. The
Company has already engaged in discussions with many such potential
representatives to work on a commission-only basis.
------------------------------
(11) Number portability is the capability of individuals, businesses, and
organizations to retain their existing telephone number(s)
(12) 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
(13) 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.
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Many of these professionals will come from companies such as WorldCom, LCI
International, TelCo and Frontier Communications where the average calling rate
is 10-12 cents per minute. The Company Vice President of Sales comes from
WorldCom with an extensive sales and marketing background in the
telecommunications industry.
Advertising
GTC will employ an aggressive concentrated media campaign that utilizes a
professional advertising agency as its fourth method of marketing. 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 advertisements. The Company
intends to continue to utilize both broadcasting and print media campaigns in
the future given sufficient funds.
GTC has also been very successful in obtaining new customers through important
"word-of-mouth" free advertising. Many customers are extremely satisfied with
the service provided by the Company and inform relatives or friends about GTC's
excellent rates and this invaluable free advertising for the Company results in
new business.
Direct Marketing
The fifth method of marketing the Company's products and services is direct
marketing. The Company has developed brochures for all products and services
that can be used as a direct marketing tool and for product promotions. In
addition, GTC is considering direct mail marketing for new target markets.
National Recognition
The Company will continue to pursue and capitalize on national media
recognition, as it has done with Kiplinger and Consumer Reports, to boost
consumer awareness in the marketplace. GTC will capitalize on this type of
recognition through strategic press releases and other media opportunities.
The Company believes these six marketing methods will be adequate to sustain the
Company now and for the foreseeable future.
COMPETITION
Telecommunication Services
The long distance telecommunications industry is highly competitive and affected
by the introduction of new services by, and the market activities of, major
industry participants, including AT&T Corp., MCI/WorldCom, Sprint Corporation,
local exchange carriers such as Bell Atlantic, and other national and regional
interexchange carriers. 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 (those that carry long distance
traffic on their own equipment) and switchless resellers (those that resale long
distance carried by facilities-based providers) offering essentially the same
services as 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
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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 provisioning 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.
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
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 to
be a value-added service to attract customers to the Company's Telecommunication
Services as opposed to a revenue-generating service. The Company offers
unlimited dial-up service for $9.95 per month and DSL service at rates ranging
from $59.95 to $249.95 per month. 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.
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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 old customers 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 commitment of $10,000 commencing March 1999. The contract expires on
September 30, 2001.
In August 1999, the Company entered into negotiations with MCI/WorldCom in an
effort to lower its network transmission costs. As a result of these
negotiations, MCI/WorldCom agreed to amend the existing contract between the
Company and MCI/WorldCom whereby MCI/WorldCom agreed to reduce the Company's
network transmission costs by approximately 40%. Additionally, under the terms
of the amendment, the minimum monthly purchase requirement was increased to
$12,000 per month and the total minimum purchase requirement increased to
$288,000. In an effort to continue to reduce its long distance network
transmission costs, the Company successfully negotiated an additional amendment
to its contract with MCI/WorldCom in September 2000. The amendment further
reduces the Company's network transmission costs by approximately 30%. In
addition, under the terms of the amendment, the contract is extended to August
31, 2003 and the minimum monthly purchase requirement increased to $400,000 per
month for the months August 2000 to January 2001 and then increases to $520,000
per month from February 2001 to the end of the contract. The total minimum
purchase requirement of the contract increased to $18,000,000. All remaining
material terms of the contract remain the same.
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 is strong and should remain so with continued
contract compliance, the termination of the Company's contract with
MCI/WorldCom, the loss of telecommunications services provided by MCI/WorldCom,
or a reduction in the quality of service the Company receives from MCI/WorldCom
could have a material adverse effect on the Company's results of operations. In
addition, the accurate and prompt billing of the Company's customers is
dependent upon the timeliness and accuracy of call detail records provided to
the Company by MCI/WorldCom. There can be no assurance that accurate
information will be provided by MCI/WorldCom on a timely basis, the failure of
which would have a material adverse effect on the Company's results of
operations.
On April 30, 1999, the Company entered into an agreement with Williams
Communications, a unit of Williams of Tulsa, Oklahoma ("Williams"), in which
Williams was to design, install and maintain a high speed, nationwide VoIP
network for the Company. Subsequently, due to Williams inability to deliver the
VoIP network as contracted and as a result of the previously discussed
amendments to the MCI/WorldCom contract, the Company determined to discontinue
its agreement with Williams (Please refer to Item 6. Management's Discussion and
Analysis or Plan of Operation Long-Term Financing section of this document for
further information).
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
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services at rates at 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 alternate 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 plans on either purchasing its own switching
facilities or entering into additional provisioning agreements with alternative
long distance providers. However, there can no assurances that the Company will
be able to purchase such facilities or that the Company will be able to
negotiate such contracts on favorable terms.
GTC does not currently have its own Internet Network. Currently, the Company
provides its Internet Service Provider Access services pursuant to a one-year
agreement with Ziplink, Inc. for the provisioning of the Company's Internet
Service Provider Access service. Pursuant to the Agreement, the Company is
subject to a monthly minimum commitment of $500. Although the Company believes
that its relationship with Ziplink is strong and should remain so with continued
contract compliance, the termination of the Company's contract with Ziplink, the
loss of Internet services provided by Ziplink, or a reduction in the quality of
service the Company receives from Ziplink could have a material adverse effect
on the Company's results of operations. In the event that Ziplink were to
discontinue its service to the Company, the Company believes, based upon
discussions that the Company has had with other Internet service providers, that
it could negotiate and obtain contracts with Internet service providers at
comparable rates.
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
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.
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
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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.
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 provides 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 switching (also commonly known as "Slamming") of a consumer's
long distance provider without the consumer's consent and specify how that
consent can be obtained. Most states have consumer protection laws that further
define the framework within which 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 every state (except Alaska) 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.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
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 September 30, 2000, the Company employed approximately 74 people on a full
time basis.
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ITEM 2. 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 increased
to $5,869 on June 1, 2000. 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.
On September 23, 1999, the Company entered into an addendum to its existing June
1, 1998 lease. This addendum replaces the February 8, 1999 lease for its
customer service operation. Beginning October 1, 1999, the revised lease
obligates the Company to an additional lease for approximately 2,973 square feet
for its customer service operation, a monthly rental rate of $ 6,095 per month
and for the Company to pay the first three months rent. This addendum is
coterminous with the Company's June 1, 1998 lease and will automatically expire
on May 31, 2001, unless previously terminated by the Company or by Lessor given
ninety (90) days written notice. The monthly rental rate increased to $6,434 on
June 30, 2000.
Beginning January 17, 2000, the Company leased an additional 2,934 square feet
for continued expansion of its customer service operation at a monthly rental
rate of $6,295 and for the Company to pay the first three and one-half months
rent. The addendum is coterminous with the Company's June 1, 1998 lease and
will automatically expire on May 31, 2001, unless previously terminated by the
Company or by the lessor given ninety (90) days written notice. The monthly
rental rate increased to $6,347 on June 30, 2000.
With this addendum, the Company leases a total of 8,621 square feet of office
space for its headquarters and customer service operations in Costa Mesa,
California at a monthly rental rate of $18,650.
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 at reasonable rates and
terms.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended June 30, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED 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 acquired GenTel on August 31, 1998 wherein the trading symbol for the
Company's Common Stock changed to GTCC.
CALENDAR BID PRICES
YEAR PERIOD HIGH LOW
--------------------------------------------------------------------------------
1998 First Quarter n/a n/a
Second Quarter n/a n/a
Third Quarter 4.75 4.50
Fourth Quarter 4.41 3.33
1999 First Quarter 11.125 3.25
Second Quarter 8.625 3.56
Third Quarter 4.937 2.00
Fourth Quarter 3.8125 1.75
2000 First Quarter 3.75 1.71875
Second Quarter 2.09375 0.7188
Third Quarter 0.8438 0.50
On September 30, 2000, the last sales price per share of the Company's common
stock, as reported by the NASDAQ Bulletin Board, was $0.50.
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of the Common Stock of the Company as
of the close of business on September 30, 2000 was approximately 203. 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.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal year 2000, the Company completed a private offering of 2,825,000
shares of the Company's "restricted" Common Stock resulting in net proceeds to
the Company of approximately $2,536,605, net of offering costs of $288,395 to 44
"accredited" investors at a price of $1.00 per share. The offering was
conducted without general solicitation or advertising and offered only to
"accredited" investors pursuant to Rule 506 of Regulation D of the Securities
Act of 1933.
In September 1999, the Company issued 50,000 shares of "restricted" Common Stock
valued at $50,000 to Dan Baer in consideration for deferment of rent owed by the
Company from April 1999 to September 1999 for its headquarters and customer
service operations in Costa Mesa, CA. The Company was required to pay a total
of $42,360 deferred rent in nine payments beginning January 1, 2000 through
September 1, 2000 in addition to its regular rent due each month under its
lease. The issuance was an isolated transaction not involving a public offering
pursuant to section 4(2) of the Securities Act of 1933.
In September 1999, the Company issued 15,000 shares of "restricted" Common
Stock valued at $15,000 to the Cutler Law Group, the Company's securities
counsel in exchange for legal services rendered. The issuance was an
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isolated transaction not involving a public offering pursuant to section 4(2) of
the Securities Act of 1933.
In September 1999, the Company issued an aggregate of 67,675 shares to seven
consultants of the Company and the Cutler Law Group, the Company's securities
counsel, in exchange for consultation and legal services provided to the Company
valued at approximately $271,247. The transactions were isolated transactions
not involving a public offering pursuant to Section 4(2) of the Securities Act
of 1933. These shares were subsequently registered on Form S-8 filed with the
Securities and Exchange Commission on October 6, 1999.
In October 1999, the Company issued 25,000 shares of "restricted" Common Stock
valued at $25,000 to an outside consultant in exchange for investor relations
services rendered. The issuance was an isolated transaction not involving a
public offering pursuant to section 4(2) of the Securities Act of 1933.
In December 1999, the Company issued an aggregate of 282,575 shares to
consultants and attorneys in exchange for consultation and legal services
provided to the Company valued at approximately $539,666. The transactions were
isolated transactions not involving a public offering pursuant to Section 4(2)
of the Securities Act of 1933. These shares were subsequently registered on
Form S-8 filed with the Securities and Exchange Commission on January 19, 2000.
In January 2000, the Company issued 7,000 shares of the Company's common stock
valued at approximately $13,118 in exchange for consultation services. The
issuance was an isolated transaction not involving a public offering pursuant to
section 4(2) of the Securities Act of 1933. These shares were subsequently
registered on Form S-8 filed with the Securities and Exchange Commission on May
19, 2000.
In January 2000, the Company issued 200,000 shares of restricted common stock
valued at approximately $200,000 in lieu of rent owed by the Company from April
1999 through June 2000 for its headquarters and Customer Services operations in
Costa Mesa, California. The issuance was an isolated transaction not involving
a public offering pursuant to section 4(2) of the Securities Act of 1933.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued 56,637 shares of common stock valued at
approximately $199,943 for one year's services. In addition, the Company issued
options to purchase 60,000 shares of the Company's common stock as follows: 1)
20,000 shares at 100% of the closing bid price on January 28, 2000, 2) 20,000
shares at 200% of the closing bid price on January 28, 2000; and 3) 20,000
shares at 300% of the closing bid price on January 28, 2000. The options were
valued at $157,800 using the Black Scholes method and recorded as investor
relations expense in January 2000. The transactions were isolated transactions
not involving a public offering pursuant to Section 4(2) of the Securities Act
of 1933. As of September 30, 2000, no options have been exercised.
In January 2000, the Company issued 55,000 shares of restricted common
stock pursuant to the conversion of a note payable with a principal amount of
$50,000 and $5,000 of interest. This issuance was conducted under an exemption
under Section 4(2) of the Securities Act of 1933.
In May 2000, the Company issued an aggregate of 456,833 shares to consultants
and attorneys in exchange for consultation and legal services provided to the
Company valued at approximately $682,000. The transactions were isolated
transactions not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933. These shares were subsequently registered on Form S-8
filed with the Securities and Exchange Commission on May 19, 2000.
In May 2000, the Company issued 15,000 shares of "restricted" Common Stock
valued at $15,000 to the Cutler Law Group, the Company's securities counsel in
exchange for legal services rendered. The issuance was an isolated transaction
not involving a public offering pursuant to section 4(2) of the Securities Act
of 1933.
In May 2000, the Company issued 250,000 shares of restricted common stock
resulting in proceeds to the Company of $250,000 to "accredited" investors at a
price of $1.00 per share. The offering was conducted without general
solicitation or advertising and offered only to "accredited" investors pursuant
to Rule 506 of Regulation D of the Securities Act of 1933.
During fiscal year 2000, Paul Sandhu ("Mr. Sandhu"), the Company's President &
CEO, Eric Clemons ("Mr. Clemons"), the Company's Chief Operating Officer, Gerald
DeCiccio, the Company's Chief Financial Officer, and other employees of the
Company, exercised options (previously granted pursuant to their employment
contracts) to purchase a total of 375,000 shares of the Company's common stock
in lieu of salary for $72,250.
During fiscal year 2000, Mr. Sandhu and Mr. Clemons canceled 619,848 and
154,962, respectively, shares of the Company's common stock held by each of
them. It was determined that these shares were not cancelled in a timely
matter. As a result, these cancellations are reflected as a reduction in the
outstanding shares as of July 1, 1998.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains certain forward-looking statements that are
subject to business and economic risks and uncertainties, and 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 telephone
and value-added services for small and medium-sized businesses and residential
customers throughout the United States. The Company's strategy has been to
build a subscriber base without committing capital or management resources to
construct its own network and transmission facilities. This strategy has
allowed the Company to add customers without being limited by capacity,
geographic coverage, or configuration of any particular network that the Company
might have developed.
Recently, the Company began providing a number of Internet related services such
as: the sale of electronic calling cards on its ecallingcards.com web site;
Internet access via Dial-Up, Wireless T-1, and DSL; and Internet Web Page
Hosting services. However, the Company's Internet related services are intended
to be a value-added service to attract customers to the Company's
Telecommunication services as opposed to a revenue generating service.
The Company's services are marketed nationwide through broadcasting and print
media, telemarketing, independent sales agents and its own sales force.
The Company's revenues consist of 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 consists of telecommunications service costs and the costs of
providing internet access. Telecommunications service costs paid by the Company
are based on the Company's customers' long distance usage. The Company pays its
carriers based on the type of call, time of call, duration of call, the
terminating telephone number, and terms of the Company's contract in effect at
the time of the call. General and administrative expenses consist of the cost
of customer acquisition (including costs paid for third-party verification),
customer service, billing, cost of information systems and personnel required to
support the Company's operations and growth.
The Company, depending on the extent of its future growth, may experience
significant strain on its management, personnel, and information systems. The
Company will need to implement and improve operational, financial, and
management information systems. In addition, the Company is implementing new
information systems that will provide better record-keeping, customer service
and billing. However, there can be no assurance that the Company's management
resources or information systems will be sufficient to manage any future growth
in the Company's business, and the failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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RESULTS OF OPERATIONS OF THE COMPANY
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
REVENUES - Revenues increased by $4,407,075 from $289,012 for the year ended
June 30, 1999 to $4,696,087 for the year ended June 30, 2000. The increase was
due primarily to the increase in telecommunications revenues of $4,365,910 and
internet revenues of $41,165. During the year ended June 30, 1999, the Company
began selling its services pursuant to its business plan which resulted in
revenues comprised primarily of $183,116 for web development and hosting and
$105,896 from telecommunication services. As of June 30, 2000, the Company had
approximately 65,555 telecommunication customers, with usage of long distance
services of approximately 74,033,000 minutes for the year ended June 30, 2000 as
compared with approximately 2,023 telecommunication customers, with usage of
long distance services of approximately 1,709,000 minutes for the year ended
June 30, 1999.
COST OF SALES - Cost of sales increased by $3,932,674 from $99,913 for the year
ended June 30, 1999 to $4,032,587 for the year ended June 30, 2000. The
increase was primarily due to the increase in carrier costs associated with the
cost of long distance service of $3,655,785 for the year ended June 30, 2000.
In addition, the Company incurred $276,889 of costs associated with its Internet
services for the year ended June 30, 2000. As a percentage of revenue, cost of
sales was 85.9% and 34.6% resulting in a gross margin of 14.1% and 65.4% for the
years ended June 30, 2000 and 1999, respectively. In an effort to reduce the
monthly minimum usage fees of internet service provider access, the Company
entered into a one year agreement with a company which directly ties these fees
to the internet subscriber base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("S,G&A") expenses increased by $4,143,320 or 116.6% from
$3,553,512 for the year ended June 30, 1999 to $7,696,832 for the year ended
June 30, 2000. For the year ended June 30, 2000, the Company began to realize
sales from its telecommunications customers, thereby resulting in significantly
increased S,G&A expenses primarily from its customer service operations and
internet support costs. S,G&A expenses for the year ended June 30, 2000 were
comprised primarily of shares valued at approximately $250,000 issued to a
vendor for deferment of rent; options valued at approximately $121,790 issued to
employees and directors of the Company; stock and options valued at $1,918,774
issued in exchange for services; approximately $2,388,276 in salaries and
related taxes paid to employees; advertising expenses of $1,004,103; Internet
support costs of $667,913; bad debts of $475,241; the costs of third party
verification for newly acquired customers of $260,247; depreciation and
amortization expense of $173,946; and $436,542 of other operating expenses,
primarily investor relations, legal, consulting, audit services, and LEC fees.
S,G&A expenses for the year ended June 30, 1999 were comprised primarily of
options valued at approximately $352,630 granted to a director of the Company;
advertising expenses of $271,916; options valued at $596,000 issued to an
investor relations company ($522,500) and a marketing company ($73,498) in
exchange for services; shares valued at approximately $238,600 issued to vendors
in exchange for services and rent; provision for bad debts of approximately
$268,200; stock and options valued at approximately $39,875 issued to supplement
compensation to certain key employees; approximately $705,000 in salaries paid
to employees; and $1,081,291 of other operating expenses, primarily rent, legal
and audit services, investor relations, and the costs of third party
verification for newly acquired customers. Net loss was $7,180,991 and
$3,361,676 for the years ended June 30, 2000 and 1999, respectively.
ASSETS AND LIABILITIES - Assets increased by $852,584 from $660,069 as of June
30, 1999 to $1,512,653 as of June 30, 2000. The increase was due primarily to
increases in accounts receivables of $615,662, cash of $230,836, deposits of
$143,490 and decreases in other assets of $137,404, associated with the increase
in customer usage. Liabilities increased by $2,829,156 from $1,087,063 as of
June 30, 1999 to $3,916,219 as of June 30, 2000. The increase was due primarily
to increases in accounts payable and accrued expenses of $1,924,157, payroll and
payroll related liabilities of $706,705, notes payable of $113,939, and
increases in other liabilities of $148,987, offset primarily by the decrease in
capitalized lease obligations of $14,632 and the conversion of a note payable
into common stock of $50,000, associated with the increase in telecommunications
service costs, internet service provider access fees and customer service
operations as a result of the increase in customers.
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $(1,976,572) from
$(426,994) as of June 30, 1999 to ($2,403,566) as of June 30, 2000. The
increase was attributable to the current year net loss of $7,180,991, offset
primarily by the fair market value of stock issued for services of $2,010,974;
the fair market value of options granted to consultants for services rendered of
$157,800; the fair market value of options granted to directors and employees
for compensation of $121,790; the exercise of stock options of $72,250; the
conversion of a note payable of $50,000, amounts raised in the Company's recent
private offerings of its common stock of $2,536,605, net of offering costs of
$288,395; sale of common stock for $250,000 and interest accrued on debt
converted of $5,000.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL - Overall, the Company had positive cash flows of $230,836 in fiscal
year 2000 resulting from $2,845,726 of cash provided by the Company's financing
activities, offset by $2,585,704 of cash used in operating activities and
$29,186 of cash used in investing activities.
CASH FLOWS FROM OPERATIONS - Net cash used in operating activities of $2,585,704
in fiscal year 2000 was primarily due to a net loss of $7,180,991, increases in
accounts receivable of $629,112 and an increase in deposits of $143,490; offset
partially by the increases in operating liabilities, principally accounts
payable and accrued expenses of $2,014,343, payroll and related taxes of
$778,955, and deferred income of $98,987; the fair market value of stock issued
for services of $2,010,974; the fair market value of options and warrants
granted to consultants for services rendered of $157,800; the fair market value
of options granted to directors and employees for compensation of $121,790,
depreciation and amortization expense of $173,946; and other items totaling
$11,094.
CASH FLOWS FROM INVESTING - Net cash used in investing activities of $29,186 in
fiscal year 2000 funded purchases of property and equipment of $156,686 and
issuance of a note receivable of $22,500 offset partially by the decrease in
long-term deposits of $150,000.
CASH FLOWS FROM FINANCING - Net cash provided by financing activities of
$2,845,726 in fiscal year 2000 was primarily due to the proceeds from sales of
the Company's common stock of $2,786,605, net of offering costs of $288,395; net
borrowings of short term debt of $73,753; offset primarily by repayments on
capitalized lease obligations of $14,632.
SHORT-TERM FINANCING - On September 23, 2000, the Company entered into a
promissory note with an unaffiliated accredited shareholder resulting in net
proceeds to the Company in the amount of $200,000. Pursuant to the terms of the
promissory note, the balance and simple interest in the amount of 12% are due
and payable to the noteholder on March 25, 2001 and the note is secured by the
Company's receivables. In addition, the Company agreed to issue to the
noteholder warrants to purchase up to 40,000 shares of the Company's restricted
Common Stock at an exercise price of $0.50 per share. The warrants are
exercisable for a period of two (2) years from the date of issue and contain
piggy-back registration rights.
The Company borrows funds from the Company's President & CEO for working capital
purposes. The borrowings accrue interest at 10% and are due on demand. As of
June 30, 2000, the note payable to the Company's President & CEO was $2,149. No
interest was accrued or paid as of June 30, 2000 and 1999.
The funds from the promissory note as described above will be used to fund the
Company's ongoing operations.
LONG-TERM FINANCING - The Company believes that its anticipated funds from
operations will be insufficient to fund its capital expenditures, working
capital, and other cash requirements through at least June 2001. Therefore, the
Company will be required to seek additional funds either through debt or equity
financing to finance its long-term operations ("Additional Funds"). Should the
Company fail to raise the Additional Funds, the Company will have insufficient
funds for the Company's intended operations and capital expenditures for the
next 12 months which may have a material adverse effect on the Company's
long-term results of operations.
CONTINGENT LIABILITIES - On April 30, 1999, the Company entered into an
agreement with Williams Communications, a unit of Williams of Tulsa, Oklahoma
("Williams"), in which Williams was to design, install and maintain a high
speed, nationwide VoIP network for the Company. Subsequently, due to Williams
inability to deliver the VoIP network as contracted and as a result of the
previously discussed amendments to the MCI/WorldCom contract, the Company
determined to discontinue its agreement with Williams. As a result of the
Company's discontinuation of its contract with Williams, the Company may be
subject to accrued costs of $600,110. The Company is in negotiations with
Williams to modify or eliminate these charges. However, no assurances can be
made that such negotiations will result in a favorable outcome.
The Company has recorded an accrual for past due payroll taxes as of June 30,
2000 due to the under-reporting of the Company's payroll tax liability. As a
result, the Company has accrued approximately $650,000 (including approximately
$85,000 of penalties and interest) under accrued payroll and related taxes in
the accompanying balance sheet at June 30, 2000. The Company anticipates having
this matter settled by June 30, 2001.
16
<PAGE>
CAPITAL EXPENDITURES
The Company expects to purchase approximately $200,000 of additional equipment
in connection with the expansion of its business. Because the Company presently
does not have the capital for such expenditures, it will have to raise these
funds. (See Long-Term Financing in this section).
SUBSIDIARIES
The Company has formed three wholly owned subsidiaries that offer different
products and services. They are managed separately because each business
requires different technology and/or marketing strategies.
The three subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com, Inc. and
U.S. Main Corporation.
CallingPlanet.com, Inc. offers international calling using a PC to phone
connection. ecallingcards.com, Inc. offers prepaid calling cards purchased over
the internet and U.S. Main Corporation offers private label telecommunications
and Internet related needs.
GOING CONCERN
The Company's independent certified public accountants have stated in their
report included in this Form 10-KSB, that the Company has incurred operating
losses in the last two years, has a working capital deficit and a significant
stockholders deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
EMPLOYMENT
As of September 30, 2000, the Company had 74 full time employees.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements and supplementary financial information
which are required to be filed under this item are presented under Item 13.
Exhibits, Financial Statement Schedules and Reports on Form 10-KSB in this
document, and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements between Corbin & Wertz LLP and Management of
the type required to be reported under this Item 8 since the date of their
engagement.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 Position(s)
--------------------------------------------------------------------------------
Paul Sandhu 39 Chief Executive Officer, President, and Chairman
of the Board
Eric Clemons 29 Director, Chief Operating Officer, Secretary
and Treasurer
Gerald DeCiccio 42 Chief Financial Officer
Mark Fleming 42 Executive Vice President
John M. Eger 60 Director
Clay T. Whitehead 61 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 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.
Between 1989 and 1994, Mr. Clemons was a licensed NASD broker. As a broker, Mr.
Clemons was subject to three claims related to such engagement and subsequently
an administrative action by the NASD related to his work as a licensed broker.
Mr. Clemons was found liable for an award of $4,000 on one of the actions and
subsequently in April 1997, was fined $65,000 and barred from association with
any NASD member with the ability for re-application following a period of two
years.
GERALD DECICCIO joined 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.,
18
<PAGE>
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.
JOHN M. EGER is a telecommunication lawyer and former counsel to the
international law firm Morrison and Forester and is currently the holder of the
prestigious Lionel Van Deerlin Endowed Chair of Communications and Public Policy
at San Diego State University. He is also the President and CEO of the World
Foundation for Smart Communities, a non-profit, non-governmental educational
program dedicated to helping communities understand the importance of
information technology as a catalyst for transforming life and work in the 21st
Century. Professor Eger formerly headed CBS Broadcast International, which he
established, and was Senior Vice President of the CBS Broadcast Group. From
1971 through 1973, Professor Eger was legal assistant to the chairman of the
Federal Communications Commission, and from 1974 through 1976 served as
Telecommunications Advisor to Presidents Nixon and Ford and was also the Head of
the White House Office of Telecommunications Policy (OTP). Earlier in his
career, Professor Eger served as a data communications specialist and design
director of information systems for the Bell System. From 1976 through 1981, he
was a Washington, DC based telecommunications attorney. Until recently,
Professor Eger served as Chairman of the Board of the San Diego Processing
Corporation, Chairman of San Diego Mayor Susan Golding's City of the Future
Advisory Committee and Chairman of Governor Pete Wilson's California Commission
on Information Technology.
CLAY T. WHITEHEAD is currently President of Clay Whitehead Associates, a
strategic consulting and business development company which concentrates on the
telecommunications and media industries. Clay Whitehead Associates primarily
works with large companies to develop business projects in the areas of
telecommunications and television. Mr. Whitehead has participated in the
formation, strategy development, regulatory posture, and financing of a number
of telecommunications businesses in the United States and internationally. Mr.
Whitehead has also served as a special assistant to President Nixon, with policy
responsibility for NASA, the Atomic Energy Commission, and the National Science
Foundation. From 1971 to 1974, he was director of the U.S. Office of
Telecommunications Policy. From 1979 to 1983, Mr. Whitehead founded and was
president of Hughes Communications, Inc., a subsidiary of Hughes Aircraft
Company. Mr. Whitehead also currently serves on the board of directors for
Prudential Funds.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely on the review of copies of such reports furnished to the Company
and written representations that no other reports were required and to the best
of its knowledge, during the year ended June 30, 2000, all Section 16(a) filing
requirements applicable to the Company's officers, directors and greater than
ten percent shareholders were complied with.
19
<PAGE>
ITEM 10. 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 agreed to 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. On January 15, 1999 the
Company voluntarily agreed to increase his salary to $168,000. 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. 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
agreed to 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. On
January 15, 1999 the Company voluntarily increased his salary to $152,000. 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
agreed to 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. On
December 23, 1999 the Company voluntarily increased his salary to $144,000. 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 agreed to
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. On January 23,
2000 the Company voluntarily increased his salary to $130,000. 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.
20
<PAGE>
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the fiscal years ended June 30, 2000,
1999, and 1998. Other than as set forth herein, no executive officer's salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------- AWARDS PAYOUTS
-------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING LTIP OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPESATION
POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
---------------- -------- ------------ -------- ------------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Sandhu 2000
(President, CEO) (6/30) 126,000 -0- -0- -0- 217,500 -0- -0-
1999
(6/30) 85,500 -0- -0- -0- -0- -0- -0-
1998
(6/30) 40,000 -0- -0- 76,000 200,000 -0- -0-
---------------- -------- ------------ -------- ------------- ---------- ----------- --------- -----------
Eric Clemons 2000
(COO) (6/30) 133,000 -0- -0- -0- 167,500 -0- -0-
1999
(6/30) 90,836 -0- -0- -0- -0- -0- -0-
1998
(6/30) 40,500 -0- -0- 19,000 100,000 -0- -0-
---------------- -------- ------------ -------- ------------- ---------- ----------- --------- -----------
Gerald DeCiccio 2000
(CFO) (6/30) 139,708 -0- -0- -0- 75,000 -0- -0-
1999
(6/30) 54,102 -0- -0- -0- 150,000 -0- -0-
1998
(6/30) -0- -0- -0- -0- -0- -0- -0-
---------------- -------- ------------ -------- ------------- ---------- ----------- --------- -----------
Mark Fleming 2000
(VP) (6/30) 121,042 -0- -0- -0- 75,000 -0- -0-
1999
(6/30) 62,083 -0- -0- -0- 100,000 -0- -0-
1998
(6/30) -0- -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SAR'S GRANTED
UNDERLYING TO EMPLOYEES IN FISCAL EXERCISE OF BASE PRICE
NAME OPTIONS/SAR'S GRANTED (#) YEAR ($/SH) EXPIRATION DATE
--------------- ------------------------- ----------------------- ------------------------ ---------------
<S> <C> <C> <C> <C>
Paul Sandhu 17,500(1) 1% $ 0.01 5/1/03
--------------- ------------------------- ----------------------- ------------------------ ---------------
5,000(2) <1% $ 1.25 5/1/04
5,000(2) <1% $ 1.25 5/1/05
5,000(2) <1% $ 1.25 5/1/06
5,000(2) <1% $ 1.25 5/1/07
5,000(2) <1% $ 1.25 5/1/08
25,000(3) 1.4% $ 1.25 5/1/10
30,000(4) 1.7% $ 1.10 10/18/05
30,000(4) 1.7% $ 1.10 10/18/06
30,000(4) 1.7% $ 1.10 10/18/07
30,000(4) 1.7% $ 1.10 10/18/08
30,000(4) 1.7% $ 1.10 10/18/09
Eric Clemons 17,500(5) 1% $ 0.01 5/1/03
--------------- ------------------------- ----------------------- ------------------------ ---------------
5,000(2) <1% $ 1.25 5/1/04
5,000(2) <1% $ 1.25 5/1/05
5,000(2) <1% $ 1.25 5/1/06
5,000(2) <1% $ 1.25 5/1/07
5,000(2) <1% $ 1.25 5/1/08
25,000(3) 1.4% $ 1.25 5/1/10
20,000(4) 1.7% $ 1.10 10/18/05
20,000(4) 1.7% $ 1.10 10/18/06
20,000(4) 1.7% $ 1.10 10/18/07
20,000(4) 1.7% $ 1.10 10/18/08
20,000(4) 1.7% $ 1.10 10/18/09
Gerald DeCiccio 25,000(3) 1.4% $ 1.25 5/1/10
--------------- ------------------------- ----------------------- ------------------------ ---------------
50,000(4) 2.8% $ 1.10 10/18/10
Mark Fleming 25,000(3) 1.4% $ 1.25 5/1/10
--------------- ------------------------- ----------------------- ------------------------ ---------------
50,000(4) 2.8% $ 1.10 10/18/10
</TABLE>
(1) Represents options issued on 5/1/00 pursuant to Mr. Sandhu's Director
Compensation agreement.
(2) Represents options issued on 5/1/00 outside of the 2000 Stock Option Plan.
(3) Represents options issued on 5/1/00 in accordance with the 2000 Stock Option
Plan. In the event that the trading price of the Company's Common Stock
closes at or above $5.00 per share for a minimum of five (5) consecutive
trading days, the Options shall become fully vested. The options are
exercisable through May 2010.
(4) Represents options issued on 10/18/99 in accordance with the 2000 Stock
Option Plan.
(5) Represents options issued on 5/1/00 pursuant to Mr. Clemon's Director
Compensation agreement.
21
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
SECURITIES UNDERLYING THE-MONEY OPTION/SARS
SHARES ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------- ---------------------- ------------------------ -------------------------- --------------------------
<S> <C> <C> <C> <C>
Paul Sandhu 200,000 329,000 17,500 / 200,000 14,592 / 0
Eric Clemons 100,000 181,750 17,500 / 150,000 14,592 / 0
Gerald DeCiccio 25,000 42,500 41,667 / 158,333 0 / 0
Mark Fleming 0 n/a 40,000 / 135,000 0 / 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 receive $1,500 and 2,500
options to purchase the Company's Common Stock per quarter.
1999 STOCK OPTION PLAN
On September 20, 1999, the Company's Board of Directors approved the GTC Telecom
Corp. Omnibus Stock Option Plan (the "Option Plan"), effective October 1, 1999.
The Option Plan was approved and ratified by the shareholders on December 13,
1999 at the Company's 1999 annual shareholder's meeting. Under the terms of the
Option Plan, the Board of Directors has the sole authority to determine which of
the eligible persons shall receive options, the number of shares which may be
issued upon exercise of an option, and other terms and conditions of the options
granted under the Plan to the extent they don't conflict with the terms of the
Plan. An aggregate of 750,000 shares of common stock are reserved for issuance
under the Plan during the year October 1, 1999 to September 30, 2000. For each
subsequent year beginning October 1, 2000, there shall be reserved for issuance
under the Plan that number of shares equal to 5% of the outstanding shares of
common stock on July 1 of that year. The exercise price for all statutory
options granted under the Plan shall be 100% of the fair market value of the
Company's common stock on the date of grant, unless the recipient is the holder
of more than 10% of the already outstanding securities of the Company, in which
case the exercise price shall be 110% of the fair market value of the Company's
common stock on the date of grant. The exercise price for all non-statutory
options granted under the Plan shall be between 25% to 100% of the fair market
value on the date of grant. All options shall vest equally over a period of
five years from the date of issuance. The Company registered 750,000 shares
underlying the options pursuant to its 1999 Stock Option Plan on Form S-8 filed
with the Securities and Exchange Commission on October 6, 1999.
On October 18, 1999, the Company's Board of Directors ("Board") granted,
pursuant to the Option Plan, an aggregate of 73,000 Incentive Stock Options (as
defined by the Plan), exercisable at $2.9375 per share (the fair market value of
the Company's Common Stock on the day of grant) to certain employees of the
Company and an aggregate of 360,000 Non-statutory Stock Options (as defined by
the Option Plan), exercisable at $1.10 per share, to the officers of the
Company, resulting in $661,500 of compensation expense charged to the Company
over a five year period beginning in fiscal year 2001 through fiscal year 2005.
During fiscal year 2000, an aggregate of 94,000 additional Incentive Stock
Options (as defined by the Plan) were granted, exercisable at an average of
$1.37 per share (each issuance priced at the fair market value of the Company's
Common Stock on the day of grant) to certain employees of the Company. On May 1,
2000, the Board granted, pursuant to the Option Plan, an aggregate of
194,100 Non-statutory Stock Options (as defined by the Plan), exercisable at
$1.25 per share (the fair market value of the Company's Common Stock on the day
of grant) to certain employees and officers of the Company. However, in the
event that the trading price of the Company's Common Stock closes at or above
$5.00 per share for a minimum of five (5) consecutive trading days, the
Options shall become fully vested.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2000, 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>
<CAPTION>
COMMON STOCK PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OUTSTANDING OUTSTANDING
----------------------- ----------------------------- ---------- ------------
<S> <C> <C> <C>
Paul Sandhu(1)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 4,021,308 20.14%
----------------------- ----------------------------- ---------- ------------
Eric Clemons(2)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 1,139,344 5.71%
----------------------- ----------------------------- ---------- ------------
Mark Fleming(3)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 70,000 0.35%
----------------------- ----------------------------- ---------- ------------
Gerald A. DeCiccio(4)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 61,667 0.31%
----------------------- ----------------------------- ---------- ------------
John M. Eger(5)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 531,000 2.66%
----------------------- ----------------------------- ---------- ------------
Clay T. Whitehead(6)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 543,816 2.72%
----------------------- ----------------------------- ---------- ------------
Reet Trust(7)
21520 Yorba Linda,Suite 6227
Common Stock Yorba Linda, CA 92887 2,000,000 10.02%
----------------------- ----------------------------- ---------- -------------
All Directors and
Officers as a
Group (6
Persons in total) 6,367,135 31.89%
----------------------- ----------------------------- ---------- -------------
<FN>
(1) Includes 17,500 options to acquire shares of Company common stock in
accordance with Mr. Sandhu's director compensation agreement. Does not include
an aggregate of 200,000 unvested options to acquire shares of Company common
stock granted in accordance with the Company's employee benefit plan.
(2) Includes 17,500 options to acquire shares of Company common stock in
accordance with Mr. Clemons' director compensation agreement. Does not include
an aggregate of 150,000 unvested options to acquire shares of Company common
stock in accordance with the Company's employee benefit plan.
(3) Includes an aggregate of 70,000 options to acquire shares of Company
common stock in accordance with Mr. Fleming's employment agreement. Does not
include an aggregate of 105,000 unvested options to acquire shares of Company
common stock in accordance with the Company's employee benefit plan.
(4) Includes an aggregate of 41,667 options to acquire shares of Company
common stock in accordance with Mr. DeCiccio's employment agreement. Does not
include an aggregate of 158,333 unvested options to acquire shares of Company
common stock in accordance with the Company's employee benefit plan.
(5) Includes an aggregate of 531,000 options to acquire shares of Company
common stock in accordance with Mr. Eger's director compensation agreement.
Does not include an aggregate of 25,000 unvested options to acquire shares of
Company common stock in accordance with the Company's benefit plan.
(6) Includes an aggregate of 17,500 options to acquire shares of Company
common stock in accordance with Mr. Whitehead's director compensation agreement.
Does not include an aggregate of 25,000 unvested options to acquire shares of
Company common stock in accordance with the Company's benefit plan.
(7) The trustee of the Reet Trust is Teg Sandhu, father of Paul Sandhu.
However, Paul Sandhu disclaims any beneficial ownership to the shares held by
the Reet Trust.
</TABLE>
23
<PAGE>
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 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company borrows funds from the Company's President & CEO for working capital
purposes. The borrowings accrue interest at 10% and are due on demand. During
fiscal 2000 and 1999, the Company borrowed $48,500 and $25,000 and made payments
in the amount of $71,351 and none, respectively. As of June 30, 2000, the note
payable to the Company's President & CEO was $2,149. No interest was accrued or
paid as of June 30, 2000 and 1999.
On October 6, 1999, the Company registered on Form S-8 filed with the Securities
and Exchange Commission, 67,675 shares of Common Stock held by consultants
valued at approximately $270,700; 411,000 options held by employees valued at
approximately $1,184,000; and 750,000 options pursuant to its 1999 Stock Option
Plan.
During fiscal year 2000, Paul Sandhu ("Mr. Sandhu"), the Company's President &
CEO, Eric Clemons ("Mr. Clemons"), the Company's Chief Operating Officer, Gerald
DeCiccio, the Company's Chief Financial Officer, and other employees of the
Company, exercised options (previously granted pursuant to their employment
contracts) to purchase a total of 375,000 shares of the Company's common stock
in lieu of salary for $72,250.
During fiscal year 2000, Mr. Sandhu and Mr. Clemons canceled 619,848 and
154,962, respectively, shares of the Company's common stock held by each of
them. It was determined that these shares were not cancelled in a timely
matter. As a result, these cancellations are reflected as a reduction in the
outstanding shares as of July 1, 1998.
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. Pursuant to the
Option Agreement, Mr. Whitehead had the option to purchase up to 526,316 shares
of the Company's Common Stock at an exercise price of $0.475 per share. In May
1999, Mr. Whitehead exercised all 526,316 options. As a result of the option
agreement, a total of approximately $352,632 of compensation expense was
recorded at the date of grant in April 1999. The issuance was exempt under
Section 4(2) of the Securities Act of 1933.
On October 20, 1999, the Company granted options to purchase 526,000 shares of
restricted Common Stock, at an exercise price of $1.00 per share, to John Eger,
a director of the Company (the fair market value of the Company's Common Stock
on the day of grant). The issuance was exempt under Section 4(2) of the
Securities Act of 1933. The options are exercisable through October 2002.
24
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors F-1
Consolidated balance sheet at June 30, 2000 F-2
Consolidated statements of operations for the years ended
June 30, 2000 and 1999 F-3
Consolidated statements of stockholders' deficit for the years ended
June 30, 2000 and 1999 F-4
Consolidated statements of cash flows for the years ended
June 30, 2000 and 1999 F-6
Notes to consolidated financial statements F-8
All other schedules are omitted as the required information is not present or is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements or
notes thereto.
INDEX TO EXHIBITS
The Company undertakes to furnish to any shareholder so requesting a copy of any
of the following exhibits upon payment to the Company of the reasonable costs
incurred by the Company in furnishing any such exhibit.
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 Certificate of Amendment of Articles of Incorporation filed
with the Nevada Secretary of State on February 23, 2000
3.5 Restated Bylaws of GTC Telecom Corp. adopted on September
20, 1999
*(4.1) GTC Telecom Corp. 1999 Omnibus Stock Incentive Plan
*(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
*(10.3.3) Service Schedule
*(10.3.4) Telecommunications Service Agreement
(10.3.5) Amendment dated September 14, 2000
*(10.5) Employment Agreement by and between GTC Telecom, a
Nevada corporation and Mark Fleming, dated October 14, 1998
*(10.6) Employment Agreement by and between GTC Telecom, a
Nevada corporation and Eric Clemons, dated December 1, 1998
*(10.7) Employment Agreement by and between GTC Telecom, a
Nevada corporation and Jerry DeCiccio, dated December 1, 1998
*(10.8) Employment Agreement by and between GTC Telecom, a
Nevada corporation and Paul SandhU, dated December 1, 1998
25
<PAGE>
*(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
*(10.16) 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
*(10.22) Addendum to Lease dated May 21, 1998 by and between GTC
Telecom and SunBelt Developers, Inc.
21.1 Subsidiaries of the Registrant
23.1 Consent of independent auditors
27.1 Financial data schedule (Article 5 of regulations S-X)
------------------------------
* Previously filed
REPORTS ON FORM 8-K
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: October 4, 2000
GTC TELECOM CORP.
(Registrant)
By: /s/ PAUL SANDHU
PAUL SANDHU President and Chief Executive Officer and Director
By: /s/ ERIC CLEMONS
ERIC CLEMONS Chief Operating Officer and Director
By: /s/ GERALD DECICCIO
GERALD DECICCIO Chief Financial Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
Signature Capacity Date
------------------------------------------------------------
/s/ CLAY WHITEHEAD Director October 4, 2000
CLAY WHITEHEAD
/s/ JOHN EGER Director October 4, 2000
JOHN EGER
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
GTC Telecom Corp.
We have audited the accompanying consolidated balance sheet of GTC Telecom Corp.
(the "Company") and subsidiaries as of June 30, 2000 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the two-year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of GTC
Telecom Corp. at June 30, 2000 and the consolidated results of their operations
and their cash flows for each of the years in the two-year period then ended, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As disclosed in Note 1, the
Company has incurred operating losses in the last two years, and has a working
capital deficit of $2,820,167, liabilities from the underpayment of payroll
taxes and contingent liabilities from cancelled contracts and a stockholders'
deficit of $2,403,566 at June 30, 2000. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1.
The consolidated financial statements do not include any adjustments that may
result from the outcome of this uncertainty.
/s/ CORBIN & WERTZ
Irvine, California
September 21, 2000, except for Note 14,
as to which the date is September 25, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
<S> <C>
ASSETS
Current assets:
Cash $ 231,336
Accounts receivable, net of allowance for
doubtful accounts of $13,450 632,551
Deposits 178,990
Note receivable 22,500
Prepaid expenses and other current assets 30,675
______________
Total current assets 1,096,052
Property and equipment, net of accumulated
depreciation of $181,633 372,365
Other assets 44,236
______________
Total assets $ 1,512,653
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 2,612,335
Accrued payroll and related taxes 874,213
Obligation under capital lease 179,263
Notes payable 138,939
Deferred revenue 111,469
______________
Total current liabilities 3,916,219
______________
Commitments
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized;
none issued and outstanding --
Common stock, $0.001 par value; 50,000,000 shares authorized;
19,967,544 shares issued and outstanding 19,968
Additional paid-in-capital 8,652,020
Accumulated deficit (11,075,554)
______________
Total stockholders' deficit (2,403,566)
______________
Total liabilities and stockholders' deficit $ 1,512,653
==============
</TABLE>
See independent auditors' report and
accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Revenues:
Telecommunications $ 4,654,922 $ 289,012
Internet services 41,165 --
------------ ------------
Net revenues 4,696,087 289,012
Cost of sales:
Telecommunications $ 3,755,698 $ 99,913
Internet services 276,889 --
------------ ------------
Total cost of sales 4,032,587 99,913
------------ ------------
Gross profit 663,500 189,099
Selling, general and administrative expenses 7,696,832 3,553,512
------------ ------------
Operating loss (7,033,332) (3,364,413)
Interest income/(expense) (142,441) 3,537
------------ ------------
Loss before provision for income taxes (7,175,773) (3,360,876)
Provision for income taxes 5,218 800
------------ ------------
Net loss $(7,180,991) $(3,361,676)
============ ============
Net loss available to common shareholders
per common share $ (0.42) $ (0.27)
============ ============
Basic and diluted weighted average
common shares outstanding 17,105,139 12,647,347
============ ============
</TABLE>
See independent auditors' report and
accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE TWO-YEAR PERIOD ENDED JUNE 30, 2000
Additional
Common Stock Paid-in Accumulated Total Stockholders'
Shares Amount Capital Deficit Deficit
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1998 8,986,950 $ 8,987 $ 507,910 $ (532,887) $ (15,990)
Acquisition of Bobernco 1,800,000 1,800 1,200 -- 3,000
Estimated fair market value
of options and warrants
granted to a director and
consultants for services
rendered -- -- 948,630 -- 948,630
Estimated fair market value
of options granted to
employees for
compensation -- -- 34,650 -- 34,650
Estimated fair market value
of restricted stock issued
for services rendered 162,000 162 161,838 -- 162,000
Estimated fair market value
of stock issued for services
rendered 16,050 16 76,584 -- 76,600
Estimated fair market value
of restricted stock issued
to employees for
compensation 11,000 11 5,214 -- 5,225
Issuance of common stock
pursuant to private
placements, net of offering
costs of $333,603
(including 23,500 shares
for placement agents) 1,681,500 1,682 1,322,715 -- 1,324,397
Issuance of restricted
common stock for
conversion of note payable 40,000 40 79,960 -- 80,000
Issuance of restricted stock
for stock options and
warrants exercised 2,589,324 2,589 313,581 -- 316,170
Net loss -- -- -- (3,361,676) (3,361,676)
---------- ------- ---------- ------------ ------------
BALANCE AT JUNE 30, 1999 15,286,824 15,287 3,452,282 (3,894,563) (426,994)
---------- ------- ---------- ------------ ------------
</TABLE>
See independent auditors' report and
accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE TWO-YEAR PERIOD ENDED JUNE 30, 2000
(CONTINUED)
Additional
Common Stock Paid-in Accumulated Total Stockholders'
Shares Amount Capital Deficit Deficit
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
pursuant to private
placements, net of offering
costs of $288,395 2,825,000 2,825 2,533,780 -- 2,536,605
Sale of common stock for
cash 250,000 250 249,750 -- 250,000
Estimated fair market value
of stock issued for services
rendered 1,175,720 1,176 2,009,798 -- 2,010,974
Estimated fair market value
of options granted to
consultants for services
rendered -- -- 157,800 -- 157,800
Estimated fair market value
of options granted to
directors and employees
for compensation -- -- 121,790 -- 121,790
Cashless exercise of stock
options 375,000 375 71,875 -- 72,250
Issuance of restricted
common stock for
conversion of note payable 55,000 55 54,945 -- 55,000
Net loss -- -- -- (7,180,991) (7,180,991)
---------- ------- ---------- ------------- ------------
BALANCE AT JUNE 30, 2000 19,967,544 $19,968 $8,652,020 $(11,075,554) $(2,403,566)
========== ======= ========== ============= ============
</TABLE>
See independent auditors' report and
accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
2000 1999
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,180,991) $(3,361,676)
Adjustments to reconcile net loss to net cash
used in operating activities:
Estimated fair market value of stock issued for services 2,010,974 243,825
Estimated fair market value of options and warrants
granted to consultants for services rendered 157,800 948,630
Estimated fair market value of options granted to
directors and employees for compensation 121,790 34,650
Interest accrued on notes payable converted to stock 5,000 --
Depreciation and amortization 173,946 35,250
Allowance for doubtful accounts 13,450 --
Changes in operating assets and liabilities:
Accounts receivable (629,112) (40,208)
Deposits (143,490) (35,500)
Prepaid expenses and other current assets (7,356) --
Accounts payable and accrued expenses 2,014,343 680,628
Accrued payroll and related taxes 778,955 97,508
Deferred revenue 98,987 12,482
------------ ------------
Net cash used in operating activities (2,585,704) (1,384,411)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (156,686) (186,023)
Purchase of other assets -- (73,500)
(Payment for) reimbursements of deposits 150,000 (150,000)
Issuance of notes receivable (22,500) --
------------ ------------
Net cash used in investing activities (29,186) (409,523)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of
offering costs of $288,395 and $333,603, respectively 2,786,605 1,446,372
Principal borrowings on note payable to stockholder 48,500 25,000
Principal repayments on notes payable to stockholder (71,351) --
Principal payments under capital lease (14,632) --
Principal borrowings on notes payable 310,000 --
Principal repayments on notes payable (213,396) --
Proceeds from exercise of stock options -- 316,170
------------ ------------
Net cash provided by financing activities 2,845,726 1,787,542
------------ ------------
Increase (Decrease) in cash 230,836 (6,392)
Cash, beginning of year 500 3,892
Cash from acquisition -- 3,000
------------ ------------
Cash, end of year $ 231,336 $ 500
============ ============
</TABLE>
See independent auditors' report and
accompanying notes to consolidated financial statements.
F-6
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of cash flow information:
Year Ended June 30,
2000 1999
--------- ---------
Cash paid during the year for:
Interest $ 127,621 $ 1,965
Income taxes 5,218 1,600
Supplemental disclosure on non-cash investing and financing activities:
During the year ended June 30, 2000, the Company issued 55,000 shares of
restricted common stock pursuant to the conversion of a note payable with a
principal amount of $50,000 and accrued interest of $5,000.
During the year ended June 30, 2000, the Company converted $90,189 of accounts
payable into a promissory note (see Note 6).
During the year ended June 30, 2000, certain employees exercised options to
purchase 375,000 shares of the Company's Common Stock in lieu of salary of
$72,250.
During the year ended June 30, 1999, the Company incurred capital lease
obligations in the amount of $193,895 for the acquisition of property and
equipment.
During the year ended June 30, 1999, the Company issued 40,000 shares of
restricted common stock pursuant to the conversion of a note payable in the
amount of $80,000.
See accompanying notes to consolidated financial statements for other non-cash
items.
See independent auditors' report and
accompanying notes to consolidated financial statements.
F-7
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS - GTC Telecom Corp. and subsidiaries (the "Company"
or "GTC") provide various Telecommunication services, including long distance
telephone and calling card services as well as various Internet related services
including Internet Service Provider access and Web Page Hosting. GTC Telecom
Corp. was organized as a Nevada Corporation on May 17, 1994 and is currently
based in Costa Mesa, California.
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 by GenTel.
GenTel Communications, was formerly known as GenX, LLC ("GenX"). GenX, a
Delaware limited liability company, was formed on May 29, 1997. GenTel was
formed on December 9, 1997 and was inactive until its reorganization with GenX.
Effective February 3, 1998, pursuant 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 a 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
acquisition, Bobernco changed its name to GTC. Bobernco had no significant
operations prior to the merger.
GOING CONCERN - The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has negative working
capital of $2,820,167, liabilities from the underpayment of payroll taxes (see
Note 12), contingent liabilities from cancelled contracts (see note 12), a
stockholders' deficit of $2,403,566, losses from operations through June 30,
2000 and a lack of operational history, among other matters, that raise
substantial doubt about its ability to continue as a going concern. The Company
hopes to continue to increase revenues from additional revenue sources and
increased margins as a result of amending its contract with MCI/WorldCom (see
Note 12) and other cost cutting measures. In the absence of significant
revenues and profits, the Company intends to fund operations through additional
debt and equity financing arrangements which management believes may be
insufficient to fund its capital expenditures, working capital, and other cash
requirements for the fiscal year ending June 30, 2001. Therefore, the Company
may be required to seek additional funds to finance its long-term operations.
The successful outcome of future activities cannot be determined at this time
and there are no assurances that if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of GTC Telecom Corp. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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. Actual results could differ from those estimates. Significant
estimates made by management are, among others, provisions for losses on
accounts receivable and estimates for income tax valuations.
RISKS AND UNCERTAINTIES - The Company has limited operating history and is
subject to the substantial business risks and uncertainties inherent to such an
entity, including the potential risk of business failure.
F-8
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
CONCENTRATION OF CREDIT RISK - The Company sells its telephone and network
services to individuals and small businesses throughout the United States and
does not require collateral. Reserves for uncollectible amounts are provided,
which management believes are sufficient.
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 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 commitment of $10,000 which commenced March 1999.
The contract expires on September 30, 2001. In August 1999, the Company entered
into negotiations with MCI/WorldCom in an effort to lower its network
transmission costs. As a result of these negotiations, MCI/WorldCom agreed to
amend the existing contract between the Company and MCI/WorldCom whereby
MCI/WorldCom agreed to reduce the Company's network transmission costs by
approximately 40%. Additionally, under the terms of the amendment, the minimum
monthly purchase requirement was increased to $12,000 per month and the total
minimum purchase requirement increased to $288,000. In an effort to continue to
reduce its long distance network transmission costs, the Company successfully
negotiated an additional amendment to its contract with MCI/WorldCom in
September 2000. The amendment further reduces the Company's network
transmission costs by approximately 30%. In addition, under the terms of the
amendment, the contract is extended to August 31, 2003 and the minimum monthly
purchase requirement increased to $400,000 per month for the months August 2000
to January 2001 and then increases to $520,000 per month from February 2001 to
the end of the contract. The total minimum purchase requirement of the contract
increased to $18,000,000. All remaining material terms of the contract remain
the same.
Pursuant to the terms of the contract with MCI/WorldCom, the Company must pay
liquidated damages in an amount equal to the aggregate minimum requirement for
the remaining term of the contract if the Company terminates the contract prior
to the expiration date. Although the Company believes that its relationship
with MCI/WorldCom is strong and should remain so with continued contract
compliance, the termination of the Company's contract with MCI/WorldCom, the
loss of telecommunications services provided by MCI/WorldCom, or a reduction in
the quality of service the Company receives from MCI/WorldCom could have a
material adverse effect on the Company's results of operations. In addition,
the accurate and prompt billing of the Company's customers is dependent upon the
timeliness and accuracy of call detail records provided to the Company by
MCI/WorldCom.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the useful life of 3 to 5 years.
During the year ended June 30, 2000 and 1999, total depreciation expense was
$149,447 and $30,485, respectively.
Betterments, renewals, and extraordinary repairs that extend the lives of the
assets are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and the gain or loss on disposition is
recognized in current operations.
LONG-LIVED ASSETS - The Company has adopted 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 this analysis, the Company
management believes that no impairment of the carrying value of its long-lived
assets existed at June 30, 2000.
REVENUE AND RELATED COST RECOGNITION - The Company recognizes revenue during the
month in which services or products are delivered, as follows:
F-9
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
TELECOMMUNICATIONS RELATED SERVICES
The Company's long distance telecommunications service revenues are generated
when customers make long distance telephone calls from their business or
residential telephones or by using any of the Company's telephone calling cards.
Telecommunication services cost of sales includes the cost of long distance
service provided by MCI/WorldCom and other carriers.
INTERNET RELATED SERVICES
Internet service revenues consist of monthly fees charged to subscribers for
Internet access and are recognized in the period service access is provided.
Internet service cost of sales includes the cost of providing internet access.
DEFERRED REVENUE - Deferred revenue represent proceeds from prepaid telephone
calling cards which are recorded as deferred revenue when the cash is received.
The Company recognizes the revenue in the statement of operations as the
telephone service is utilized.
ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising
expense was $1,004,103 and $271,915 for fiscal 2000 and 1999, respectively.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is provided for significant deferred tax assets when it is
more likely than not that such assets will not be recovered.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
issued to employees using the intrinsic value based method as prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under the intrinsic value based method, compensation is
the excess, if any, of the fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Compensation, if any, is recognized over the applicable service period, which is
usually the vesting period.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." This standard, if fully adopted, changes the method of
accounting for employee stock-based compensation plans to the fair value based
method. For stock options and warrants, fair value is determined using an
option pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option or warrant and the annual
rate of quarterly dividends. Compensation expense, if any, is recognized over
the applicable service period, which is usually the vesting period.
The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as if the Company
adopted the cost recognition requirements under SFAS 123, are required to be
presented (see Note 8).
LOSS PER SHARE - The Company has adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the
F-10
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
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.
START-UP ACTIVITIES - The Company has adopted Statement of Position No. 98-5
("SOP 98-5"), "Reporting the Costs of Start-Up Activities." SOP 98-5 requires
that all non-governmental entities expense the costs of start-up activities,
including organization costs as those costs are incurred. The adoption of this
standard did not have a material effect on the Company's results of operations,
financial position or cash flows.
COMPUTER SOFTWARE - The Company has adopted Statement of Position 98-1 ("SOP
98-1") "Accounting for the Cost of Computer Software Development or Obtained for
Internal Use." The adoption of this Standard did not have a material impact on
the Company's results of operations, financial position or cash flows.
FAIR VALUES 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 notes payable
approximates their estimated fair values due to the short-term maturities of
those financial instruments. The fair value of note payable to stockholder is
not determinable as these borrowings are with a related party.
COMPREHENSIVE INCOME - The Company had adopted Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The adoption of SFAS 130
has not materially impacted the Company's financial position or results of
operations as the Company has no items of comprehensive income.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - The Company had adopted
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers.
As approximately 99% of the Company's revenues, loss from operations and
identifiable assets are from the telecommunications segment, the Company has not
made segment disclosures in the accompanying financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
amounts to conform to current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet at their fair value. This statement, as
amended by SFAS 137, is effective for financial statements for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The 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.
ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS - In March 2000, the Emerging Issues
Task Force reached a consensus on Issue No. 00-2, "Accounting for Web Site
Development Costs" ("EITF 00-2") to be applicable to all web site development
costs incurred for the quarter beginning after June 30, 2000. The consensus
states that for specific web site development costs, the accounting for such
costs should be accounted for under AICPA Statement
F-11
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company does not expect the
adoption of EITF 00-2 to have a material effect on its financial statements.
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - In March
2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB 25". FIN 44
clarifies the application of APB 25 for (a) the definition of employee for
purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain provisions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain other provisions of FIN 44 prior to June 30, 2000 did
not have a material effect on the financial statements. The Company does not
expect that the adoption of the remaining provisions will have a material effect
on the financial statements.
REVENUE RECOGNITION - In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue and provide
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and
Exchange Commission. The effective date of this pronouncement is the fourth
quarter of the fiscal year beginning after December 15, 1999. The Company
believes that adopting SAB 101 will not have a material impact on its financial
position and results of operations.
NOTE 2 - ACQUISITION
Pursuant to an Agreement and Plan of Reorganization dated August 31, 1998, the
Company completed an acquisition with and into Bobernco, Inc. (the
"Acquisition"). Under the terms of the tax-free reorganization and acquisition,
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 acquisition became the directors and officers of Bobernco, which
subsequently changed its corporate name to GTC Telecom Corp. ("GTC"). Due to
Bobernco having no operations for the two months ended July and August 1998, no
proforma financial statements are presented for the year ended June 30, 1999.
F-12
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30, 2000:
Computer equipment $431,736
Furniture and office equipment 58,238
Telephone equipment 64,024
--------
553,998
Less accumulated depreciation (181,633)
--------
$372,365
========
NOTE 4 - OTHER ASSETS
Other assets consist of PUC carrier certifications the Company must obtain in
order to provide interstate and intrastate telephone service. Other assets are
recorded at cost and are being amortized using the straight-line method over the
useful life of 3 years. Amortization expense for the years ended June 30, 2000
and 1999 is $24,499 and $4,765, respectively.
F-13
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
NOTE 5 - OBLIGATION UNDER CAPITAL LEASE
The Company is a lessee of certain property and equipment under a capital lease
that is to expire in April 2002 (see below). Terms of the lease call for
monthly payments of $6,738. The asset and liability under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair market value of the related assets. The asset is depreciated over its
estimated useful life.
Future minimum annual commitments under lease arrangements are as follows:
Years Ending
June 30,
______
2001 $142,119
2002 67,376
--------
Total minimum future lease payments 209,495
Less: Amounts representing interest (30,232)
--------
Present value of net minimum lease payments $179,263
========
The Company has not made the monthly lease payments pursuant to the lease
agreement since September 1999. As a result, the Company is delinquent in its
lease payments in the amount of $46,566, plus accrued interest of $14,702 which
is included in accrued expenses, in the accompanying balance sheet at June 30,
2000. Due to the lessor having the right to demand payment in full, the Company
has classified the entire lease obligation in current liabilities at June 30,
2000.
The following is an analysis of the leased equipment under capital leases as of
June 30, 2000, which is included in property and equipment (Note 3).
Computer equipment $ 205,416
Less: Accumulated depreciation (74,178)
----------
$ 131,238
==========
Interest incurred pursuant to the capital lease obligation was $19,653 and
$1,965 for fiscal years 2000 and 1999, respectively.
NOTE 6 - NOTES PAYABLE
In January 2000, the Company borrowed $200,000 for working capital purposes from
a third party. The note was due February 28, 2000 plus accrued interest of
$20,000. If all unpaid principal and interest was not paid by February 28,
2000, the aggregate balance is to accrue interest at 2% per month with no
predetermined due date. On April 11, 2000, the Company repaid $100,000 of the
principal balance and is in the process of renegotiating the terms of the note.
The principal balance outstanding was $100,000, plus accrued interest of $32,585
which is included in accrued expenses in the accompanying balance sheet at June
30, 2000.
The Company borrows funds from the Company's President and Chief Executive
Officer for working capital purposes. The borrowings accrue interest at 10% and
are due on demand. As of June 30, 2000, the note payable to the Company's
President and Chief Executive Officer was $2,149. No interest was accrued or
paid as of June 30, 2000 and 1999.
On February 3, 2000, the Company terminated its agreement with Level 3 and
signed a promissory note for amounts owed of $90,189. The promissory note
requires the Company to make nine monthly installment payments of approximately
$10,000 per month beginning February 15, 2000 through October 15, 2000. If the
Company fails to make an installment payment, then the unpaid balance is
immediately due and payable. As of June 30, 2000, the balance due on the
promissory note was $36,790. The promissory note is personally guaranteed by
the Company's President and Chief Executive Officer. In addition, the Company
is relieved of its minimum usage obligations subsequent to February 3, 2000
through the end of the contract.
F-14
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
NOTE 7 - CONVERTIBLE NOTES PAYABLE
The Company borrowed $50,000 for working capital purposes from a third party.
The note, which accrued interest at 10% per annum, was due on August 6, 1999.
During fiscal 2000, the noteholder converted the note payable and accrued
interest, totaling $55,000 into 55,000 shares of the Company's restricted common
stock at $1.00 per share (estimated to be the fair market value on the date of
conversion based on the price per share of the current private placement
memorandum).
NOTE 8 - STOCK OPTIONS
On September 20, 1999, the Company's Board of Directors approved the GTC Telecom
Corp. 1999 Omnibus Stock Option Plan (the "Option Plan"), effective October 1,
1999. An aggregate of 750,000 shares of common stock are reserved for issuance
under the Plan during the year October 1, 1999 to September 30, 2000. For each
subsequent year beginning October 1, 2000, there shall be reserved for issuance
under the Plan that number of shares equal to 10% of the outstanding shares of
common stock on July 1 of that year. The exercise price for each option shall
be equal to 25% to 100% of the fair market value of the common stock on the date
of grant, as defined, and shall vest over a five-year period. The Company
registered 750,000 shares underlying the options pursuant to its 1999 Stock
Option Plan on Form S-8 filed with the Securities and Exchange Commission on
October 6, 1999.
On October 18, 1999, the Company's Board of Directors granted, pursuant to the
Option Plan, an aggregate of 73,000 Incentive Stock Options (as defined by the
Plan), exercisable at $2.9375 per share (the fair market value of the Company's
Common Stock on the day of grant) to certain employees of the Company and an
aggregate of 360,000 Non-statutory Stock Options (as defined by the Option
Plan), exercisable at $1.10 per share, to the officers of the Company, resulting
in $661,500 of compensation expense to be charged to the Company over the five
year vesting period beginning in fiscal year 2001 through fiscal year 2005.
During fiscal year 2000, an aggregate of 94,000 additional Incentive Stock
Options (as defined by the Plan) were granted, exercisable at $1.37 per share
(each issuance priced at the fair market value of the Company's Common Stock on
the day of grant) to certain employees of the Company. The options are
exercisable through October 2009.
From time to time, the Company issues non-plan stock options pursuant to various
agreements and other compensatory arrangements to employees and third parties.
During fiscal 2000 and 1999, the Company entered into various employment
agreements wherein the Company has agreed to supplement compensation to certain
key employees in the form of stock options. Pursuant to the agreements, the
Company issued options to purchase 75,000 and 390,000 shares of restricted
common stock during fiscal 2000 and 1999, respectively, at exercise prices
ranging from $.01 per share to $5.00 per share and vesting over a period ranging
from six months to three years from date of grant. A total of approximately
$85,165 of compensation expense will be recorded over the vesting period of
which, $50,490 and $34,650 was recognized during fiscal 2000 and 1999,
respectively. The options are exercisable through October 2004.
During fiscal 1999, pursuant to various consulting and outside service provider
agreements, the Company issued to directors and consultants options to purchase
1,276,316 shares of the Company's restricted common stock at an exercise price
ranging from $0.01 to $1.00 per share (the Company estimated the fair market
value per share to be $1.00 on the date of each grant). The options vest on the
date of grant over a pre-determined vesting schedule and are exercisable through
November 2004. Total expense of $426,132 was recognized at June 30, 1999.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued 56,637 shares of common stock valued at $199,943
for services (see Note 10). In addition, the Company issued options to purchase
60,000 shares of the
F-15
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
Company's common stock as follows: 1) 20,000 shares at 100% of the closing bid
price on January 28, 2000, 2) 20,000 shares at 200% of the closing bid price on
January 28, 2000 and, 3) 20,000 shares at 300% of the closing bid price on
January 28, 2000. The options were valued at $157,800 using the Black Scholes
method and recorded as investor relations expense under Selling, General and
Administrative expense in the accompanying Statement of Operations. As of
September 30, 2000, no options have been exercised. The options are exercisable
through December 2001.
In January 2000, the Company entered into an agreement with a third party to
market the Company's products and services. The agreement requires the Company
to pay a monthly commission for each customer minute charged and collected from
the third party's efforts. In addition, the Company agreed to issue warrants to
purchase up to 1,000,000 shares of the Company's Common Stock at $1.88 per
share, at the rate of one share per customer brought to the Company by the
marketing company, subject to a minimum of 250,000 customers. No warrants have
been earned or granted as of the date of this filing.
On May 1, 2000, the Board issued options to purchase an aggregate of 57,500
shares of the Company's Common Stock, at an exercise price of $0.01, valued at
$71,300 to the members of the Board pursuant to their agreement of director
compensation. The options are exercisable through May 2003.
On May 1, 2000, the Board granted, pursuant to the Option Plan, an aggregate of
194,100 Non-statutory Stock Options (as defined by the Plan), exercisable at
$1.25 per share (the fair market value of the Company's Common Stock on the day
of grant) to certain employees and officers of the Company. In addition, the
Board granted options to purchase 100,000 shares of restricted Common Stock, at
an exercise price of $1.25 per share (the fair market value of the Company's
Common Stock on the day of grant) to the members of the Board. However, in the
event that the trading price of the Company's Common Stock closes at or above
$5.00 per share for a minimum of five (5) consecutive trading days, the Options
shall become fully vested. The options are exercisable through May 2010.
On October 20, 1999, the Company granted options to purchase 526,000 shares of
restricted Common Stock, at an exercise price of $1.00 per share, to a director
of the Company (the fair market value of the Company's Common Stock on the day
of grant). The options are exercisable through October 2002.
A following is a status of the stock options outstanding at June 30, 2000 and
1999 and the changes during the years then ended:
2000 1999
Wtd Avg Wtd Avg
Options Ex Price Options Ex Price
----------- ------- ----------- -------
Outstanding, beginning of year 765,000 $1.7577 300,000 $0.2375
Granted 1,779,000 1.4189 1,666,316 0.9995
Exercised (375,000) 0.1920 (1,172,316) 0.2576
Expired/Forfeited (12,500) 4.1750 (29,000) 3.1052
----------- ------- ----------- -------
Outstanding, end of year 2,156,500 $1.7365 765,000 $1.7577
=========== ======= =========== =======
Exercisable at end of year 1,089,401 $1.5578 439,000 $0.4000
=========== ======= =========== =======
Wtd avg fair value of options granted $ 1.39 $ 1.00
======= =======
702,000 of the options outstanding at June 30, 2000 have exercise prices between
$0.01 and $1.00, with a weighted average exercise price of $0.90 and a weighted
average remaining contractual life of 3.9 years. 702,000 of these options are
exercisable at June 30, 2000. 983,000 of the options outstanding at June 30,
2000 have exercise prices between $1.01 and $2.00, with a weighted average
exercise price of $1.16 and a weighted average remaining contractual life of 9.6
years. 239,400 of these options are exercisable at June 30, 2000. The
remaining 471,500 options have exercise prices between $2.72 and $10.59, with a
weighted average exercise price of $4.17 and a weighted average remaining
contractual life of 8.0 years. 148,001 of these options are exercisable at June
30, 2000.
F-16
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
SFAS 123 Proforma Information:
The fair market value of each option granted in 2000 and 1999 to consultants and
other third parties is estimated using the Black-Scholes option pricing method
per SFAS 123. The Black-Scholes option-pricing model used the following
assumptions for the years ended June 30, 2000 and 1999, respectively: (i) no
dividend yield for each year, (ii) average volatility of 152 percent and 127
percent, (iii) weighted-average risk-free interest rate of approximately 6.25
percent and 6.5 percent, and (iv) expected life of 1 year.
Had compensation cost for the Company's 2000 and 1999 options granted to
employees been determined consistent with SFAS 123, the Company's net loss and
net loss per share for the year ended June 30, 2000 and 1999 would approximate
the pro forma amounts below:
Years ended June 30,
----------------------------------
2000 1999
---------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
------------ ------------ ------------ ------------
Net loss $ (7,180,991) $ (7,455,503) $ (3,361,676) $ (3,361,676)
Basic and diluted
loss per share $ (0.42) $ (0.44) $ (0.27) $ (0.27)
NOTE 9 - WARRANTS
From time to time, the Company issues warrants pursuant to various consulting
agreements.
During fiscal 1999, pursuant to an agreement with an outside consultant, the
Company issued warrants to purchase 281,042 shares of the Company's restricted
common stock at an exercise price of $0.01 per share (the Company estimated the
fair market value on the date of grant to be $1.00 per share). The warrants
vested based on a formula and as of June 30, 1999, all warrants were vested and
exercised. Total consulting expense of $522,498 (including vesting of warrants
granted in fiscal 1998) was recognized as of June 30, 1999.
No warrants were granted or issued during fiscal 2000.
The following represents a summary of the warrants outstanding at June 30, 2000
and 1999 and changes during the years then ended:
Wtd Avg
Warrants Ex Price
--------------------------
Outstanding, July 1, 1998 1,135,966 $0.01
Granted 281,042 0.01
Exercised (1,417,008) 0.01
Expired/Forfeited -- --
------------- ------------
Outstanding, June 30, 1999 and 2000 -- --
==========================
The fair value of each warrant granted during 1999 is estimated using the
Black-Scholes option-pricing model on the date of grant using the following
assumptions: (i) no dividend yield, (ii) average volatility of 127 percent,
(iii) weighted-average risk-free interest rate of approximately 6.5 percent, and
(iv) expected life of 1 year.
F-17
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
NOTE 10 - COMMON STOCK ISSUANCES
On August 31, 1998, the Company (which at the time was designated Bobernco,
Inc., a Nevada corporation) acquired all of the outstanding common stock of
GenTel Communications, Inc., a Colorado corporation in a business combination
described as a "reverse acquisition." As part of the reorganization, the
Company issued 8,986,950
shares of its Common Stock to the shareholders of GenTel in exchange for all of
the outstanding shares of Common Stock of GenTel. Such shares include the
shares owned by officers and directors of the Company.
During the fiscal year ended June 30, 1999, the Company issued 162,000 shares of
restricted common stock, valued at $162,000 (estimated by the Company to be
$1.00 per share) to outside consultants for services rendered.
During the fiscal year ended June 30, 1999, the Company issued 16,050 shares of
common stock, valued at $76,600 (based on the market value on the date of grant)
to outside consultants for services rendered.
During the fiscal year ended June 30, 1999, the Company issued 11,000 shares of
restricted common stock, valued at $5,225 (estimated by the Company to be $0.475
per share) to employees in lieu of salary.
In October 1998, the Company issued 40,000 shares of restricted common stock
pursuant to the conversion of a note payable in the amount of $80,000.
During the fiscal year ended June 30, 1999, the Company issued 1,558,500
(including 23,500 shares for offering costs) shares of restricted common stock
pursuant to a private placement memorandum of $1,215,947, net of offering costs
of $319,053.
During fiscal 1999, the Company issued 2,589,324 shares of restricted Common
Stock in connection with the exercise of options and warrants for $316,170.
On April 21, 1999, the Company issued a confidential private placement
memorandum of 2,000,000 shares of the Company's restricted common stock at $3.00
per share. As of June 30, 1999, the Company had only sold 41,000 shares
pursuant to this offering, resulting in cash of $108,450, net of offering costs
of $14,550. On July 20, 1999, the Company replaced this offering with a
confidential private placement offering of 3,000,000 shares of the Company's
restricted common stock at a price of $1.00. As a result, the Company has
agreed to issue an additional 82,000 shares to these participants which are
included in the Statement of Stockholders' Deficit as of June 30, 1999.
During the fiscal year ended June 30, 2000, the Company issued 2,825,000 shares
of restricted common stock pursuant to the above private placement memorandum
for $2,536,605, net of offering costs of $288,395. The private placement
memorandum was closed as of June 2000.
During the fiscal year ended June 30, 2000, the Company issued 250,000 shares of
restricted Common Stock for $250,000 to two unaffiliated investors.
During the fiscal year ended June 30, 2000, the Company issued 305,000 shares of
restricted common stock, valued at $305,000 (estimated by the Company to be
$1.00 per share) to outside consultants and vendors for services rendered.
In September 1999, the Company issued 67,675 shares of common stock, valued at
$271,247 (based on the market value on the date of grant) to consultants in
exchange for consultation and legal services rendered.
In December 1999, the Company issued 282,575 shares of common stock, valued at
$539,666 (based on the market value on the date of grant) to consultants in
exchange for consultation and legal services rendered.
In January 2000, the Company issued 7,000 shares of the Company's common stock
valued at $13,118 (based on the market value on the date of grant) in exchange
for consultation services.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued 56,637 shares of common stock valued at $199,943
(based on the market value on the date of grant) for services.
During fiscal year 2000, the Company issued 55,000 shares of restricted common
stock pursuant to the conversion of a note payable with a principal amount of
$50,000 and accrued interest of $5,000.
In May 2000, the Company issued 456,833 shares of common stock, valued at
$682,000 (based on the market value on the date of grant) to consultants in
exchange for consultation and legal services rendered.
F-18
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
During fiscal year 2000, the Company's President and Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, and certain other employees ,
exercised options to purchase a total of 375,000 shares of the Company's common
stock in lieu of salary for $72,250.
CANCELLATION OF CERTAIN SHARES OF STOCK HELD BY MANAGEMENT - During fiscal year
2000, Mr. Sandhu and Mr. Clemons canceled 619,848 and 154,962, respectively,
shares of the Company's common stock held by each of them. It was determined
that these shares were not cancelled in a timely matter. As a result, these
cancellations are reflected as a reduction in the outstanding shares as of July
1, 1998.
NOTE 11 - INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes are as
of June 30, 2000:
Deferred tax asset:
Net operating loss carryforward $ 4,347,000
Expense recognized for granting options and warrants 115,000
Other, net 6,218
-----------
Total gross deferred tax asset 4,468,218
Less valuation allowance (4,468,218)
-----------
Net deferred asset $ --
===========
The valuation allowance increased by approximately $2,919,218 during the year
ended June 30, 2000. No current provision for income taxes for the periods
ended June 30, 2000 and 1999 is required, except for minimum state taxes, since
the Company incurred taxable losses during such years.
The provision for income taxes for fiscal 2000 and 1999 was $800 and differs
from the amount computed by applying the U.S. Federal income tax rate of 34% to
loss before income taxes as a result of the following as of:
June 30,
2000 1999
Computed tax benefit at federal statutory rate $ (2,440,000) $ (1,143,000)
State income tax benefit, net of federal effect (474,000) (191,200)
Increase in valuation allowance 2,919,218 1,335,000
Other, net -- --
----------- ------------
$ 5,218 $ 800
=========== ============
As of June 30, 2000, the Company had net operating loss carryforwards of
approximately $11,500,000 and $5,000,000 for federal and state income tax
reporting purposes, which begin expiring in 2013 and 2003, respectively.
In the event the Company were to experience a greater than 50% change in
ownership as defined in Section 382 of the Internal Revenue Code, the
utilization of the Company's net operating loss carryforwards could be severely
restricted.
F-19
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On April 30, 1999, the Company entered into an agreement with Williams
Communications, a unit of Williams of Tulsa, Oklahoma ("Williams"), in which
Williams was to design, install and maintain a high speed, nationwide VoIP
network for the Company. Subsequently, due to Williams' inability to deliver
the VoIP network as contracted and as a result of the previously discussed
amendments to the MCI/WorldCom contract, the Company determined to discontinue
its agreement with Williams. As a result of the Company's discontinuation of
its contract with Williams, the Company may be subject to $600,110 in fees. The
Company is in negotiations with Williams to modify or eliminate these charges.
However, no assurances can be made that such negotiations will result in a
favorable outcome. No amounts have been recorded related to the discontinuation
of this contract as of June 30, 2000.
The Company has recorded an accrual for past due payroll taxes as of June 30,
2000 due to the under-reporting of the Company's payroll tax liability. As a
result, the Company has accrued approximately $650,000 (including approximately
$85,000 of penalties and interest) under accrued payroll and related taxes in
the accompanying balance sheet at June 30, 2000. The Company expects this
matter to be settled and the related accrual paid by June 30, 2001.
LEASE AGREEMENTS - The Company leases its facilities for its corporate and
operations offices under a non-cancelable lease expiring in May 2001.
Future minimum annual commitments under lease arrangements are as follows:
Years Ending Operating
June 30, Leases
------------- ----------
2001 $ 205,150
==========
Rent expense for the fiscal years ended June 30, 2000 and 1999 was $322,880 and
$148,666, respectively.
EMPLOYMENT AGREEMENTS - In fiscal 1999, the Company entered into employment
agreements with certain officers. Under the terms of the agreements, the
officers will receive an annual salary and options to purchase Company common
stock (see Note 8). The Company has no long-term employment agreements.
CONTRACTS AND AGREEMENTS - On June 17, 1998, the Company entered into an
agreement with The Michelson Group, Inc. ("Michelson"), whereby Michelson
performed 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 paid Michelson a monthly fee of $6,500 though June 2000.
In addition, the Company agreed 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 (a
total of 1,417,008 shares) upon the completion of a proposed bridge financing at
an exercise price of $0.01 per share. As of June 30, 1999, all warrants were
vested and exercised (see Note 9).
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 valued at
$50,000 and charged as commission expense plus a 13% commission on gross
proceeds received in connection with the February 12, 1999 private offering
(totaling $130,000). In addition, the Company agreed to issue TCC options to
purchase 600,000 shares of the Company's Common Stock at an exercise price of
$0.01 per share pursuant to a pre-determined performance schedule. During the
year ended June 30, 1999, TCC met all requirements for the granting of 600,000
options resulting in an offering cost charge of $594,000. As of June 30, 1999,
all 600,000 options have been exercised at $.01 per share.
F-20
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
In December 1999, the Company entered into a one-year agreement with a third
party for the Company's Internet Service Provider Access service. The agreement
requires the Company to pay the greater of actual incurred usage or a minimum
monthly fee of $500. Total amount paid pursuant to this agreement was $1,042 as
of June 30, 2000.
On December 9, 1999, the Company entered into a consulting agreement with a
third party to assist the Company in its marketing efforts. Pursuant to the
Agreement, the Company is subject to the following:
1. Payment for consulting services of: (i) $8,000 each month for the
calendar months of December 1999 and January 2000, (ii) $10,000 each month for
calendar months February and March 2000, (iii) $12,000 each month for calendar
months April and May 2000, and (iv) $1.00 retainer for each calendar month
thereafter through January 2001. The payment for consulting services may be
terminated by the Company or by the marketing company given thirty (30) days
written notice.
2. Issue to the marketing company up to 20,000 shares of the Company's
Common Stock at a rate of one share for each billed customer brought to the
Company by the marketing company by February 29, 2000, subject to a minimum of
5,000 customers. No shares have been issued or earned pursuant to this
agreement through the date of the report.
3. In addition, the Company may issue an additional 20,000 shares of Common
Stock and grant warrants to purchase 200,000 shares of the Company's Common
Stock at $2.57 per share if certain customer thresholds are met, as defined. As
of September 8, 2000, no additional shares have been issued or earned and no
additional warrants have been granted or earned.
This consulting agreement was terminated on September 8, 2000. For the year
ended June 30, 2000, the Company recognized $99,536 in expense pursuant to this
agreement.
On November 13, 1999, the Company entered into an agreement with an Internet
Services Provider ("ISP") whereby the ISP will provide Digital Subscriber Line
("DSL") services for the Company. The agreement provides for no minimum monthly
revenue commitment and shall continue for one year and is automatically renewed
on a month-to-month basis unless terminated by the Company or by the ISP given
thirty (30) days written notice. For the year ended June 30, 2000, the Company
has paid $3,902 pursuant to this agreement.
In connection with the Company's confidential private placement memorandum dated
July 20, 1999, the Company entered into a revised Investment Banking Agreement
with TCC on August 1, 1999. As part of this Agreement, TCC agreed to provide
the Company with consulting services and to assist the Company in raising
capital. In return, the Company agreed to compensate TCC with a 13% commission
on gross proceeds received in connection with the July 20, 1999 offering. Total
commissions of $294,345 were paid to TCC pursuant to this offering. In
addition, the Company agreed to issue TCC options to purchase up to 300,000
shares of the Company's Common Stock at an exercise price of $1.10 per share
based upon 10% of the total proceeds raised by TCC. Options to purchase 239,400
shares of the Company's restricted Common Stock at an exercise price of $1.10
per share were granted and are exercisable through April 2003. The options were
estimated to be $220,248 using the Black-Scholes option pricing model per SFAS
123 and were recorded as Offering Costs in Stockholder's deficit.
Beginning in August 1999, the Company entered into negotiations with
MCI/WorldCom ("MCI/WorldCom") in an effort to lower its network transmission
costs. As a result of these negotiations, MCI/WorldCom agreed to amend the
existing contract whereby MCI/WorldCom agreed to reduce the Company's network
transmission costs by
F-21
<PAGE>
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2000
approximately 40%. Additionally, under the terms of the amendment, the minimum
monthly purchase requirement was increased to $12,000 per month and the total
minimum purchase requirement increased to $288,000. In an effort to continue to
reduce its long distance network transmission costs, the Company successfully
negotiated an additional amendment to its contract in September 2000. The
amendment further reduces the Company's network transmission costs by
approximately 30%. In addition, under the terms of the amendment, the contract
is extended to August 31, 2003 and the minimum monthly purchase requirement
increased to $400,000 per month for the months August 2000 to January 2001 and
then increases to $520,000 per month from February 2001 to the end of the
contract. The total minimum purchase requirement of the contract increased to
$18,000,000. All remaining material terms of the contract remain the same. For
the years ended June 30, 2000 and 1999, the Company paid $2,239,778 and $53,557,
respectively, pursuant to this agreement.
F-22
<PAGE>
In September 1998, the Company entered into an agreement with a billing company
who provides processing services for customer billing and collections. In
addition the billing company will provide financing through a third-party lender
for amounts up to 60% of eligible accounts receivable, as defined. For the
years ended June 30, 2000 and 1999, the Company paid $121,043 and $6,715,
respectively, in fees to the billing company pursuant to this agreement.
In October 1998, the Company entered into an agreement to become a licensed user
of a telecommunications management and accounting software program. The
agreement, which expires in October 2003, unless terminated by the Company, has
a five-year renewal feature and provides for the Company to pay $1,425 per
month. For the years ended June 30, 2000 and 1999, the Company paid $17,309 and
$7,627, respectively, pursuant to this agreement.
NOTE 13 EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Years Ended June 30,
2000 1999
------------ ------------
Numerator for basic and diluted earnings per share:
Net loss charged to common stockholders $ (7,180,991) $ (3,361,676)
Denominator for basic and diluted earnings per share:
Weighted average shares 17,105,139 12,647,347
Basic and diluted earnings per share $ (0.42) $ (0.27)
NOTE 14 - SUBSEQUENT EVENTS:
On September 25, 2000, the Company entered into a promissory note with a
shareholder in the amount of $200,000. The note, which accrues interest at 12%,
is due on March 25, 2001 and is secured by the Company's receivables. In
addition, the Company agreed to issue to the noteholder warrants to purchase up
to 40,000 shares of the Company's restricted Common Stock at an exercise price
of $0.50 per share valued at approximately $13,500 (based on the Black-Scholes
pricing model). The warrants are exercisable for a period of two (2) years from
the date of issuance and contain piggy-back registration rights.
F-23
<PAGE>
