As filed with the Securities and Exchange Commission on July 26, 2005
Registration No. 333-126708
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
GTC TELECOM CORP.
(Name of Registrant in Its Charter)
NEVADA 4813 88-0318246
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification No.)
or Organization)
3151 AIRWAY AVE., SUITE P-3 S. PAUL SANDHU
COSTA MESA, CALIFORNIA 3151 AIRWAY AVE., SUITE P-3
(714) 549-7700 COSTA MESA, CALIFORNIA
(Address and telephone number of Principal (714) 549-7700
Executive Offices and Principal Place (Name, address and
telephone number of agent
for service)
of Business)
Copies To:
Brian A. Lebrecht, Esq.
The Lebrecht Group, APLC
22342 Avenida Empresa, Suite 220
Rancho Santa Margarita, CA 92688
(949) 635-1240
Fax No.: (949) 635-1244
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ x ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE PER PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------
Common Stock of certain selling shareholders 5,000,000 $ 0.17 (1) $ 850,000 $ 100.05
Common Stock underlying conversion 31,230,770 $ 0.13 (2) $ 4,060,000 $ 477.86
of convertible notes
Common Stock underlying warrants held by 22,395,000 $ 0.21 (3) $ 4,672,500 $ 549.95
certain warrantholders ----------
TOTAL: $ 1,127.86
(1) The proposed maximum offering price is estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) of the
Securities Act of 1933, as amended. The price per share is based on
the average bid and ask price of the common stock on the
Over-The-Counter Bulletin Board maintained by the National Association
of Securities Deals on July 18, 2005.
(2) Denotes the conversion price of the convertible notes.
(3) Denotes the weighted average exercise price of the warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated July 26, 2005
UP TO 58,625,770 SHARES OF COMMON STOCK
GTC TELECOM CORP.
[GRAPHIC OMITED]
GTC Telecom is registering up to 5,000,000 shares of our common stock
already issued, 31,230,770 shares issuable by us upon conversion of convertible
notes and 22,395,000 shares issuable upon exercise of warrants all held by
existing shareholders.
The selling shareholders may resell these shares, and resell the shares
issuable upon exercise of the warrants, using this prospectus. All of the common
stock registered by this prospectus will be sold by the selling shareholders at
the prevailing market price at the time they are sold.
Our common stock is quoted on the over-the-counter electronic bulletin
board under the symbol "GTCC."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ________, 2005
PROSPECTUS SUMMARY
GTC TELECOM CORP.
We are a provider of various telecommunication services, including local
and long distance telephone services as well as a provider of Internet service
access. We were organized on May 17, 1994 and are currently based in Costa
Mesa, California. Our common stock is quoted on the over-the-counter electronic
bulletin board under the symbol "GTCC."
Our principal office is located at 3151 Airway Ave., Suite P-3, Costa Mesa,
CA 92627, telephone number (714) 549-7700. Our worldwide website is
www.gtctelecom.com. Information contained on our website is not part of this
prospectus.
THE OFFERING
We are registering 5,000,000 shares for sale by existing shareholders, up
to 31,230,770 shares for sale by existing convertible note holders upon
conversion of their convertible notes, and up to 22,395,000 shares for sale by
existing warrant holders upon the exercise of their warrants. All of the common
stock registered by this prospectus will be sold by the selling shareholders at
the prevailing market prices at the time they are sold. We currently have
29,625,622 shares of common stock outstanding, and if all of the convertible
notes are converted and all the warrants are exercised, we will have 83,351,392
shares of common stock outstanding.
-2-
RISK FACTORS
OUR COMPANY IS SUBJECT TO VARIOUS RISKS WHICH MAY MATERIALLY HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY
CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION
IN THIS FILING BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. THESE ARE NOT THE
ONLY RISKS AND UNCERTAINTIES THAT WE FACE. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
WE CURRENTLY DO NOT HAVE SUFFICIENT CASH FLOW FROM OPERATIONS TO MEET ALL
OF OUR MONTHLY OPERATING REQUIREMENTS. Currently, billings from accounts
receivable are sufficient to meet our monthly operating requirements. However,
the amounts actually collected from our customers is not sufficient to fully pay
all of our monthly operating expenses. With our recent entry into the local
telephone market, an increasing number of our customers have elected to pay
their monthly bills by check. Previously, the majority of our long distance
customers elected to pay their bills by credit card. Payment by credit card
allows us to collect our billings within days of billing our customers. Payment
by check, however, typically results in collection times in excess of thirty
days. In addition, payment by credit card allows us to quickly determine
whether a customer is going to pay their bill whereas, with payment by check,
this determination can take in excess of thirty days. As a result, we have
experienced a significant increase in the amount of bad debt associated with our
local product.
In an effort to reduce this bad debt and increase collections, we have
recently begun implementing several corrective measures. These include:
determining a customer's credit rating prior to provisioning service;
strengthening our internal and third-party collection efforts by increasing the
number of our collection employees and reducing the timeframe before collection
efforts are initiated; and reporting delinquent customers to the appropriate
credit bureaus. We anticipate that these measures will increase our cash flows
from operating activities. However, if we are unsuccessful in our efforts to
increase our cash collections or increase revenues and customers, we will not
have sufficient cash flows to fund our monthly operations as well as service our
debt obligations.
WE MAY NOT HAVE SUFFICIENT CASH TO REPAY OUR DEBT OBLIGATIONS. Recently,
we restructured approximately $7.7 million in accrued liabilities consisting of
notes payable, accrued interest and other outstanding accounts payable, into new
short and long term debt (see below) that resulted in the elimination of
approximately $6.9 million in accrued liabilities. Consequently, beginning in
September 2005, we will be required to begin making monthly principal and
interest payments on these new obligations. Unless we are able to increase our
revenues and increase our cash collections, we may not have sufficient cash flow
to fully support daily operations and service our debt obligations and will need
to increase revenues and customers, decrease bad debt, or acquire alternate
financing.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS WHICH ARE REQUIRED FOR US
TO PROVIDE OUR SERVICES. We do not own our own long distance network and
therefore currently depend primarily upon Sprint Communications LP to provide
for the transmission of long distance phone calls by our customers and to
provide the call detail records upon which we base our customer's billings. We
also rely upon incumbent local exchange carriers such as BellSouth
Communications and SBC Communications to provide the underlying networks for the
provisioning of our local telephone service. Additionally, our Internet
services are provided pursuant to agreements with various outside companies.
Although we believe that our relations with these companies are strong and
should remain so with continued contract compliance, the termination of our
contracts with these companies, the loss of services provided by them, or a
reduction in the quality of service we receive from them would likely harm our
business. For additional details, please see Major Suppliers below.
COMPETITION IN OUR MARKETS IS VERY INTENSE AND WE MAY NOT BE ABLE TO
COMPETE. The local and long distance telecommunications industry is highly
competitive and affected by the introduction of new services by, and the market
activities of, major industry participants, including AT&T Corp., WorldCom,
Sprint Corporation, SBC, Verizon, and other national and regional local and
interexchange carriers. Competition in the local and long distance business is
based upon pricing, customer service, billing services and perceived quality.
We compete against various national and regional carriers that are composed of
both facilities-based providers (those that carry traffic on their own
equipment) and switchless resellers (those that resell local and long distance
carried by facilities-based providers) offering essentially the same services as
we do. Several of our competitors are substantially larger and have greater
financial, technical and marketing resources. Although we believe that we have
the human and technical resources to pursue our strategy and compete effectively
in this competitive environment, our success will depend upon our continued
ability to profitably provide high quality, high value services at prices
generally competitive with, or lower than, those charged by our competitors.
-3-
We expect to encounter continued competition from major domestic and
international communications companies. In addition, we may be subject to
additional competition due to the enactment of the Telecommunications Act of
1996, the development of new technologies and increased availability of domestic
and international transmission capacity. A continuing trend toward business
combinations and alliances in the telecommunications industry may create
significant new competitors, which may have financial, personnel and other
resources significantly greater than ours. Other potential competitors include
cable television companies, wireless telephone companies, electric utilities,
microwave carriers and private networks of large end users.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing transmission capacity for services similar to those provided by us.
We cannot predict which of many possible future product and service offerings
will be important to maintain our competitive position or what expenditures will
be required to develop and provide such products and services.
The market for Internet-based online services is relatively new, intensely
competitive and rapidly changing. Since the advent of commercial services on the
Internet, the number of Internet Service Providers and online services competing
for users' attention and spending has proliferated because of, among other
reasons, the absence of substantial barriers to entry, and we expect that
competition will continue to intensify. Many of our current and potential
competitors such as Earthlink, Yahoo, AOL, UUNET, and Microsoft Network have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources. These
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements and to devote greater resources to the
development, promotion and sale of their products and services than we are.
AS OUR CUSTOMERS ARE FREE TO CHANGE THEIR TELECOMMUNICATION PROVIDER, OUR
REVENUES MAY DECREASE AT ANY TIME. The vast majority of our customers are not
obligated to purchase any minimum usage amount and can discontinue service,
without penalty, at any time. Therefore, we cannot know if our customers will
continue to buy their local or long distance telephone service through us. A
high level of customer attrition is inherent in the long distance industry, and
our revenues are affected by such attrition. Attrition is attributable to a
variety of factors, including termination of customers by us for nonpayment and
the initiatives of existing and new competitors as they engage in, among other
things, national advertising campaigns, telemarketing programs and the issuance
of cash or other forms of incentives.
In the event that a significant portion of our customers decide to purchase
service from another provider, we do not know if we would be able to replace our
customer base from other sources. Loss of a significant portion of our
customers would result in a corresponding reduction in our revenues.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION THAT MAY BE CHANGED IN
WAYS THAT HURT OUR BUSINESS. We are subject to regulation by the FCC and by
various state public service and public utility commissions as a nondominant
provider of local and long distance services. We are required to file tariffs
for interstate and international service with the FCC, which tariffs are
presumed lawful and become effective on one day's notice. We are also required
to file tariffs or obtain approval for intrastate service provided in most of
the states in which we market local or long distance services. By engaging in
direct marketing to end users, we will be subject to applicable regulatory
standards for marketing activities and the increased FCC and state attention to
certain marketing practices may become more significant to us. Additionally,
certain marketing practices, including the methods and means to convert a
customer's telephone service from one carrier to another, have recently been
subject to increased regulatory review at both the federal and state levels.
This increased regulatory review could impede our possible future acquisition of
new business from other resellers. Our marketing activities mandate compliance
with applicable state and federal regulations. We are unable to predict the
effect of such increased regulatory review.
YOU MAY BE UNABLE TO EFFECTIVELY EVALUATE THE BUSINESS OF OUR PERFEXA
SUBSIDIARY BECAUSE PERFEXA'S OUTSOURCED CALL CENTER AND INFORMATION TECHNOLOGY
SERVICE BUSINESS HAS EXISTED FOR ONLY A SHORT PERIOD OF TIME. Perfexa-U.S. was
originally incorporated on October 3, 2000 as GTC Wireless, Inc. and was
inactive until September 13, 2002 when it changed its name to Perfexa Solutions,
Inc. Perfexa-U.S. owns 99% of the issued and outstanding capital stock of
Perfexa Solutions Pvt. Ltd., a corporation formed under the laws of the Republic
of India. Perfexa develops and markets offshore outsourced call center
solutions and information technology services to small and medium size companies
and does not have an established operating history. Accordingly, you can
evaluate Perfexa's business, and therefore its future prospects, based only its
very limited operating history. In addition, you must consider Perfexa's
prospects in light of the risks, expenses, and difficulties frequently
encountered in the establishment of a new business in a rapidly evolving market.
PERFEXA WILL BE SUBJECT TO CERTAIN INHERENT RISKS ASSOCIATED WITH THE
REPUBLIC OF INDIA. Perfexa's operating subsidiary, Perfexa Solutions Pvt. Ltd.,
is incorporated in the Republic of India, and substantially all of Perfexa's
assets and employees are located in India. Consequently, Perfexa's financial
performance will be affected by political, social and economic developments
affecting India, Government of India policies, including taxation and foreign
investment policies, government currency exchange control, as well as changes in
exchange rates and interest rates.
-4-
Regional conflicts in South Asia could adversely affect the Indian economy,
disrupt Perfexa's operations and cause its business to suffer. South Asia has
from time to time experienced instances of civil unrest and hostilities among
neighboring countries, including between India and Pakistan. India's relations
with neighboring Pakistan, each a nuclear power, are tense. In April 1999, India
and Pakistan each conducted long-range missile tests. Since May 1999, military
confrontations between India and Pakistan have occurred in the disputed
Himalayan region of Kashmir. India's relations with neighboring China are also
tense. Events of this nature in the future could influence the Indian economy
and have a material adverse effect on Perfexa's business. The potential for
such hostilities has recently increased as a result of terrorist attacks in the
U.S. and the recent attack on the Indian Parliament has increased tensions
between India and Pakistan. Events of this nature in the future could influence
the Indian economy and could have a material adverse effect on Perfexa's
operations and on the market for Perfexa's services.
Political instability or changes in the government in India could delay the
liberalization of the Indian economy and adversely affect economic conditions in
India generally, which could impact Perfexa's financial results and prospects.
Since 1991, successive Indian governments have pursued policies of economic
liberalization, including significantly relaxing restrictions on the private
sector. Nevertheless, the role of the Indian central and state governments in
the Indian economy as producers, consumers and regulators has remained
significant. The Government of India has changed several times over the past
decade. The current Government of India, formed in 2004, has announced policies
and taken initiatives that support the continued economic liberalization
policies that have been pursued by previous governments. There can be no
assurances that that these liberalization policies will continue in the future.
The rate of economic liberalization could change, and specific laws and policies
affecting technology companies, foreign investment, currency exchange and other
matters affecting investment in its securities could change as well. A
significant change in India's economic liberalization and deregulation policies
could adversely affect business and economic conditions in India generally and
Perfexa's business in particular.
PERFEXA'S BUSINESS IS SUBJECT TO FLUCTUATIONS IN FOREIGN CURRENCIES.
Perfexa's business is subject to fluctuations in the value of the Indian Rupee
against the U.S. dollar due to Perfexa's Indian subsidiary. Operational costs
including labor, equipment, and facilities leases could fluctuate depending on
the value of the Rupee vis-a-vis the U.S. dollar. With the recent decline in
the value of the dollar in relation to the Rupee, we have experienced a
corresponding increase in our operating costs. In the future, Perfexa may also
sell its products and services in other currencies which would make the
management of currency fluctuations more difficult.
OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS. The market price for our common stock may
fluctuate significantly in response to a number of factors, some of which are
beyond our control. These factors include:
- - Quarterly variations in operating results;
- - Changes in financial estimates by securities analysts;
- - Announcements by us or our competitors of new products, significant
contracts, acquisitions or strategic relationships;
- - Publicity about our company, management, products or our competitors;
- - Additions or departures of key personnel;
- - Any future sales of our common stock or other securities; and
- - Stock market price and volume fluctuations of publicly traded companies.
-5-
These and other external factors have caused and may continue to cause the
market price and demand for our common stock to fluctuate substantially, which
may limit or prevent investors from readily selling their shares of common stock
and may otherwise negatively affect the liquidity of our common stock.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. If securities class action litigation is brought against us it could
result in substantial costs and a diversion of our management's attention and
resources, which could hurt our business.
CERTAIN SHARES OF OUR COMMON STOCK ARE RESTRICTED FROM IMMEDIATE RESALE.
THE LAPSE OF THOSE RESTRICTIONS, COUPLED WITH THE SALE OF THE RELATED SHARES IN
THE MARKET, OR THE MARKET'S EXPECTATION OF SUCH SALES, COULD RESULT IN AN
IMMEDIATE AND SUBSTANTIAL DECLINE IN THE MARKET PRICE OF OUR COMMON STOCK. A
substantial number of our shares of common stock are restricted from immediate
resale in the public market. The sale or resale of those shares in the public
market, or the market's expectation of such sales, may result in an immediate
and substantial decline in the market price of our shares. Such a decline will
adversely affect our investors, and make it more difficult for us to raise
additional funds through equity offerings in the future.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING
ACTIVITY IN OUR STOCK MAY BE REDUCED. Our common stock may be deemed to be
"penny stock" as that term is defined in Rule 3a51-1 promulgated under the
Securities Exchange Act of 1934. Penny stocks are stock:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00 per
share); or
- In issuers with net tangible assets less than $2.0 million (if the issuer
has been in continuous operation for at least three years) or $5.0 million
(if in continuous operation for less than three years), or with average
revenues of less than $6.0 million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
YOU MAY INCUR DILUTION IN THE FUTURE. We may require additional funds to
support our working capital requirements or for other purposes, and will seek to
raise additional funds through public or private equity financing. Also, we may
acquire other companies or finance strategic alliances by issuing equity. Any
capital raising transaction may result in additional dilution to our
shareholders.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, including the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," that are based on our management's
beliefs and assumptions and on information currently available to our
management. Forward-looking statements include the information concerning our
possible or assumed future results of operations, business strategies, financing
plans, competitive position, industry environment, potential growth
opportunities, the effects of future regulation and the effects of competition.
Forward-looking statements include all statements that are not historical facts
and can be identified by the use of forward-looking terminology such as the
words "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar
expressions. These statements are only predictions and involve known and unknown
risks and uncertainties, including the risks outlined under "Risk Factors" and
elsewhere in this prospectus.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievement. We are not under any duty to update any of
the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
-6-
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling shareholders. We will not receive
any proceeds from the sale of shares of common stock in this offering. However,
we may receive proceeds from the exercise of warrants. The weighted average
exercise price to acquire all of the shares of common stock included in this
prospectus underlying the exercise of warrants is $0.21 per share, and the
maximum proceeds to us upon the exercise of all the warrants is approximately
$4,672,500.
These proceeds would be received from time to time as warrants are
exercised, and we will use these proceeds for working capital needs.
Our allocation of proceeds represents our best estimate based upon the
expected exercise of warrants and the requirements of our proposed business and
marketing plan. If any of these factors change, we may reallocate some of the
net proceeds. The portion of any net proceeds not immediately required will be
invested in certificates of deposit or similar short-term interest bearing
instruments.
-7-
SELLING SHAREHOLDERS
The following table provides certain information with respect to shares
offered by the selling shareholders:
PERCENTAGE OF
OUTSTANDING SHARES TO BE PERCENTAGE OF
SHARES SHARES ACQUIRED UPON OUTSTANDING
BENEFICIALLY BENEFICIALLY CONVERSION OF SHARES TO BE SHARES TO BE
SELLING OWNED BEFORE OWNED BEFORE CONVERTIBLE SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING OFFERING(1) NOTE(3) OFFERING THE OFFERING(4)
Alpha Capital 7,647,059 (5) 21.19%(2) 9,185,520 15,565,611 0%
DCOFI Master 9,176,471 (6) 24.54%(2) 11,022,624 18,678,733 0%
SCG Capital 2,294,118 (7) 7.27%(2) 2,755,656 4,669,683 0%
Silver Oak 3,823,529 (8) 11.64%(2) 4,592,760 7,782,805 0%
Ellis International 1,529,412 (9) 4.95% 1,837,104 3,113,122 0%
Bumper Fund, LP 1,529,412(10) 4.95% 1,837,104 3,113,122 0%
Lance Baral 1,250,000(11) 4.25% N/A 1,250,000 0%
Blue Future, Inc. 25,000(12) * N/A 25,000 0%
Hunter Wise Financial Group LLC 120,000(13) * N/A 120,000 0%
_________________________________________
* Represents less than 1% of outstanding shares.
(1) Percentage of outstanding shares prior to offering is based on
29,625,622 shares of common stock outstanding as of the date of this prospectus
plus the shares underlying warrants being registered for that particular selling
shareholder in this offering.
(2) Represents the total maximum percentage of shares that may be owned by
the selling shareholder. However, pursuant to a subscription agreement entered
into between us and the selling shareholder, the selling shareholder may not own
at any one time, more than 4.99% of the our outstanding common stock.
(3) Reflects 175% of the number of shares that may be acquired by the
Selling Shareholder upon conversion of the principal plus interest underlying
the 12% Convertible Note at a conversion rate of $0.13 per share.
(4) Percentage of outstanding shares is based on 29,625,622 shares of common
stock outstanding as of date of this prospectus, together with the 175% of the
shares of common stock that may be acquired from the conversion of the principal
amount and interest of the Convertible Notes at a the conversion rate of $0.13
per share, and 22,395,000 shares underlying warrants being registered in this
offering.
(5) Includes 3,529,412 shares underlying Class A Warrants and 2,941,176
Class B Warrants.
(6) Includes 4,235,294 shares underlying Class A Warrants and 3,529,412
Class B Warrants.
(7) Includes 1,058,824 shares underlying Class A Warrants and 882,353 Class
B Warrants.
(8) Includes 1,764,706 shares underlying Class A Warrants and 1,470,588
Class B Warrants.
(9) Includes 705,882 shares underlying Class A Warrants and 855,235 Class B
Warrants.
(10) Includes 705,882 shares underlying Class A Warrants and 855,235 Class B
Warrants.
(11) Includes 250,000 shares underlying warrants to acquire common stock at
an exercise price of $0.11 per share.
(12) Reflects number of shares underlying warrants to acquire common stock
at an exercise price of $0.17 per share.
(13) Reflects number of shares underlying warrants to acquire common stock
at an exercise price of $0.20 per share.
Material Relationships With The Selling Shareholders
Blue Future, Inc. has been retained by us to provide financial consulting
services. Hunter Wise Financial Group LLC has been retained by us to provide
investment banking services. With the exception of the above, we have had no
other material relationships with the selling shareholders during the past three
years.
-8-
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected by the
selling stockholders as principals or through one or more underwriters, brokers,
dealers or agents from time to time in one or more transactions (which may
involve crosses or block transactions) (i) on the over-the-counter market or on
any other market in which the price of our shares of common stock are quoted or
(ii) in transactions otherwise than in the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any
of such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If
the selling stockholders effect such transactions by selling their shares of
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved).
We will pay all expenses in connection with the registration and sale of
the common stock by the selling security holders, who may be deemed to be
underwriters in connection with their offering of shares. The estimated expenses
of issuance and distribution are set forth below:
Securities and Exchange Commission Registration Fee $ 1,128
Printing and Engraving Expenses $ 1,000
Accounting Fees and Expenses $ 10,000
Legal Fees and Expenses $ 50,000
Blue Sky Qualification Fees and Expenses $ 1,500
Miscellaneous $ 5,000
TOTAL $ 68,628
Under the securities laws of certain states, the shares of common stock may
be sold in such states only through registered or licensed brokers or dealers.
The selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and we have complied with them. The selling
stockholders and any brokers, dealers or agents that participate in the
distribution of common stock may be considered underwriters, and any profit on
the sale of common stock by them and any discounts, concessions or commissions
received by those underwriters, brokers, dealers or agents may be considered
underwriting discounts and commissions under the Securities Act of 1933.
In accordance with Regulation M under the Securities Exchange Act of 1934,
neither we nor the selling stockholders may bid for, purchase or attempt to
induce any person to bid for or purchase, any of our common stock while we or
they are selling stock in this offering. Neither we nor any of the selling
stockholders intends to engage in any passive market making or undertake any
stabilizing activity for our common stock. None of the selling stockholders will
engage in any short selling of our securities. We have been advised that under
the rules and regulations of the NASD, any broker-dealer may not receive
discounts, concessions, or commissions in excess of 8% in connection with the
sale of any securities registered hereunder.
-9-
LEGAL PROCEEDINGS
From time to time, we may be involved in various claims, lawsuits, disputes
with third parties, actions involving allegations of discrimination, or breach
of contract actions incidental to the operation of our business. We are not
currently involved in any such litigation which we believe could have a
materially adverse effect on our financial condition or results of operations.
DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the director nominees, and 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 appointed 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. Unless described below, there are no family relationships
among any of the directors and officers, and none of our officers or directors
serves as a director of another reporting issuer.
Name Age Position(s)
- --------------------------------------------------------------------------------
Paul Sandhu 44 Chief Executive Officer and Chairman of the Board
Eric Clemons 34 Director, President, Secretary and Treasurer
Gerald A. DeCiccio 47 Director and Chief Financial Officer
PAUL SANDHU is currently our Chief Executive Officer and the Chairman of
our Board of Directors. Mr. Sandhu has been with us since our inception. Mr.
Sandhu has over fourteen years experience with start-up and emerging growth
companies. Mr. Sandhu was Co-Founder, President and Co-Owner of Maximum
Security, a Security and surveillance company he started in 1992. While at
Maximum, Mr. Sandhu actively managed a staff of over 200 employees. In 1997 Mr.
Sandhu sold the business to his partner. Mr. Sandhu graduated from the
University of Punjab in India with a degree in Engineering.
ERIC CLEMONS is currently our President and a member of our Board of
Directors. Mr. Clemons has been with us since our inception. Mr. Clemons has
over twelve years experience with sales and marketing organizations. Mr.
Clemons most recent position prior to joining the Company was as Vice President
of Marketing for Intelligent Electronic Communications managing a staff of 50
employees.
GERALD A. DECICCIO joined us in January 1999 as Chief Financial Officer and
is currently a member of our Board of Directors. Mr. DeCiccio has over twenty
years experience in the financial and accounting field. Prior to joining us, Mr.
DeCiccio was the Vice President of Finance and Administration for National
Telephone & Communications, Inc., ("NT&C") a $150 million inter-exchange carrier
and provider of communications products and services. While at NT&C, Mr.
DeCiccio managed NT&C's finance, accounting, human resources and legal
departments. Between 1995 and 1997, Mr. DeCiccio was the Corporate Controller
for Newport Corporation, a $140 million multi-national manufacturer /
distributor of laser and optics products. Prior to that, Mr. DeCiccio was the
Director of Audit and Quality Systems for Sunrise Medical, Inc., a $750 million
multi-national manufacturer / distributor of health care products. From 1980 to
1984, Mr. DeCiccio was a Supervising Senior Accountant for Ernst and Young. Mr.
DeCiccio received his Bachelor of Science in Accounting from Loma Linda
University, and his Masters of Science in Finance and Systems Technology from
the University of Southern California. Mr. DeCiccio is a Certified Public
Accountant in the State of California.
-10-
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 15, 2005, certain information with
respect to the equity securities owned of record or beneficially by:
- - each of our Officers and Directors;
- - each person who owns beneficially more than 5% of each class of our equity
securities; and
- - all Directors and Executive Officers as a group.
COMMON STOCK PERCENT OF(1)
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIALOWNER OUTSTANDING OUTSTANDING
- --------------------------------------------------------------------------------
Paul Sandhu(2)
Common Stock 3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626. 4,187,715 13.81%
-------------------------------------- --------- ------
Eric Clemons(3)
Common Stock 3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626. 882,522 2.92%
-------------------------------------- --------- ------
Gerald A. DeCiccio(4)
Common Stock 3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626. 413,500 1.38%
-------------------------------------- --------- ------
Reet Trust(5)
Common Stock 21520 Yorba Linda, Suite 6227
Yorba Linda, CA 92887 2,000,000 6.75%
-------------------------------------- --------- ------
Rapaport Family Trust
Common Stock 584 Via Almar
Palos Verde Peninsula, CA 90275 3,595,000 12.13%
-------------------------------------- --------- ------
Common Stock All Directors and Officers as a Group
(3 Persons in total) 5,483,737 18.51%
-------------------------------------- --------- ------
<FN>
______________________________________
(1) Percentage of outstanding shares is based on 29,625,622 shares of common
stock outstanding as of the date of this prospectus plus shares underlying
options exercisable within 60 days for that particular holder.
(2) Includes 693,000 options to acquire shares of our common stock in
accordance with Mr. Sandhu's director compensation agreement and our employee
benefit plan. Does not include an aggregate of 837,000 unvested options to
acquire shares of our common stock granted in accordance with our employee
benefit plan.
(3) Includes 572,000 options to acquire shares of our common stock in
accordance with Mr. Clemons' director compensation agreement and our employee
benefit plan. Does not include an aggregate of 573,000 unvested options to
acquire shares of our common stock in accordance with our employee benefit plan.
(4) Includes an aggregate of 391,000 options to acquire shares of our common
stock in accordance with Mr. DeCiccio's employment and director compensation
agreements and our employee benefit plan. Does not include an aggregate of
394,000 unvested options to acquire shares of our common stock in accordance
with our employee benefit plan.
(5) The trustee of the Reet Trust is Teg Sandhu, father of S. Paul Sandhu.
However, S. Paul Sandhu disclaims any beneficial ownership to the shares held by
the Reet Trust.
We believe that the beneficial owners of securities listed above, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
-11-
DESCRIPTION OF SECURITIES
Authorized Capital Stock.
- ---------------------------
The authorized capital stock of our company currently consists of
100,000,000 shares of common stock, par value $0.001 and 20,000,000 shares of
preferred stock, par value $0.001. As of July 15, 2005, we have 29,625,622
shares of common stock outstanding and no shares of preferred stock designated
or outstanding.
Common Stock. Each share of common stock entitles the holder to one vote on
each matter submitted to a vote of our shareholders, including the election of
directors. There is no cumulative voting. Subject to preferences that may be
applicable to any outstanding preferred stock, shareholders are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors. Shareholders have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions
available to the common stock. In the event of liquidation, dissolution or
winding up of our company, shareholders are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding.
Preferred Stock. The Board of Directors is authorized, subject to any
limitations prescribed by the Nevada Revised Statutes, or the rules of any
quotation system or national securities exchange on which stock of our company
may be quoted or listed, to provide for the issuance of shares of preferred
stock in one or more series; to establish from time to time the number of shares
to be included in each such series; and to fix the rights, powers, preferences,
and privileges of the shares of such series, without any further vote or action
by the shareholders. Depending upon the terms of the preferred stock established
by the Board of Directors, any or all series of preferred stock could have
preference over the common stock with respect to dividends and other
distributions and upon liquidation of our company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
common stock. We have no present plans to issue any shares of preferred stock.
12% Convertible Promissory Notes.
---------------------------------
General Terms. In May and July 2005, we issued an aggregate of $2,000,000
principal amount in 12% Convertible Promissory Notes. This principal amount
reflects a original issue discount of 15%, which resulted in $1,700,000 in gross
proceeds to us. The notes accrue simple interest at the rate of 12% per annum
and mature on November 23, 2006. Under the terms of the notes, we are obligated
to make minimum payments beginning 120 days following the issuance of the notes.
The first three monthly minimum payments after the initial 120 day grace period,
will each equal 2.5 percent of the principal amount. The next eleven monthly
minimum payments will each equal 5 percent of the principal amount. Any
remaining outstanding principal or interest is then due upon maturity of the
note, which is November 23, 2006.
Repayment in Stock. Under the terms of the notes, subject to certain
limitations, we have the option of paying our minimum monthly payments with our
common stock. Such common stock would be valued at a conversion rate equal to
the lessor of (i) $0.13 per share or (ii) 85% of the average of the five closing
bid prices of our common stock prior to the date we make our payment. However,
unless waived by the noteholder, we may not pay the monthly minimum payment in
common stock if the amount the shares for such payment exceeds 35% of the
aggregate daily trading volume for our stock for the seven trading days prior to
our payment. We may also not use this feature to the extent that doing so at
such time, will cause a noteholder to own more than 4.99% of out common stock.
Additionally, we may not exercise this option if an effective registration
statement covering these shares is not in place. We have not decided whether to
make our minimum monthly payments in stock or cash.
Provided that certain conditions exist, we may force the noteholders to
convert some or all of the then outstanding principal and unpaid interest into
shares of our common stock at the rate of $0.13 per share. We may only exercise
this mandatory conversion option if the closing bid of our common stock is more
than $0.35 for each for the 10 trading days prior to our notice of a mandatory
conversion and then only for one day. Also, the shares to be paid in a
mandatory conversion may not exceed 35% of the daily trading volume of our
common stock for the preceding seven trading days multiplied by our common
stock's volume weighted average price.
Conversion Rights. The noteholder has the right, but not the obligation, to
convert all or any portion of the then aggregate outstanding principal amount
and any interest or fees then due, into shares of our common stock at the rate
of $0.13 per share. However, the noteholder may not exercise this option (unless
the noteholder waives this limitation upon 61 days prior notice) to the extent
that by doing so, it will own more than 4.99% of our outstanding shares of
common stock.
-12-
Default Provisions. Upon the occurrence of certain conditions set forth in
the notes, the noteholders shall be entitled to declare all outstanding
principal amounts and unpaid interest immediately due and payable. In the event
of a default, we may not pay a minimum monthly payment in stock and we may not
force a mandatory conversion.
Registration of Underlying Common Stock. To permit the purchasers to
resell the common shares underlying the convertible notes, we agreed to register
175% of the common shares issuable upon conversion of the convertible notes as
well as the shares underlying the Class A and Class B warrants described below.
To that end, we agreed that we will prepare and file such amendments and
supplements to the registration statement and the prospectus as may be necessary
in accordance with the Securities Act and the rules and regulations promulgated
thereunder, to keep it effective until the earliest of any of the following
dates:
- - the date after which all of the common shares held by the purchasers or
which are issuable by the convertible notes or warrants, have been sold by the
purchasers pursuant to such registration statement;
- - the date after which all of the common shares held by the purchasers or
which are issuable by the convertible notes or warrants that are covered by the
registration statement may be sold, in the opinion of our counsel, without
restriction under the Securities Act of 1933; or
- the date that is thirty-six (36) months from the effective date of
the registration statement.
Class A and Class B Warrants
----------------------------
In connection with the issuance of the 12% Convertible Promissory Notes, we
issued to the purchasers of the notes six Class A Warrants and five Class B
Warrants for each dollar amount of principal amount purchased.
Class A Warrants
The Class A Warrants entitle the holder to purchase our common stock for
$0.22 per share. Class A warrants are exercisable up to four years from the
date of issuance. If a registration statement covering the common stock
underlying the warrants is effective at the time of exercise, then the warrants
may only be exercised upon payment of cash. If such registration statement is
not in effect, then the holder may elect to exercise the warrant via a cashless
exercise method. Cashless exercise works in the following way. At the time the
holder wishes to exercise their warrants, if the fair market value of our common
stock is greater than the exercise price, then in lieu of paying cash to satisfy
the exercise price, the holder can elect to pay the exercise price by reducing
the amount of common stock they'll receive by the number of shares multiplied by
the then fair market value necessary to exercise the warrants.
For example, if a holder of 1,000 Class A Warrants wishes to exercise all
1,000 warrants, and at the time of exercise the fair market value of our common
stock is $0.44 per share, then instead of paying $220 to exercise their warrants
(1,000 shares x $0.22 exercise price), the holder would reduce the number of
shares they would receive by 500 ($220 divided by the fair market value of $0.44
per share). The holder would then get 500 shares upon exercise of their 1,000
warrants. The holders of the Class A Warrants are under no obligation to
exercise their warrants.
Class B Warrants
The Class B Warrants entitle the holder to purchase our common stock for
$0.20 per share. Class B warrants are exercisable from the date of issuance
until 120 days following the day in which a registration statement covering the
shares underlying the Class B Warrants is effective. During the period, the
warrants may only be exercised upon payment of cash. If such registration
statement is not in effect, then the holder may elect to exercise the warrant
via a cashless exercise method. The holders of the Class B Warrants are under
no obligation to exercise their warrants.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION, BYLAWS AND
NEVADA LAW
The following provisions of the Articles of Incorporation and Bylaws of our
company could discourage potential acquisition proposals and could delay or
prevent a change in control of our company. Such provisions may also have the
effect of preventing changes in the management of our company, and preventing
shareholders from receiving a premium on their common stock.
-13-
Authorized but Unissued Stock. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without shareholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans.
Blank Check Preferred Stock. The existence of authorized but unissued and
unreserved shares of preferred stock may enable the Board of Directors to issue
shares to persons friendly to current management which would render more
difficult or discourage an attempt to obtain control of our company by means of
a proxy contest, tender offer, merger or otherwise, and thereby protect the
continuity of our company's management.
Nevada Business Combination Law. The State of Nevada has enacted
legislation that may deter or frustrate takeovers of Nevada corporations. The
Nevada Business Combination Law generally prohibits a Nevada corporation from
engaging in a business combination with an "interested shareholder" (defined
generally as any person who beneficially owns 10% or more of the outstanding
voting stock of our company or any person affiliated with such person) for a
period of three years following the date that such shareholder became an
interested shareholder, unless the combination or the purchase of shares made by
the interested shareholder on the interested shareholder's date of acquiring
shares is approved by the board of directors of the corporation before that
date. A corporation may not engage in any combination with an interested
shareholder of the corporation after the expiration of three years after his
date of acquiring shares unless:
- The combination or the purchase of shares made by the interested
shareholder is approved by the board of directors of the corporation before
the date such interested shareholder acquired such shares;
- A combination is approved by the affirmative vote of the holders of stock
representing a majority of the outstanding voting power not beneficially
owned by the interested shareholder proposing the combination, or any
affiliate or associate of the interested shareholder proposing the
combination, at a meeting called for that purpose no earlier than three
years after the interested shareholder's date of acquiring shares; or
- The aggregate amount of cash and the market value, as of the date of
consummation, of consideration other than cash to be received per share by
all of the holders of outstanding common shares of the corporation not
beneficially owned by the interested shareholder, satisfies the fair value
requirements of Section 78.441 of Nevada Revised Statutes.
Special Meetings of Shareholders. Special meetings of the shareholders of
our company may be called by our Board of Directors or other persons authorized
to do so under Nevada law. Under applicable Nevada law, shareholders do not have
the right to call a special meeting of the shareholders. This may have the
effect of discouraging potential acquisition proposals and could delay or
prevent a change in control of our company by precluding a dissident shareholder
from forcing a special meeting to consider removing the Board of Directors or
otherwise.
Transfer Agent and Registrar. Transfer On-line is the transfer agent and
registrar for our common stock. Its address is 317 SW Alder Street, Portland,
Oregon, 97204.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The Lebrecht Group, APLC serves as our legal counsel in connection with
this offering. The Lebrecht Group and its employees are the owner of 900 shares
of our common stock. Additionally, pursuant to an agreement with the Lebrecht
Group, we are obligated to issue to them 50,000 shares of our common stock.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by Nevada law. This limitation of liability is subject
to exceptions including intentional misconduct, obtaining an improper personal
benefit and abdication or reckless disregard of director duties. Our articles
of incorporation and bylaws provide that we may indemnify our directors,
officer, employees and other agents to the fullest extent permitted by law. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We currently have an insurance policy for our officers and directors.
-14-
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
-15-
DESCRIPTION OF BUSINESS
OVERVIEW
We are a provider of various services including, telecommunication services
such as local and long distance telephone services, Internet related services,
and business process outsourcing ("BPO") services. We were organized as a
Nevada Corporation on May 17, 1994 and are currently based in Costa Mesa,
California. Our common stock trades on the NASDAQ's OTC Bulletin Board under
the symbol "GTCC."
Our services consist of the following:
TELECOMMUNICATIONS RELATED SERVICES
We are currently licensed in every state (except Alaska) and the District
of Columbia to provide long distance telecommunications services. We primarily
service small and medium sized businesses and residential customers throughout
the United States and have positioned ourselves to be a low-cost provider in the
marketplace. To date, we have operated as a switchless(1), nonfacilities-based
reseller of long distance services. By committing to purchase large usage
volumes from national carriers such as Sprint, pursuant to contract tariffs(2),
we have been able to procure substantial discounts and offer low-cost,
high-quality long distance services to our customers at rates at or below
current standard industry levels.
We provide long distance telephone service under a variety of plans. These
include outbound service, inbound toll-free 800 service and calling card
service. We are also continuing our efforts to expand our service offerings to
provide local telephone service by becoming a Competitive Local Exchange Carrier
("CLEC"). We have recently obtained licenses in several states including
California, Florida, Georgia, Kentucky, New York, New Jersey, North Carolina,
Ohio, and Texas to operate as a CLEC. We recently began offering service in
Florida, Georgia, Kentucky, North Carolina, and Texas and are in the process of
expanding our local service offerings. Future plans are to provide local
services in most of the major states throughout the country. We anticipate that
by providing CLEC services, we will be able to offer our own bundled services
and thereby reverse the recent attrition of our telecommunications customer
base. Recently, however, the Federal Court of Appeals for the District of
Columbia, overturned rules regulating rates which incumbent local exchange
carriers charge competitive local exchange carriers such as the Company.
Consequently, incumbent local exchange carriers such as SBC, Bellsouth and
Verizon are no longer legally required to offer us certain network elements
which we require to offer local service. However, we have been able to
negotiate commercial agreements with SBC and Bellsouth for the provisioning of
such service at rates which we believe are acceptable.
INTERNET RELATED SERVICES
We also operate as an Internet Service Provider, offering dial-up access at
speeds up to 56kps and Digital Subscriber Line (DSL) service. These services
are available to both consumer and business users. Our Internet related
services are billed using the same methods as those used for billing our
telecommunication services. Our Internet related services are provided pursuant
to contracts with third-party providers, who remain competitors with us. By
contracting with third-party providers to purchase large quantities of usage
volumes, we are able to secure significant discounts, which then allows us to
offer these services to our end-users at rates equal to or less than our
competitors.
BUSINESS PROCESS OUTSOURCING SERVICES
In 2002 we began exploring various options to reduce our labor and overhead
costs as well as explore new markets. We determined that by developing a call
center and Information Technology ("IT") development center in India, we could
take advantage of India's highly skilled but vastly lower labor and operating
costs thereby allowing for the reduction of a significant portion of our
operating overhead. Despite significant start-up costs associated with the
development of our outsourcing subsidiary, we believe that these operations will
result in significant savings for us. Additionally, our outsourcing operations
were designed to provide additional revenue opportunities for us in the Business
Process Outsourcing Services market (see below). Our domestic outsourcing
operations are conducted through our majority owned subsidiary, Perfexa
Solutions, Inc., which we call Perfexa-U.S. Perfexa-U.S.'s subsidiary, Perfexa
Solutions Private Limited, a corporation formed under the laws of the Republic
of India ("Perfexa-India") manages and operates our call center and IT
development center in New Delhi, India. We will collectively refer to both
Perfexa-U.S. and Perfexa-India as Perfexa in this prospectus.
__________________________
(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.
-16-
Our Perfexa operations provide inbound, as well as outbound call center
management solutions, IT management solutions and business operations management
solutions. Perfexa's solution is to: 1) capitalize on India's highly educated,
English speaking workforce; 2) utilize the inherent cost and labor availability
advantages within India; and 3) take advantage of the low employee turnover
rates in India, which will enable us to capitalize on our significant investment
in ongoing employee training and development programs which will dramatically
improve the quality of the customer care experience. Future plans are to expand
into other low cost countries as business develops.
Perfexa currently provides customer service for our approximately 93,000
telecommunication and Internet users. Perfexa's IT group currently develops IT
solutions for our customer care needs and the integration of our customer care
system with those of Perfexa's New Delhi Center. Perfexa has recently begun
offering its services to third parties and plans to focus on marketing its
outsourced call center services to U.S. based companies. Perfexa's IT group
will work initially to ensure the integration of Perfexa's systems with those of
Perfexa's clients. Subsequently, the IT group will develop customized software
solutions for third parties.
COMPETITION
Telecommunication Services
The local and 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., Sprint, local
exchange carriers such as Verizon and SBC Communications, and other national and
regional carriers. Competition in the telecommunications business is based upon
pricing, customer service, billing services and perceived quality. We compete
against various national and regional carriers that are composed of both
facilities-based providers (those that carry local and long distance traffic on
their own equipment) and switchless resellers (those that resale long distance
carried by facilities-based providers or lease local telephone lines and
switching equipment from incumbent local carriers) offering essentially the same
services as us. Several of our competitors are substantially larger and have
greater financial, technical and marketing resources. We believe that we are
able to compete with these competitors by providing high quality service at the
lowest price possible.
We believe that the pricing strategies and cost structures of the major
carriers have resulted historically in their charging higher rates to the
residential and small-to-medium sized business customer. Smaller customers
typically are not able to make the volume commitments necessary to negotiate
reduced rates under individualized contracts. By committing to large volumes of
traffic, we guarantee traffic to the major long distance carrier while relieving
the major long distance carrier of the administrative burden of qualifying and
servicing large numbers of small-to-medium-sized accounts. To be successful, we
believe that we must have lower overhead costs and be able to efficiently market
the long distance product, process orders, verify credit and provide customer
service to a large number of accounts. Although we believe we have human and
technical resources to pursue our strategy and compete effectively in this
competitive environment, our success will depend upon our continued ability to
profitably provide high quality, high value services at prices generally
competitive with, or lower than, those charged by our competitors. There can be
no assurances that we will be able to compete successfully in these markets.
Our long distance traffic is currently carried by Sprint Communications,
Inc. which provides our underlying long distance network. Sprint remains a
competitor of ours for the provisioning of telecommunications services.
The Telecommunications Act of 1996 is intended to introduce more
competition to U.S. telecommunications markets. The legislation opens the local
services market by requiring local exchange companies to permit interconnection
to their networks and establishing, among other things, their obligations with
respect to access, resale, number portability, dialing parity, access to
rights-of-way and mutual compensation. The legislation also codifies local
exchange carriers' equal access and nondiscrimination obligations and preempts
most inconsistent state regulation. The legislation also contains special
provisions that eliminate restrictions on the Regional Bell Operating Companies
("RBOCs") providing long distance services, which means that we 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.
-17-
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 we expect that
competition will continue to intensify. Many of our current and potential
competitors such as Earthlink, Yahoo, AOL, and Microsoft Network 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 us.
We believe that our Internet Related Services are marketed at competitive
rates and provide quality and services comparable to our competitors.
Business Process Outsourcing Services
IT Outsourcing. Electronic Data Systems Corporation (EDS) is currently the
largest IT outsourcer. According to IDC, EDS captured over 25% of the $25.7
billion IT outsourcing market in 2000. Given the strength of the company's
competition, maintaining its sizable market share is not easily accomplished;
EDS's most formidable competitor in terms of revenue generation is IT
outsourcing giant IBM Global Services, which captured 14% of the segment's
market share in 2000. Other competitors include Computer Sciences Corporation,
Unisys, Affiliated Computer Systems (ACS), CGI Group Inc. and Science
Applications International Corporation (SAIC).
Perfexa's ability to obtain business is dependent upon its ability to offer
better strategic concepts and technical solutions, better value, a quicker
response, or a combination of these factors. Many of these competitors have a
more substantial amount of resources and therefore have the greater ability to
obtain client contracts where large asset purchases or investments are required.
In order to sustain competitive prices, Perfexa must operate with efficient and
minimal overhead while building a stable client base. India provides the
infrastructure to leverage low cost IT solutions.
Call Center Outsourcing. Convergys is a leading provider of outsourced
services within the billing services and software segment as well as the call
center services segment. The company handles more than one million customer
contacts daily through its 28,000 workstations and manages customer interactions
that range from initial product information requests, account activation and
product sales to service renewal, billing inquiries and complaint resolution.
Additional competitors include Exult, NCO Group, ProBusiness, SITEL Corporation,
Synhrgy, Teletech Holdings, Inc, West Corporation, and Peopleclick.
Pricing strategies and cost structures of these major players are generally
built on labor rates, technical and operation capabilities, and industry and
process knowledge. The required competency is optimization of the business
process at hand, and pricing models may be based on cost plus incentives, fixed
fee, or per transaction. Perfexa's initial revenues will be derived from the
areas of call center and administrative outsourcing services. Critical
competitive factors include the ability to measure the quality of job
performance and pricing and obtain a solid understanding of clients' specific
job requirements through consultative assessments.
Value-added services is one of the key advantages that Perfexa expects to
have. By leveraging a highly educated and cost-effective team in India, this
advantage is expected to reduce customers' business operating costs by 40% to
50% lower than onshore outsourcing providers. To be successful, Perfexa will
offer a distinct value proposition to the client---significant savings by
converting fixed employee costs to flexible, variable costs while avoiding large
capital expenditures required to implement and maintain call center
technologies. The challenge that Perfexa may face is whether they will be able
to provide high quality service at a cost savings while at the same time be both
profitable and lower-priced than their competitors. There can be no assurances
that Perfexa will be able to compete successfully in these markets.
CUSTOMER ATTRITION
We believe that a high level of customer attrition is a characteristic of
the domestic residential long distance, local and Internet related industries.
Attrition is attributable to a variety of factors, including the termination of
customers by us for non-payment and the initiatives of existing and new
competitors as they engage in, among other things, national advertising
campaigns, telemarketing programs and the issuance of cash or other forms of
incentives. Such attrition could have a material adverse effect upon our future
results of operations and financial conditions.
-18-
DEPENDENCE ON KEY CUSTOMERS
We are not dependent on any single customer for a significant portion of
our annual sales. Our customer base changes on a continuous basis, as new
customers are added or old customers removed.
MAJOR SUPPLIERS
We do not own our own long distance network and currently depend upon
Sprint Communications Company L.P. to provide for the transmission of phone
calls by our customers and to provide the call detail records upon which we base
our customer's billings. Pursuant to the terms of our agreement with Sprint, as
amended, we are obligated to a monthly minimum of $25,000 through July 26, 2006.
For any period during which we fail to meet our monthly minimum, we would be
liable for 25% of the difference between our actual usage and the stated
minimum. We may terminate the agreement upon 90 days written notice provided
that we pay a termination fee equal to 50% of the aggregate minimum revenue
requirement for the remaining term of the contract if we terminate for
convenience or by default of us prior to the expiration date which was
approximately $194,000 as of June 30, 2005. Sprint may terminate the agreement
upon 30 days written notice and then only in the event that we are in material
breach of the agreement. However, in cases of nonpayment, Sprint may elect to
immediately terminate the Agreement.
The termination of our contract with Sprint, the loss of telecommunications
services provided by Sprint, or a reduction in the quality of service we receive
from Sprint would materially harm our business. In addition, the accurate and
prompt billing of our customers is dependent upon the timeliness and accuracy of
call detail records provided to us by Sprint. Our business would be harmed if
Sprint's call detail records are inaccurate or are not timely delivered.
In the event that the services provided by Sprint to us were discontinued,
we believe that we would be able to identify alternate suppliers that would be
able to provide us with sufficient levels of services at terms similar to those
of Sprint. Although we have the right to switch our current customers to an
alternate underlying carrier, our customers have the right to discontinue their
service with us at any time. Accordingly, the termination or non-renewal of our
contract tariffs with Sprint or the loss of telecommunications services from
Sprint may adversely effect our business.
We do not have our own local telephone network. We currently lease local
telephone lines and switching equipment from incumbent local exchange carriers
such as SBC and Bellsouth. Previously, these carriers were required by law to
lease us local lines and switching services at regulated rates. Recently, court
decisions and FCC regulations have eliminated the local carriers' legal
obligation to provide us with switching services at regulated rates.
Consequently, we have entered into multi-year contracts with SBC and Bellsouth
for the continued provisioning of these services to us at negotiated rates.
Although these rates are higher than those previously offered, we believe that
we can continue to economically offer service to our end-users at favorable
rates. In the event that the services provided by these local exchange carriers
were discontinued, we would be unable, absent significant capital expenditures,
to continue providing local service. Currently, these services do not comprise a
material portion of our operations.
We do not have our own Internet Network. Currently, we provide our Internet
Service Provider Access services pursuant to agreements with third party
companies for the provisioning of our Internet Service Provider Access service.
We are not obligated to any monthly minimums under these agreements. Although we
believe that our relationship with our third-party providers is strong and
should remain so with continued contract compliance, the termination of our
contract with our underlying provider, the loss of Internet services provided by
this company, or a reduction in the quality of service we receive from this
company could have an adverse effect on our internet operations. In the event
that an underlying provider was to discontinue its service to us, we believe,
based upon discussions that we have had with other Internet service providers,
that we could negotiate and obtain contracts with Internet service providers at
comparable rates.
REGULATION
The provisioning of our communications services is subject to extensive
government regulation. Federal law regulates interstate and international
telecommunications, while states have jurisdiction over telecommunications that
originate and terminate within the same state. Changes in existing policies or
regulations in any state or by the FCC could materially adversely affect our
financial condition or results of operations, particularly if those policies
make it more difficult for us to obtain service from Sprint or other long
distance companies at competitive rates, or otherwise increase the cost and
regulatory burdens of marketing and providing service. There can be no
assurance that the regulatory authorities in one or more states or the FCC will
not take action having an adverse effect on our business or financial condition
or results of operations.
-19-
Federal
We are classified by the FCC as a nondominant carrier. After the prior
reclassification of AT&T as nondominant, only the local exchange carriers are
classified as dominant carriers among domestic carriers. 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 publish and make available service agreements listing their rates,
terms and conditions of service. The FCC also has the authority to impose more
stringent regulatory requirements on us and change our regulatory classification
from nondominant to dominant. In the current regulatory atmosphere, we believe,
however, that the FCC is unlikely to do so.
The FCC imposes only minimal reporting requirements on nondominant
resellers, although we are subject to certain reporting, accounting and
record-keeping obligations.
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
We are subject to varying levels of regulation in the states in which we
currently provide local or intrastate telecommunications services. The vast
majority of the states require us to apply for certification to provide local or
intrastate telecommunications services, or at least to register or to be found
exempt from regulation, before commencing such service. The vast majority of
states also require us to file and maintain detailed tariffs listing our rates
for local and intrastate service. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of certified
carriers, corporate reorganizations, acquisitions of telecommunications
operations, assignments of carrier assets, including subscriber bases, carrier
stock offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and the rules, regulations and policies of the state regulatory
authorities. Fines and other penalties, including the return of all monies
received for intrastate traffic from residents of a state, may be imposed for
such violations. In certain states, prior regulatory approval may be required
for acquisitions of telecommunications operations.
As we expand our efforts to provide local and long distance services, we
will have to remain attentive to relevant federal and state regulations. FCC
rules prohibit switching (also commonly known as "Slamming") of a consumer's
service provider without the consumer's consent and specify how that consent can
be obtained. Most states have consumer protection laws that further define the
framework within which our marketing activities must be conducted. We intend to
comply fully with all laws and regulations, and the constraints of federal and
state restrictions could impact the success of direct marketing efforts.
We are not currently subject to any State or Federal regulation with
respect to our Internet related services. However, there can be no assurances
that we will not be subject to such regulations in the future. We are not aware
of any pending legislation that would have a material adverse effect on our
operations.
Our domestic BPO operations are not currently subject to any State or
Federal regulations. However, our Perfexa-India operations are regulated by the
policies of the Indian government. Indian law regulates call center activities
requiring the registration of call centers with the Indian Department of
Telecommunications. Our Perfexa-India subsidiary has obtained all required
permits and licenses to operate its call center. Pursuant to such licenses,
however, we must notify and obtain permission from the Indian DOT prior to
expansion of our call center. Additionally, in times of war, the Indian
government may have the power to appropriate Perfexa-India's facilities.
PATENTS, TRADEMARKS, LICENSES
We have registered service marks for our Perfexa Solutions business.
However, we do not depend upon any other patents or trademarks to conduct our
business. We are required to hold licenses with the Federal Communication
Commission for the operation of our telecommunication services. We are also
required to hold licenses in the states in which we provide intrastate long
distance services. Currently, we are licensed in every state (except Alaska)
and the District of Columbia to provide intrastate services and hold licenses in
nineteen states to provide local service. Our federal and state
telecommunication licenses are of indefinite length and will remain effective so
long as we comply with all Federal and State regulations.
-20-
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
We currently have no costs associated with compliance with environmental
regulations. However, there can be no assurances that we will not incur such
costs in the future.
NUMBER OF EMPLOYEES
As of June 30, 2005, we employed approximately 25 people on a full time
basis in the United States and our subsidiary employs approximately 200 people
on a full time basis in India.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains certain forward-looking statements that
are subject to business and economic risks and uncertainties, and our actual
results could differ materially from those forward-looking statements. The
following discussion regarding our financial statements should be read in
conjunction with the financial statements and notes thereto.
GENERAL OVERVIEW
Our principal line of business is to provide local and long distance
telephone and value-added services for small and medium-sized businesses and
residential customers throughout the United States. Our strategy has been to
build a subscriber base without committing capital or management resources to
construct our own network and transmission facilities. This strategy has
allowed us to add customers without being limited by capacity, geographic
coverage, or configuration of any particular network that we might have
developed. We also provide a number of Internet related services such as
Internet access via Dial-Up and Digital Subscriber Line. Currently, our
Internet related services are intended to be a value-added service to attract
customers to our Telecommunication services as opposed to a significant revenue
generating service. Our services are marketed nationwide through sales
affiliates, independent sales agents and our own sales force.
Our revenues consist of revenues from the sale of telecommunications,
Internet, and BPO services. Telecommunication revenues are generated primarily
from monthly recurring charges for local service and when customers make long
distance telephone calls from their business or residential telephones.
Internet related services are typically billed at a flat rate and are billed in
advance. Revenues are recognized in the period earned. BPO services revenues
are billed each month based on a client contract that provides for either a
dedicated or per minute rate as the services are rendered.
Cost of sales consists of telecommunications service costs and the costs of
providing internet access, and BPO services. Local telecommunications service
costs are paid by us on a per line basis. Long distance telecommunications
service costs are based on our customers' long distance usage. We pay our
carriers based on the type of call, time of call, duration of call, the
terminating telephone number, and terms of our contract in effect at the time of
the call. General and administrative expenses consist of the cost of customer
acquisition (including costs paid for third-party verification), customer
service, billing, cost of information systems and personnel required to support
our operations and growth.
RESULTS OF OPERATIONS OF THE COMPANY
- ------------------------------------
NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004
REVENUES - Revenues decreased by $1,925,823 or 22.4% to $6,658,091 in the
nine months ended March 31, 2005 from $8,583,914 in the nine months ended March
31, 2004. The decrease was due to a decrease in telecommunications revenues of
$1,886,835 and a decrease in Internet revenues of $125,826, offset partially by
the increase in BPO revenues of $86,838. As of March 31, 2005, we had 89,190
telecommunications customers and 3,780 Internet customers, with usage of long
distance services of approximately 82,576,000 minutes for the nine months ended
March 31, 2005 as compared with 77,421 telecommunications customers and 6,004
Internet customers as of March 31, 2004, with usage of long distance services of
approximately 122,134,000 minutes for the nine months ended March 31, 2004.
We believe that the reduction in minutes is a result of several recent
competitive pressures including: the increase in the number of low-priced long
distance calling plans currently available, the expansion of bundled local/long
distance services offered by local exchange carriers and/or competitive local
exchange carriers, and the migration of traditional long distance usage to
cellular long distance and internet usage. In addition, the difficulties we
recently experienced as a result of the change in our underlying providers may
have contributed to this reduction in minutes (see Change In Primary Supplier
below). In an effort to increase revenue, we have stepped up our outbound
telemarketing campaigns.
We are also continuing our efforts in becoming a local telephone service
provider. We have recently obtained licenses to provide such services in
several states including California, Florida, Georgia, Kentucky, New York, New
Jersey, North Carolina, Ohio, and Texas. We recently began offering service in
Florida, Georgia, Kentucky, North Carolina, and Texas and are in the process of
expanding our local service offerings. Future plans are to provide local
services in most of the major states throughout the country. We anticipate that
by providing local services, we will be able to offer our own bundled services
and thereby reverse the recent attrition of our telecommunications customer
base.
Additionally, we are continuing to focus on developing third party revenue
for our Perfexa subsidiary. During the quarter ended December 31, 2003, we
began widespread marketing of our BPO services to third parties and have begun
securing client contracts for these services. Perfexa generated third-party
revenues of $129,560 and $42,722 for the nine months ended March 31, 2005 and
2004, respectively.
-22-
COST OF SALES - Cost of sales decreased by $848,313 or 22.1% to $2,998,283
in the nine months ended March 31, 2005 from $3,846,596 in the nine months ended
March 31, 2004. The decrease was primarily due to the decrease in carrier costs
associated with decreased telecommunications service revenues of $799,189,
offset partially by increased carrier costs associated with the increase in our
cost of providing telecommunications service of $194,611 for the nine months
ended March 31, 2005 (see Change In Primary Supplier below and to our new local
phone services which will have a higher cost as compared to our long distance
products). In addition, for the nine months ended March 31, 2005, the costs
associated with Internet services decreased $301,802 and the costs associated
with BPO services increased $58,067. As a percentage of revenue, cost of sales
increased to 45.0% from 44.8%, primarily as a result of the increase in
telecommunications cost of sales as a percentage of telecommunications revenues
to 45.6% in the nine months ended March 31, 2005 from 42.4% in the nine months
ended March 31, 2004 (see Change In Primary Supplier below), offset partially by
the decrease in internet cost of sales as a percentage of internet revenues to
31.6% in the nine months ended March 31, 2005 from 77.6% (due to monthly minimum
purchase requirements with MCI) in the nine months ended March 31, 2004. This
results in a gross margin of 55.0% as compared to 55.2% for the nine months
ended March 31, 2005 and 2004, respectively.
Perfexa incurred third-party cost of sales of $86,184 and $28,117 for the
nine months ended March 31, 2005 and 2004, respectively.
OPERATING EXPENSES - Operating expenses decreased by $1,573,804 or 30.7% to
$3,544,802 in the nine months ended March 31, 2005 from $5,118,606 in the nine
months ended March 31, 2004 primarily due to our shift of customer service and
information technology development to our Perfexa subsidiary.
Operating expenses, individually net of Perfexa related costs, for the nine
months ended March 31, 2005 were comprised primarily of $769,936 in payroll and
related expenses paid to employees; billing related costs of $497,704; rent of
$118,539; bad debt of $287,304; depreciation expense of $88,003; amortization of
previously issued options to employees valued at approximately $82,687; and
$984,310 of other operating expenses, primarily sales commissions, internal
telephone usage, costs of third party verification for newly acquired customers,
internet support costs and audit and legal costs.
Perfexa related operating expenses for the nine months ended March 31, 2005
were comprised primarily of $995,636 in payroll and related expenses paid to
employees; rent of $190,933; depreciation expense of $139,948; and $(610,198) of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
Operating expenses, individually net of Perfexa related costs, for the nine
months ended March 31, 2004 were comprised primarily of $1,188,715 in payroll
and related expenses paid to employees; billing related costs of $541,758;
penalties and interest in connection with past due payroll taxes of prior
periods of $135,000; rent of $144,875; bad debt of $142,285; depreciation
expense of $92,364; amortization of previously issued options to employees
valued at approximately $82,688; and $36,593 of other operating expenses,
primarily sales commissions, costs of third party verification for newly
acquired customers, internet support costs and audit and legal costs, offset
primarily by corporate expense allocations.
Perfexa related operating expenses for the nine months ended March 31, 2004
were comprised primarily of $995,323 in payroll and related taxes paid to
employees; rent of $182,345; depreciation expense of $127,230; and $1,449,430 of
other operating expenses, primarily corporate expense allocations, and office
maintenance and supplies.
INTEREST EXPENSE - Net interest expense increased by $8,271 to $851,021 for
the nine months ended March 31, 2005 from $842,750 for the nine months ended
March 31, 2004. The increase was primarily due to the interest owed on notes
payable, and the interest owed on outstanding balances due to WorldCom,
including accrued interest of approximately $1,104,000 owed on default of the
WorldCom note.
NET LOSS - Net loss decreased $456,601 to 725,253 or $0.03 loss per common
share for the nine months ended March 31, 2005, from a net loss of $1,181,854,
or $0.06 loss per common share, for the nine months ended March 31, 2004.
ASSETS AND LIABILITIES - Assets decreased by $19,855 to $1,564,631 as of
March 31, 2005 from $1,584,486 as of June 30, 2004. The decrease was due to net
decreases in cash of $50,616, deposits of $915, prepaid expenses of $2,369,
other assets of $275, and property and equipment of $163,702, net of an increase
in accounts receivable of $198,022. Liabilities increased by $863,286 to
$9,014,067 as of March 31, 2005 from $8,150,781 as of June 30, 2004. The
increase was due to increases in accounts payable and accrued expenses of
$898,803, primarily for amounts owed to WorldCom (associated with customer usage
and accrued interest), and payroll and payroll related liabilities of $18,490;
net of decreases in obligations under capital lease of $10,641, and notes
payable of $43,366 due primarily to principal repayments, associated with the
decrease in telecommunications service costs, internet service provider access
fees and customer services operations as a result of the decrease in customers.
-23-
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $863,010 to
$7,541,419 as of March 31, 2005 from $6,678,409 as of June 30, 2004. The
increase was attributable to a net loss of $725,253 in the nine months ended
March 31, 2005, and a cumulative translation adjustment of $301,271; net of
increases in amortization of compensation expense related to previously issued
options to employees in the amount of $82,687; the fair market value of stock
issued pursuant to notes payable of $20,827, and the proceeds from the sale of
stock of $60,000.
FISCAL YEAR ENDED JUNE 30, 2004 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2003
REVENUES - Revenues decreased by $4,190,070 or 27.7% to $10,957,588 for the
year ended June 30, 2004 from $15,147,658 for the year ended June 30, 2003. The
decrease was due primarily to a decrease in telecommunications revenues of
$4,150,947 and a decrease in Internet revenues of $117,767, offset partially by
the increase in BPO revenues of $78,644. As of June 30, 2004, we had
approximately 80,397 long distance customers and 5,666 internet customers, with
usage of long distance services of approximately 156,772,000 minutes for the
year ended June 30, 2004 as compared with approximately 102,041 long distance
customers and 5,965 internet customers, with usage of long distance services of
approximately 219,237,000 minutes for the year ended June 30, 2003.
We believe that the reduction in minutes is a result of several recent
competitive pressures including: the increase in the number of low-priced long
distance calling plans currently available, the expansion of bundled local/long
distance services offered by local exchange carriers and/or competitive local
exchange carriers, and the migration of traditional long distance usage to
cellular long distance and internet usage. In addition, the difficulties we
recently experienced as a result of the change in our underlying providers may
have contributed to this reduction in minutes (see Change In Primary Supplier
below). In an effort to increase revenue, we have stepped up our outbound
telemarketing campaigns.
We are also continuing our efforts in becoming a local telephone service
provider. We have recently obtained licenses to provide such services in
several states including California, Florida, Georgia, Kentucky, New York, New
Jersey, North Carolina, Ohio, and Texas. We recently began offering service in
Florida, Georgia, Kentucky, North Carolina, and Texas and are in the process of
expanding our local service offerings. Future plans are to provide local
services in most of the major states throughout the country. We anticipate that
by providing local services, we will be able to offer our own bundled services
and thereby reverse the recent attrition of our telecommunications customer
base.
Additionally, we are continuing to focus on developing third party revenue
for our Perfexa subsidiary. During the year ended June 30, 2004, we began
widespread marketing of our BPO services to third parties and have begun
securing client contracts for these services. For the year ended June 30, 2004,
Perfexa generated third-party revenues of $78,644. Perfexa had no revenues in
prior years.
COST OF SALES - Cost of sales decreased by $2,574,213 or 34.7% to
$4,836,377 for the year ended June 30, 2004 from $7,410,590 for the year ended
June 30, 2003. The decrease was primarily due to the decrease in carrier costs
associated with decreased telecommunications service revenues of $1,969,998 and
by decreased costs associated with a 20% reduction in our transportation cost
negotiated in November 2003 of $572,972 for the year ended June 30, 2004. In
addition, the costs associated with Internet services decreased $90,482 for the
year ended June 30, 2004 in proportion with our decreased Internet services
revenue, and the costs associated with BPO services increased $59,239. As a
percentage of revenue, cost of sales was 44.1% and 48.9% resulting in a gross
margin of 55.9% and 51.1% for the years ended June 30, 2004 and 2003,
respectively.
For the year ended June 30, 2004, Perfexa incurred third-party cost of
sales of $59,239. Perfexa had no cost of sales in prior years.
-24-
OPERATING EXPENSES - Operating expenses decreased by $2,322,752 or 30.0% to
$5,419,914 for the year ended June 30, 2004 from $7,742,666 for the year ended
June 30, 2003. We have continued to streamline operations in the year ended
June 30, 2004, thereby decreasing operating expenses when compared to the year
ended June 30, 2003, primarily due to our shift of customer service and
information technology development to our Perfexa subsidiary.
Operating expenses, individually net of Perfexa related costs, for the year
ended June 30, 2004 were comprised primarily of $1,519,161 in payroll and
related expenses paid to employees; billing related costs of $709,824; rent of
$189,505; penalties and interest in connection with past due payroll taxes of
prior periods of $135,000; bad debt of $159,467; sales commissions of $132,770;
depreciation expense of $125,083; amortization of previously issued options to
employees valued at $110,250; and $7,580 of other operating expenses, primarily
investor relations, internal telephone usage, consulting services, costs of
third party verification for newly acquired customers, internet support costs
and audit and legal costs, offset primarily by corporate expense allocations of
$316,560.
Perfexa related operating expenses for the year ended June 30, 2004 were
comprised primarily of $1,338,257 in payroll and related expenses paid to
employees; rent of $244,449; depreciation expense of $172,973; and $575,595 of
other operating expenses, primarily corporate expense allocations of $316,560,
and office maintenance and supplies.
Operating expenses, individually net of Perfexa related costs, for the year
ended June 30, 2003 were comprised primarily of $3,433,528 in payroll and
related expenses paid to employees; billing related costs of $935,486; rent of
$313,661; bad debt of $112,770; sales commissions of $149,814; depreciation
expense of $132,257; amortization of previously issued options to employees
valued at $113,925; and $732,346 of other operating expenses, primarily investor
relations, internal telephone usage, consulting services, costs of third party
verification for newly acquired customers, internet support costs and audit and
legal costs.
Perfexa related start-up operating expenses for the year ended June 30,
2003 were comprised primarily of $371,092 in payroll and related expenses paid
to employees; rent of $94,404; depreciation expense of $16,991; and $1,336,392
of other operating expenses, primarily corporate expense allocations of
$870,302, and office maintenance and supplies.
INTEREST EXPENSE - Net interest expense increased by $891,766 to $1,262,697
for the year ended June 30, 2004 from $370,931 for the year ended June 30, 2003.
The increase was primarily due to the interest owed and amortization of debt
discount on notes payable, and the interest owed on outstanding balances due to
WorldCom, including accrued interest of approximately $399,000 owed on default
of WorldCom note.
NET LOSS - Net loss increased $523,161 to $552,267, or $(0.03) loss per
share for the year ended June 30, 2004, from a net loss of $29,106, or $0.00 per
share, for the year ended June 30, 2003, respectively. The net loss for the
year ended June 30, 2004, included a one-time charge of $135,000 resulting from
an increased accrual on penalties and interest on out past due payroll tax
liability. The net loss for the year ended June 30, 2003 included a one-time
credit of $332,018 resulting from waived penalties and interest on our past due
payroll tax liability, offset partially by Perfexa start-up costs of $949,509.
ASSETS AND LIABILITIES - Assets decreased by $234,240 to $1,584,486 at June
30, 2004 from $1,818,726 at June 30, 2003. The decrease was due to a net
decreases in accounts receivables of $258,339, prepaid expenses of $19,930,
deposits of $19,218, and property and equipment of $10,471; net of increases in
cash of $73,072, and other assets of $646. Liabilities increased by $11,404 to
$8,150,781 at June 30, 2004 from $8,139,377 at June 30, 2003. The increase was
due to increases in accounts payable and accrued expenses of $468,303, primarily
for amounts owed to WorldCom (associated with customer usage), deferred income
of $1,315, and obligations under capital lease of $29,733 primarily due to
purchase of equipment, net of decreases in notes payable of $299,475, and,
accrued payroll and payroll related liabilities of $188,472, associated with the
decrease in telecommunications service costs, Internet service provider access
fees and customer service operations as a result of the decrease in customers.
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $(285,442) to
$6,678,409 at June 30, 2004 from $6,392,967 at June 30, 2003. The increase was
attributable to a net loss of $552,267 for the year ended June 30, 2004, and a
cumulative translation adjustment of $58,146; net of decreases in amortization
of compensation expense related to previously issued options to employees in the
amount of $110,251, the fair market value of stock issued pursuant to notes
payable of $149,695, the fair market value of warrants granted to a consultant
for services rendered of $65,000, and the exercise of stock options by an
officer of $25.
CHANGE IN PRIMARY SUPPLIER
On July 7, 2004 we initiated a system wide conversion of our underlying
long distance provider from MCI to Sprint. As a result, we initially
experienced an approximate 16% reduction in our call volumes and corresponding
revenues. We believe that we have resolved all outstanding technical issues
relating to this conversion and continue to market our services in order to
re-acquire or add new customers. However, there can be no assurances that we
will be able to re-acquire or add sufficient numbers of customers to compensate
for the reduction incurred by this conversion.
Additionally, the cost of Sprint's services to us are higher than those of
MCI's and will affect our future gross margins. We are attempting to
renegotiate more favorable pricing terms with Sprint. Alternatively we
are examining the rates we charge our customers. There can be no assurances
that we will be able to negotiate more favorable rates with Sprint. Also, an
increase in our rates to end-users may have a detrimental effect in customer
acquisition and retention.
-25-
LIQUIDITY AND CAPITAL RESOURCES
GENERAL - Currently, billings from accounts receivable are sufficient to
meet our monthly operating requirements. However, the amounts actually
collected from our customers is not sufficient to fully pay all of our monthly
operating expenses (see "Cash Flows from Operating Activities" below).
Recently, we restructured approximately $7.7 million in accrued liabilities
consisting of notes payable, accrued interest and other outstanding accounts
payable, into new short and long term debt (see below) that resulted in the
elimination of approximately $6.9 million in accrued liabilities. Consequently,
beginning in September 2005, we will be required to begin making monthly
principal and interest payments on these new obligations where we previously did
not. Although this financing reduced our overall debt, it did not materially
increase our cash flow. As a result, we may not have sufficient cash flow to
fully support daily operations and service our debt obligations and will need to
increase revenues and customers as detailed above, as well as decrease bad debt,
or acquire alternate financing.
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash provided by operating
activities of $311,250 for the nine months ended March 31, 2005 was primarily
due to net loss of $725,253, offset partially by changes in operating assets and
liabilities, principally increases in accounts payable and accrued expenses of
$901,142, and accrued payroll and related taxes of $18,490, and a decrease in
accounts receivable and other current assets of $481,767; and minority interest
of $20,131; offset partially by the amortization of previously issued options
vesting to employees in the current period of $82,687; the fair market value of
stock issued in connection with a note payable of $20,827; depreciation and
amortization expense of $227,951; and the increase in bad debt expense related
to accounts receivable of $287,304.
With our recent entry into the local telephone market, an increasing number
of our customers have elected to pay their monthly bills by check. Previously,
the majority of our long distance customers elected to pay their bills by credit
card. Payment by credit card allows us to collect our billings within days of
billing our customers. Payment by check, however, typically results in
collection times in excess of thirty days. In addition, payment by credit card
allows us to quickly determine whether a customer is going to pay their bill
whereas, with payment by check, this determination can take in excess of thirty
days. As a result, we have experienced a significant increase in the amount of
bad debt associated with our local product.
In an effort to reduce this bad debt and increase collections, we have
recently begun implementing several corrective measures. These include:
determining a customer's credit rating prior to provisioning service;
strengthening our internal and third-party collection efforts by increasing the
number of our collection employees and reducing the timeframe before collection
efforts are initiated; and reporting delinquent customers to the appropriate
credit bureaus. We anticipate that these measures will increase our cash flows
from operating activities. However, if we are unsuccessful in our efforts to
increase our cash collections or increase revenues and customers, we will not
have sufficient cash flows to fund our monthly operations as well as service our
debt obligations.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing
activities of $29,463 for the nine months ended March 31, 2005 funded purchases
of property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash used in financing
activities of $31,132 in the nine months ended March 31, 2005 was primarily due
to principal repayments on notes payable of $80,491, and principal repayments
under capital lease obligations of $10,641, offset partially by proceeds from
sale of stock of $60,000.
OUTSTANDING DEBT OBLIGATIONS AND RECENT DEBT RESTRUCTURINGS - In May and
July 2005, we entered into subscription agreements, as amended, with certain
third party investors for the sale of convertible notes, $2,000,000 principal
amount along with shares of our common stock and warrants, resulting in gross
proceeds of $1.7 million, less offering costs of $141,825. The notes accrue
simple interest of 12% per annum and may be converted into shares of our common
stock. Under the terms of the notes, we must begin repayment of principal and
interest beginning in September 2005.
In May 2005, we restructured $927,524 in amounts due on a past due note
payable and corresponding accrued interest and penalties into a new long term
note payable, principal amount $1,200,000. The new note accrues simple interest
in the amount of 12% per annum. We are obligated to pay accrued interest
monthly, but then only if, after deducting all then current obligations, we at
that time have at least $300,000 in available cash.
-26-
In February 2005, we negotiated the settlement of all amounts due to MCI
Worldcom, our former underlying network provider, totaling approximately
$7,700,000 in exchange for the payment of $769,000. On May 23, 2005, we paid
the settlement amount and satisfied the terms of the settlement agreement.
On June 8, 2004, we borrowed $50,000 for working capital purposes from an
unrelated third party. The note was originally to be repaid plus interest of
$7,500 on September 7, 2004. On November 18, 2004, we restructured the note.
Under the new terms of the note, we are required to make monthly payments of
$5,000 plus simple interest of 10% until all principal and accrued interest is
repaid. As of the date of this prospectus, we have made all payments as
required in the note.
On December 9, 2003, we borrowed $200,000 for working capital purposes from
an unrelated third party. The note was to be repaid plus interest of $21,333 on
April 8, 2004. On May 17, 2004, the note, as amended, was extended to July 19,
2004. On July 1, 2005, we agreed to resolve all outstanding amounts owed under
the note via the payment of $30,000 plus bi-weekly payments of $8,000. The
outstanding principal and accrued interest, which, at the time of the agreement
totaled $167,000 will accrue simple interest at the rate of 10% per annum until
fully repaid.
On October 2, 2002, we borrowed $100,000 for working capital purposes from
an unrelated third party. All amounts owed, with the exception of $25,000 has
been repaid. We currently are in the process of renegotiating payment terms.
We maintain a revolving line of credit of $45,000 to finance the purchase
of computer equipment. The revolving line of credit provides for us to make
monthly payments of $795, including interest at a rate of approximately 14.74%.
The total outstanding balance on the revolving line of credit was $29,797 and is
included in notes payable in the accompanying consolidated balance sheet at
March 31, 2005. As of the date of this report, we have made all payments as
required in the revolving line of credit.
INTERCOMPANY ACTIVITIES - Since inception, Perfexa-U.S. and its Indian
subsidiary Perfexa-India have relied upon us for funding and for administrative
services required in the development of their business plan. Perfexa is
obligated to reimburse us for such advances and their share of such expenses.
As of March 31, 2005, we have advanced Perfexa-U.S. $4,770,390 in cash and
equipment, of which $661,504 was for the purchase of equipment and $4,108,886
for operating expenses. In addition, we have allocated $2,080,503 of shared
administrative expenses to Perfexa-U.S. Cash and equipment advances accrue
interest of 10% per annum and are due upon demand. Shared administrative
expenses accrue no interest and are also due upon demand.
Pursuant to a Master Services Agreement between Perfexa-US and us, Perfexa
provides call center and IT development services to us on a cost plus 5% basis.
As of March 31, 2005, Perfexa-U.S. has billed us $2,274,766 for such services
during the nine months then ended.
As of March 31, 2005, Perfexa-U.S. owes us $4,414,227, net of $161,900
repaid by Perfexa-U.S. from funds raised and $2,274,766 in amounts billed for
services rendered.
EQUITY FINANCING - On December 28, 2004, we sold 1,000,000 shares of our
restricted common stock to an unrelated accredited third-party investor for
$60,000. In addition, we agreed to issue to the third party, warrants to
purchase up to 250,000 shares of our common stock. The warrants have an
exercise price of $0.11 per share. The warrants vest immediately and are
exercisable for two (2) years from the date of issuance and contain piggy-back
registration rights. No consulting expense was recognized due to the fact the
warrants were issued in connection with equity fund raising activities.
CAPITAL EXPENDITURES
We expect to purchase approximately $200,000 of additional equipment on top
of the purchases already made in connection with the expansion of our business.
In addition, as previously discussed, we expanded our operations into the
Republic of India through our Perfexa subsidiary. We expect to continue funding
this expansion with an additional $200,000 to Perfexa primarily for leasehold
improvements, equipment (computer and telephone), furniture and fixtures, and
deposits. Because we presently do not have the capital for such expenditures,
we will have to raise these funds.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements.
-27-
SUBSIDIARIES
We have formed four wholly owned subsidiaries, of which only one is
currently active (see below), to offer different products and services. They
are managed separately because each business requires different technology
and/or marketing strategies.
The four subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com,
Inc., Curbside Communications, Inc., and Perfexa Solutions, Inc.
CallingPlanet.com, Inc. was set up to offer international calling using a
PC to phone connection. It is currently inactive. ecallingcards.com, Inc. was
set up to offer prepaid calling cards purchased over the internet. It is
currently inactive. Curbside Communications, Inc., currently inactive, has been
set up for future strategic purposes which are currently in the planning
process. Perfexa Solutions, Inc. offers business process outsourcing services.
GOING CONCERN
Our independent certified public accountants have stated in their report
included in our 2004 Form 10-KSB, that we have incurred operating losses in the
last two years, have a working capital deficit, and have a significant
stockholders' deficit. These conditions, among others, raise substantial doubt
about our ability to continue as a going concern.
INFLATION
We believe that inflation has not had a material effect on our results of
operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
amounts reported in our condensed consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported on our
balance sheet and the amounts of revenues and expenses reported for each of our
fiscal periods are affected by estimates and assumptions, which are used for,
but not limited to, the accounting for revenue recognition, accounts receivable,
doubtful accounts, deferred tax asset valuation allowances, and valuation of
securities, options, and warrants issued. Actual results could differ from
these estimates. The following critical accounting policies are significantly
affected by judgments, assumptions and estimates used in the preparation of the
financial statements:
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Significant estimates made by us are, among others,
provisions for losses on accounts receivable, realizability of long-lived
assets, estimates for deferred income tax asset valuations, and valuation
estimates for securities, options, and warrants issued.
REVENUE AND RELATED COST RECOGNITION - We recognize revenue during the
month in which services or products are delivered, as follows:
TELECOMMUNICATIONS RELATED SERVICES
Our telecommunications service revenues are generated primarily when
customers make long distance telephone calls from their business or
residential telephones for long distance service, monthly recurring charges
for local service, or by using any of our telephone calling cards.
Telecommunication services cost of sales consists of the cost of long
distance service provided by Sprint based on usage and on a per line basis
for local service.
INTERNET RELATED SERVICES
Internet service revenues consist of monthly fees charged to subscribers
for Internet access and are recognized in the period service access is
provided. Internet service cost of sales consists of the cost of providing
Internet access.
-28-
BPO SERVICES
BPO service revenues consist of amounts billed each month based on a client
contract that provides for either a dedicated or per minute rate as the
services are rendered. BPO service cost of sales consists of labor and its
related support costs directly associated with a service contract.
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. SAB 101 was later superseded by SAB 104. We believe our revenue
recognition policies conform to SAB 104.
STOCK-BASED COMPENSATION - We account 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.
SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" 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.
SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123," was issued
in December 2002 and is effective for fiscal years ending after December 15,
2002. SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
The adoption of the accounting methodology of SFAS 123 is optional and we
have elected to continue accounting for stock-based compensation issued to
employees using APB 25; however, pro forma disclosures, as if we adopted the
cost recognition requirements under SFAS 123, are required to be presented.
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment,"
which requires that the compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be recognized in
the financial statements. That cost will be measured based on the estimated
fair value of the equity or liability instruments issued. SFAS No. 123-R covers
a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, "Accounting
for Stock-Based Compensation," and supersedes Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." As
originally issued, SFAS No. 123 established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that pronouncement permitted entities to continue applying the
intrinsic-value model of APB Opinion 25, provided that the financial statements
disclosed the pro forma net income or loss based on the preferable fair-value
method.
Small Business Issuers are required to apply SFAS No. 123-R in the first
annual reporting period that begins after December 15, 2005. Thus, our
consolidated financial statements will reflect an expense for (a) all
share-based compensation arrangements granted after July 1, 2006 and for any
such arrangements that are modified, cancelled, or repurchased after that date,
and (b) the portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-date estimated
fair value.
TRANSLATION OF FOREIGN CURRENCIES - We use the U.S. dollar as our
functional and reporting currency while our foreign subsidiary uses the Indian
Rupee as its functional currency. Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at year-end or period-end exchange
rates, and revenues and expenses are translated at average rates prevailing
during the year or other period presented. In accordance with SFAS No. 52,
"Foreign Currency Translation," net exchange gains or losses resulting from such
translation are excluded from net loss, but are included in comprehensive loss
and accumulated in a separate component of stockholders' deficit.
-29-
DESCRIPTION OF PROPERTY
We lease a total of 5,137 square feet of office space for our headquarters
and domestic customer service operations in Costa Mesa, California at a monthly
rental rate of $9,697 pursuant to a one-year lease agreement ending February 28,
2006.
Effective October 1, 2002, Perfexa-India began leasing approximately 15,422
square feet of office space in Gurgaon, India, a suburb of New Delhi, at a
monthly rate of Rs. 524,348 (approximately $11,400) per month. This facility
serves as Perfexa-India's call center, IT development center, and administrative
offices. The lease is for a term of three years with an option to renew for an
additional three year term with an increase in the rental rate of 20%.
Effective October 1, 2002, Perfexa-India also entered into a maintenance
agreement for their New Delhi facility. The maintenance agreement obligates
Perfexa-India to pay a monthly maintenance fee of Rs. 138,798 (approximately
$3,000) per month for the first twelve months. Thereafter, the monthly fee will
be calculated based on the actual costs of maintenance (including electricity
and water) plus a 20% mark-up.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of March 31, 2005, we had net advances to Eric Clemons, our President,
of $60,306. The advances accrue interest at 10% (no interest income has been
recorded as of March 31, 2005) and are due on demand. We have reclassified the
note receivable as an increase to stockholders' deficit in the accompanying
condensed consolidated balance sheets at March 31, 2005. There have been no
additional advances since June 2001.
In February, 2003, Perfexa-U.S. entered into a Master Services Agreement
with us whereby Perfexa-U.S. agreed to provide call center outsourcing and
Information Technology systems development for GTC. Pursuant to the terms of
the Agreement, GTC has agreed to reimburse Perfexa-U.S. for such services on a
cost plus 5% basis. Work on this agreement commenced May 1, 2003 upon
completion of the Perfexa call center. As of March 31, 2005, Perfexa-U.S. has
billed us $2,274,766 for such services.
Since inception, Perfexa-U.S. and their Indian subsidiary Perfexa-India has
relied upon us for funding and for administrative services required in the
development of their business plan. Perfexa is obligated to reimburse us for
such advances and their share of such expenses. As of March 31, 2005, the
Company has advanced Perfexa-U.S. $4,770,390 in cash and equipment, of which
$661,504 was for the purchase of equipment and $4,108,886 for operating
expenses. In addition, the Company has allocated $2,080,503 of shared
administrative expenses to Perfexa-U.S. Cash and equipment advances accrue
interest of 10% per annum and are due upon demand. Shared administrative
expenses accrue no interest and are also due upon demand.
As of March 31, 2005, Perfexa-U.S. owes us $4,414,227 net of $161,900
repaid by Perfexa-U.S. from funds raised and $2,274,766 in amounts billed for
services rendered.
-30-
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
The following table sets forth the high and low bid prices for shares of
our common stock for the periods noted, as reported by the National Daily
Quotation Service and the NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
CALENDAR BID PRICES
YEAR PERIOD HIGH LOW
- --------------------------------------------------------------------------------
2002 First Quarter 0.27 0.17
Second Quarter 0.30 0.15
Third Quarter 0.25 0.15
Fourth Quarter 0.22 0.13
2003 First Quarter 0.23 0.13
Second Quarter 0.24 0.14
Third Quarter 0.19 0.13
Fourth Quarter 0.14 0.09
2004 First Quarter 0.13 0.07
Second Quarter 0.18 0.07
Third Quarter 0.08 0.03
Fourth Quarter 0.16 0.03
2005 First Quarter 0.23 0.07
Second Quarter 0.20 0.15
On June 30, 2005, the last sales price per share of our common stock, as
reported by the Nasdaq Over-The-Counter Electronic Bulletin Board, was $0.16.
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of our common stock as of the
close of business on June 30, 2005 was approximately 400. Many of the shares of
our common stock are held in "street name" and consequently reflect numerous
additional beneficial owners.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLANS AS OF JUNE 30, 2004
(A) (B) (C)
--------------------------- ---------------------- --------------------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR FUTURE
TO BE ISSUED UPON EXERCISE EXERCISE PRICE OF ISSUANCE UNDER EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES REFLECTED
WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
PLAN CATEGORY (#) ($) (#)
- ------------------------- --------------------------- ---------------------- --------------------------------------
Equity compensation plans
approved by security
holders 1,931,600(1) $ 0.47 3,792,000(2)
- ------------------------- --------------------------- ---------------------- --------------------------------------
Equity compensation plans
not approved by security
holders 1,362,400 $ 0.53 0
- ------------------------- --------------------------- ---------------------- --------------------------------------
Total 3,004,000 $ 0.49 3,792,000
</FN>
(1) consists of 723,600 options issued under the 1999 Stock Option Plan and
1,208,000 options issued under the 2001 Stock Incentive Plan.
(2) does not include any ungranted options under the 1999 Omnibus Stock Option
Plan as this plan was terminated.
-31-
DIVIDEND POLICY
To date, we have declared no cash dividends on our common stock, and we do
not expect to pay cash dividends in the next term. We intend to retain future
earnings, if any, to provide funds for operation of our business.
EXECUTIVE COMPENSATION
The following table shows certain compensation information for services
rendered in all capacities for the fiscal years ended June 30, 2004, 2003 and
2002. Other than as listed below, no executive officer's salary and bonus
exceeded $100,000 in any of the listed years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------- AWARDS PAYOUTS
-------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING LTIP OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPESATION
POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------
Paul Sandhu 2004
(CEO) (6/30) $ 184,800 -0- 5,000(1) -0- -0- -0- 7,108(3)
2003
(6/30) 184,800 -0- 40,000(1) -0- -0- -0- -0-
2002
(6/30) 186,450 16,800 12,000(2) -0- 280,000 -0- 27,139(3)
- ---------------------------------------------------------------------------------------------------------------------------
Eric Clemons 2004
(President) (6/30) 167,200 -0- -0- -0- -0- -0- -0-
2003
(6/30) 160,233 -0- -0- -0- -0- -0- -0-
2002
(6/30) 198,550(4) 1,520 12,000(2) -0- 270,000 -0- 24,554(3)
- ---------------------------------------------------------------------------------------------------------------------------
Gerald DeCiccio 2004
(CFO) (6/30) 158,400 -0- -0- -0- -0- -0- -0-
2003
(6/30) 158,400 -0- -0- -0- -0- -0- 6,092(3)
2002
(6/30) 155,100 14,400 12,000(2) -0- 260,000 -0- 17,169(3)
- ---------------------------------------------------------------------------------------------------------------------------
Vi Bui(5) 2004
(General Counsel) (6/30) 105,000 -0- -0- -0- -0- -0- -0-
2003
(6/30) 94,298 -0- -0- -0- -0- -0- -0-
2002
(6/30) -0- -0- -0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
(1) Amounts paid on deferred salary from prior years
(2) Amounts paid for director's fees earned in fiscal year 2001 and paid in
fiscal year 2002
(3) Amounts paid for vacation
(4) Includes $24,383 of salary advances
(5) Mr. Bui joined the Company on July 15, 2002. Mr. Bui is not an
executive officer of the Company.
-32-
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN FISCAL EXERCISE OF BASE PRICE
NAME (#) YEAR ($/SH) EXPIRATION DATE
---------------------- ----------------------- ------------------------ ---------------
Paul Sandhu 0 0 $ 0 n/a
---------------------- ----------------------- ------------------------ ---------------
Eric Clemons 0 0 $ 0 n/a
---------------------- ----------------------- ------------------------ ---------------
Gerald DeCiccio 0 0 $ 0 n/a
---------------------- ----------------------- ------------------------ ---------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
SECURITIES UNDERLYING THE-MONEY OPTION/SARS
SHARES ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------------- ------------------------ -------------------------- --------------------------
Paul Sandhu 0 n/a 207,000 / 198,000 0 / 0
Eric Clemons 0 n/a 263,000 / 182,000 0 / 0
Gerald DeCiccio 2,500 n/a 295,666 / 131,000 0 / 0
1999 STOCK OPTION PLAN
On September 20, 1999, our Board of Directors approved the GTC Telecom
Corp. Omnibus Stock Option Plan (the "1999 Plan"), effective October 1, 1999.
The 1999 Plan was approved and ratified by the shareholders on December 13, 1999
at our 1999 annual shareholder's meeting. Under the terms of the 1999 Plan, the
Board 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 1999
Plan to the extent they don't conflict with the terms of the 1999 Plan.
Upon implementation of our 2001 Stock Incentive Plan (as described below),
we closed the 1999 Plan. As of the end of the fiscal year ended June 30, 2004,
a total of 723,600 options, previously issued to employees, exercisable at a
weighted average of $0.94 per share remain outstanding.
2001 STOCK INCENTIVE PLAN
On October 17, 2001, our Board approved the GTC Telecom Corp. 2001 Stock
Incentive Plan (the "SIP Plan"), effective January 1, 2002. The SIP Plan was
approved and ratified by the stockholders on December 13, 2001 at our 2001
annual stockholder's meeting. The SIP Plan provides for the grant of various
types of equity-based incentives, including stock options, stock appreciation
rights ("SARs"), restricted stock, and cash and stock bonuses, on a current or
deferred basis, collectively "Awards." We may settle Awards in cash or shares
of our Common Stock ("Shares").
Number of Shares Available. The maximum number of Shares that may be
issued under the SIP Plan is 5,000,000 shares of our Common Stock. The Internal
Revenue Code requires a fixed limit on the number of Shares that may be covered
by options and SARs granted to any one individual in any one calendar year and a
fixed limit on the number of Shares that may be covered by all Awards granted to
any one individual in any one calendar year. These limits are each 1,000,000
shares.
Plan Administration. The SIP Plan may be administered by the Board or by a
committee appointed by the Board (the "Committee"). Currently the SIP Plan is
administered by the full Board of Directors. Subject to the express terms of
the SIP Plan, the SIP Plan administrator will have broad power to administer,
construe, and interpret the SIP Plan.
-33-
Consideration for Awards and Shares. Awards may be issued for services
rendered or to be rendered. Shares also may be issued for any lawful
consideration, including cash, other securities or rights. The administrator
may authorize loans from us to participants in the amount necessary for
participants to pay the withholding taxes due in connection with the exercise or
vesting of Awards.
Eligibility. All of our directors, officers, consultants, and employees
and our subsidiaries are eligible for Award grants. Only persons actually
selected by the administrator will be granted Awards.
During the fiscal year ended June 30, 2004, we issued options to certain
employees to purchase an aggregate of 56,000 shares of common stock at a
weighted average exercise price of $0.12 per share pursuant to the SIP Plan
(each issuance priced at the estimated fair market value of our common stock on
the date of grant). The options vest over five years from the date of grant and
are exercisable through December 2013. Subsequently, due to the departure of the
employees, these options were forfeited.
During the year ended June 30, 2004, we issued options pursuant to the SIP
Plan to certain board of directors and an employee to purchase an aggregate of
30,000 shares of common stock, at a weighted average exercise price of $0.12 per
share (each issuance priced at the estimated fair market value of our common
stock on the date of grant). The options vested on the date of grant and are
exercisable through April 2006. Subsequently, due to the departure of the
directors, these options were forfeited.
On December 21, 2004, our Board granted, pursuant to the SIP Plan,
Incentive Stock Options (as defined by the SIP Plan), to purchase an aggregate
of 1,375,000 shares of our common stock at an exercise price of $0.10 per share
(the fair market value of our common stock on the day of grant), to certain of
our employees. In addition, on December 21, 2004, our Board granted to our CEO,
pursuant to the SIP Plan, options to purchase 925,000 shares of our common stock
at an exercise price equal to 110% of the fair market value on the date of grant
($0.11 per share). The options vest equally over a period of five years from the
date of grant and are exercisable through December 2013.
NON-PLAN ISSUANCES
On April 12, 2004, we entered into an agreement with an outside consultant
for investor relations services. Pursuant to the agreement, we agreed, in
addition to certain cash consideration, to issue to the investor relations
company, warrants to purchase up to 500,000 shares of our common stock. The
warrants have an exercise price of $0.13 per share. The warrants are valued at
approximately $65,000 (based on the Black Scholes pricing model) which we
recorded to consulting expense in April 2004. The warrants vest immediately and
are exercisable for a period of three years from the date of issuance.
BONUS POOL PLAN
On January 5, 2005, our Board of Directors approved the establishment of a
bonus pool plan to incentivize our executive officers and employees in an effort
to increase our profitability and productivity. Pursuant to the bonus plan,
upon reaching revenue goal milestones as set forth below, our executives and
employees would be entitled to share in the corresponding bonus pool.
Individual distributions from the pool, if any, would be recommended by our
officers, subject to final approval by the Board of Directors.
Bonus Pool Amount
Quarter Revenue Goal Executives Non-Executives
- --------------------------- ------------- ----------- --------------
1st Quarter ending 3/31/05 $ 2.5 Million $ 30,000 $30,000
2nd Quarter ending 6/30/05 $ 3.15 Million $ 45,000 $45,000
3rd Quarter ending 9/30/05 $ 4.0 Million $ 60,000 $60,000
4th Quarter ending 12/31/05 $ 5.0 Million $ 75,000 $75,000
As of the date of this report, no distributions have been made pursuant to the
bonus pool plan.
EXECUTIVE EMPLOYMENT AGREEMENTS
On December 1, 1998, we entered into an Employment Agreement with Paul
Sandhu, our Chief Executive Officer. The Agreement was approved by our Board of
Directors. On September 6, 2001, the Compensation Committee of the Board agreed
to revise the Agreement increasing Mr. Sandhu's salary to $184,800. The
Agreement continues for an indefinite term but may be canceled at any time by
either Mr. Sandhu or us. However, if we terminate the Agreement without cause,
as defined in the Agreement, we shall be obligated to pay Mr. Sandhu 25% of his
then annual salary as severance.
-34-
On December 1, 1998, we entered into an Employment Agreement with Eric
Clemons, our President. The Agreement was approved by our Board of Directors. On
September 6, 2001, the Compensation Committee of the Board agreed to revise the
Agreement increasing Mr. Clemon's salary to $167,200. The Agreement continues
for an indefinite term but may be canceled at any time by either Mr. Clemons or
us. However, if we terminate the Agreement without cause, as defined in the
Agreement, we shall be obligated to pay Mr. Clemons 25% of his then annual
salary as severance.
On December 1, 1998, we entered into an Employment Agreement with Gerald
DeCiccio, our Chief Financial Officer. The Agreement was approved by our Board
of Directors. On September 6, 2001, the Compensation Committee of the Board
agreed to revise the Agreement increasing Mr. DeCiccio's salary to $158,400. The
Agreement continues for an indefinite term but may be canceled at any time by
either Mr. DeCiccio or us. However, if we terminate the Agreement without cause,
as defined in the Agreement, we shall be obligated to pay Mr. DeCiccio 25% of
his annual salary as severance.
COMPENSATION OF DIRECTORS
Our current directors do not receive compensation for their services as our
directors.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
EXPERTS
Our balance sheet as of June 30, 2004 and the related statements of
operations, stockholders deficit and cash flows for the fiscal years ended June
30, 2004 and 2003 appearing in this prospectus have been audited by Squar,
Milner Reehl & Williamson, LLP, independent registered public accountants, as
stated in their report therein, and are included herein in reliance upon the
report of such firm given their authority as experts in accounting and auditing.
There have been no disagreements between Squar, Milner Reehl & Williamson, LLP
and Management since the date of their engagement.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by The Lebrecht Group, APLC, Rancho Santa Margarita, California.
The Lebrecht Group and its employees are the owner of 900 shares of our common
stock. Additionally, pursuant to an agreement with the Lebrecht Group, we are
obligated to issue to them 50,000 shares of our common stock.
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
Reports, registration statements, proxy and information statements, and
other information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at their regional offices located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials
may be obtained at prescribed rates from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Securities and Exchange Commission maintains a site
on the World Wide Web (http://www.sec.gov) that contains reports, registration
statements, proxy and information statements and other information. You may
obtain information on the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330.
-35-
INDEX TO FINANCIAL STATEMENTS
Years Ended June 30, 2004 & June 30, 2003
- -----------------------------------------
Page
----
Report of Independent Auditors F-2
Consolidated balance sheet at June 30, 2004 F-3
Consolidated statements of operations for the years ended
June 30, 2004 and 2003 F-4
Consolidated statements of stockholders' deficit for the years
ended June 30, 2004 and 2003 F-5
Consolidated statements of cash flows for the years ended
June 30, 2004 and 2003 F-7
Notes to consolidated financial statements F-9
Nine Months Ended March 31, 2005
- -----------------------------------------
Condensed consolidated balance sheets at March 31, 2005
(unaudited) and June 30, 2004 F-25
Condensed consolidated statements of operations and other
comprehensive loss unaudited) for the three and nine months
ended March 31, 2005 and 2004 F-26
Condensed consolidated statements of cash flows (Unaudited)
for the nine months ended March 31, 2005 and 2004 F-27
Notes to condensed consolidated financial statements (Unaudited) F-29
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.
-36-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and the related
consolidated statements of operations, comprehensive loss, stockholders' deficit
and cash flows for each of the years in the two-year period ended June 30, 2004.
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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GTC Telecom
Corp. and subsidiaries at June 30, 2004 and the consolidated results of their
operations and their cash flows for each of the years in the two-year period
ended June 30, 2004, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying 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, has a working capital
deficit of approximately $7,200,000, liabilities from the underpayment of
payroll taxes, an accumulated deficit of approximately $15,800,000, and a
stockholders' deficit of approximately $6,680,000 at June 30, 2004. Additionally
as discussed in Note 10, the Company terminated its contract with MCI WorldCom
Network Services, Inc. ("MCI") as its underlying carrier and owes MCI
approximately $5,600,000 at June 30, 2004. 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/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP
Newport Beach, California
August 29, 2004, except for Note 14, as to which the
date is September 19, 2004
F-1
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30,
2004
-------------
ASSETS
Cash $ 73,572
Accounts receivable, net of allowance for doubtful accounts of
approximately $49,000 691,749
Deposits 57,587
Prepaid expenses 64,899
-------------
Total current assets 887,807
Property and equipment, net 620,471
Other assets 76,208
Total assets $ 1,584,486
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,998,130
Accrued payroll and related taxes 210,997
Obligation under capital leases 13,394
Notes payable 5,868,597
Deferred income 4,560
-------------
Total current liabilities 8,095,678
-------------
Long-term liabilities:
Obligation under capital leases, net of current portion 31,538
Notes payable, net of current portion 23,565
-------------
Total liabilities 8,150,781
-------------
Commitments and contingencies
Minority interest in consolidated subsidiary 112,114
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;
22,106,622 shares issued and outstanding 22,107
Additional paid-in-capital 9,208,778
Note receivable officer (60,306)
Accumulated deficit (15,800,852)
Accumulated other comprehensive income (loss) (48,136)
-------------
Total stockholders' deficit (6,678,409)
-------------
Total liabilities and stockholders' deficit $ 1,584,486
=============
See accompanying notes to consolidated financial statements
F-2
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Year Ended June 30,
2004 2003
------------ ------------
Revenues:
Telecommunications $10,103,082 $14,254,029
Internet services 775,862 893,629
BPO services 78,644 --
------------ ------------
Total revenues 10,957,588 15,147,658
------------ ------------
Cost of sales:
Telecommunications 4,221,809 6,764,779
Internet services 555,329 645,811
BPO services 59,239 --
------------ ------------
Total cost of sales 4,836,377 7,410,590
------------ ------------
Gross profit 6,121,211 7,737,068
Operating expenses
Payroll and related 2,857,419 3,804,620
Selling, general, and administrative 2,562,495 3,938,046
------------ ------------
Total operating expenses 5,419,914 7,742,666
------------ ------------
Operating income (loss) 701,297 (5,598)
Interest expense, net (1,262,697) (370,931)
Gain on waiver of payroll tax penalties and interest -- 332,018
Loss on sale of equipment (10,392) (2,419)
------------ ------------
Loss before provision for income taxes and minority interest (571,792) (46,930)
Provision for income taxes 13,753 2,760
------------ ------------
Loss before minority interest (585,545) (49,690)
Minority interest in loss of consolidated subsidiaries 33,278 20,584
------------ ------------
Net loss available to common shareholders (552,267) (29,106)
Foreign currency translation adjustment (58,146) 10,010
------------ ------------
Comprehensive loss $ (610,413) $ (19,096)
============ ============
Basic and diluted net loss available to common
shareholders per common share: $ 0.03 $ 0.00
============ ============
Basic and diluted weighted average common shares
outstanding: 21,096,423 20,634,314
============ ============
See accompanying notes to consolidated financial statements
F-3
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE TWO-YEAR PERIOD ENDED JUNE 30, 2004
Accumulated
Additional Note Other Total
Common Stock Paid-in Receivable Accumulated Comprehensive Stockholders'
Shares Amount Capital Officer Deficit Income (Loss) Deficit
-----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 20,556,622 20,557 8,723,530 (60,306) (15,219,479) -- (6,535,698)
Estimated fair market value of
stock issued for services
rendered 50,000 50 8,200 -- -- -- 8,250
Estimated fair market value of
stock and warrants issued in
connection with notes payable 65,000 65 12,262 -- -- -- 12,327
Estimated fair market value of
warrants granted to
consultants for services
rendered -- -- 26,900 -- -- -- 26,900
Estimated fair market value of
vested options granted to
employees for compensation -- -- 113,925 -- -- -- 113,925
Exercise of stock options by
officers 42,500 42 383 -- -- -- 425
Net loss -- -- -- -- (29,106) -- (29,106)
Cumulative foreign currency
Translation adjustment -- -- -- -- -- 10,010 10,010
-----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 20,714,122 20,714 8,885,200 (60,306) (15,248,585) 10,010 (6,392,967)
-----------------------------------------------------------------------------------
Estimated fair market value of
stock and warrants issued in
connection with notes payable 1,390,000 1,390 148,305 -- -- -- 149,695
Estimated fair market value of
warrants granted to
consultant for services
rendered -- -- 65,000 -- -- -- 65,000
Estimated fair market value of
vested options granted to
employees for compensation -- -- 110,251 -- -- -- 110,251
Exercise of stock options by
officers 2,500 3 22 -- -- -- 25
Net loss -- -- -- -- (552,267) -- (552,267)
Cumulative foreign currency
Translation adjustment -- -- -- -- -- (58,146) (58,146)
-----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 22,106,622 $22,107 $9,208,778 $(60,306) $(15,800,852) $(48,136) $(6,678,409)
===================================================================================
See accompanying notes to consolidated financial statements
F-4
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
2004 2003
------------ ------------
Cash Flows From Operating Activities:
Net loss $ (552,267) $ (29,106)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Estimated fair market value of options granted
to employees for compensation 110,251 113,925
Estimated fair market value of options and warrants
granted to consultants for services rendered 65,000 26,900
Estimated fair market value of stock
issued in connection with notes payable 149,695 12,327
Bad debt expense 159,467 112,770
Depreciation and amortization 298,056 149,248
Amortization of debt discount 199,500 --
Minority interest in loss of consolidated subsidiaries (33,278) (20,584)
Loss on sale of equipment 11,392 2,419
Gain on waiver of payroll tax penalties and interest -- (332,018)
Estimated fair market value of stock issued for services -- 8,250
Changes in operating assets and liabilities:
Accounts receivable and other current assets 137,314 178,425
Accounts payable and accrued expenses 472,439 1,336,958
Accrued payroll and related taxes (188,472) (530,208)
Deferred income 1,315 (44,169)
------------ ------------
Net cash provided by operating activities 830,412 985,137
------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (171,425) (490,413)
Proceeds from sale of equipment -- 15,138
------------ ------------
Net cash used in investing activities (171,425) (475,275)
------------ ------------
Cash Flows From Financing Activities:
Principal repayments on notes payable (1,893,330) (1,405,571)
Principal borrowings on notes payable, net of fees of
$202,000 1,305,341 575,000
Proceeds from issuance of stock of subsidiary, net of
offering costs of $6,000 69,000 92,900
Principal payments under capital lease obligations (8,805) (8,192)
Proceeds from exercise of stock options 25 425
------------ ------------
Net cash used in financing activities (527,769) (745,438)
Effect of exchange rate on cash (58,146) 10,010
Net increase/(decrease) in cash 73,072 (225,566)
Cash at beginning of year 500 226,066
------------ ------------
Cash at end of year $ 73,572 $ 500
============ ============
See accompanying notes to consolidated financial statements
F-5
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of cash flow information:
Years Ended June 30,
2004 2003
--------- ---------
Cash paid during the year for:
Interest $577,986 $358,686
See accompanying notes to consolidated financial statements for additional
non-cash investing and financing activities.
During the fiscal year ended June 30, 2004, the Company financed the purchase of
equipment totaling $146,404, including $39,538 of capital leases and $107,866 of
notes payable.
During the fiscal year ended June 30, 2004, Perfexa issued 8,152 shares of
restricted common stock pursuant to the conversion of interest payable in the
amount of $4,076.
The accompanying notes are an integral part of these consolidated financial
statements.
See accompanying notes to consolidated financial statements
F-6
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GTC - GTC Telecom Corp. and subsidiaries (the "Company" or "GTC") provide
various services including, telecommunication services, which includes long
distance telephone and calling card services, Internet related services
including Internet service provider access, and business process outsourcing
("BPO") services. GTC Telecom Corp. was organized as a Nevada Corporation on May
17, 1994 and is currently based in Costa Mesa, California. The Company trades on
the Over-The-Counter Bulletin Board under the symbol "GTCC".
PERFEXA - Perfexa Solutions, Inc. ("Perfexa" or "Perfexa-U.S."), a majority
owned subsidiary of the Company, currently provides customer service for the
Company's telecommunication and Internet users. Perfexa's Information Technology
("IT") group currently develops IT solutions for GTC's customer care needs and
the integration of GTC's customer care system with those of Perfexa's New Delhi
Center. Perfexa has recently begun offering its services to third parties and
plans to focus on marketing its outsourced call center services to U.S. based
companies. Perfexa's IT group will work initially to ensure the integration of
Perfexa's systems with those of Perfexa's clients. Subsequently, the IT group
will develop customized software solutions for third parties.
GOING CONCERN - The accompanying condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. At June 30, 2004, the Company has
negative working capital of $7,207,871, liabilities from the underpayment of
payroll taxes (see Note 10), an accumulated deficit of $15,800,852, and a
stockholders' deficit of $6,678,409; in addition, through June 30, 2004, the
Company historically had losses from operations and a lack of profitable
operational history, among other matters, that raise substantial doubt about its
ability to continue as a going concern. The Company hopes to continue to
increase revenues from additional revenue sources and/or increase profit margins
through continued negotiations with Sprint (see Note 10) and other cost cutting
measures. In the absence of significant increases in revenues and margins, the
Company intends to fund operations through additional debt and equity financing
arrangements. The successful outcome of future activities cannot be determined
at this time and there are no assurances that if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of GTC Telecom Corp. and its subsidiaries which are
CallingPlanet.com, Inc., ecallingcards.com, Inc., Curbside Communications, Inc.,
and Perfexa Solutions, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
MINORITY INTEREST - Minority interest represents the minority stockholders'
proportionate share of the equity of Perfexa Solutions, Inc. At June 30, 2004
and 2003, the Company owned approximately 97% and 98%, respectively, of Perfexa
Solutions, Inc.'s common stock. The Company's controlling interest requires that
Perfexa Solutions, Inc.'s operations be included in the consolidated financial
statements. The 3% and 2% equity interest of Perfexa Solutions, Inc. that is not
owned by the Company at June 30, 2004 and 2003, respectively, is shown as
minority interest in consolidated subsidiary in the accompanying consolidated
financial statements.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates made by management are,
among others, the allowance for doubtful accounts on accounts receivable,
realizability of long-lived assets, estimates for income tax valuations, and
valuation of securities options, and warrants issued.
RISKS AND UNCERTAINTIES - The Company operates in a highly competitive industry
that is subject to intense competition, government regulation and rapid
technological changes. The Company has limited operating history and is subject
to the substantial business risks and uncertainties inherent to such an entity,
including financial, operational, technological, regulatory and other risks
including the potential risk of business failure. Additionally, the Company's
operations in India are subject to various political, economic, and other risks
and uncertainties inherent in such country.
F-7
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
CONCENTRATION OF CREDIT RISK - The Company currently maintains substantially all
of its cash with one major financial institution. At times, cash balances may be
in excess of the amounts insured by the Federal Deposit Insurance Corporation
("FDIC").
The Company sells its telephone and network services to individuals and small
businesses throughout the United States and does not require collateral. The
Company performs periodic credit evaluations of its customers. The Company
maintains reserves for potential credit losses based upon the Company's
historical experience related to credit losses which management believes are
sufficient. Although the Company expects to collect amounts due, actual
collections may differ from the estimated amounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company establishes an allowance for
doubtful accounts based on a qualitative and quantitative review of credit
profiles of customers, contractual terms and conditions, current economic trends
and historical payments. The Company assesses the allowance for doubtful
accounts each period. If the Company made different judgments or utilized
different estimates for any period, material differences in the amount and
timing of revenue recognized could result.
DEPENDENT ON KEY CUSTOMERS - The Company is not dependent on any single customer
or groups of affiliated customers for a significant portion of its annual sales.
The Company's customer base changes on a continuous basis as customers are added
or removed.
MAJOR SUPPLIERS - The Company does not own its own long distance network and
currently depends primarily upon Sprint to provide for the transmission of phone
calls by its customers and to provide the call detail records upon which the
Company bases its customer's billings. See Note 10 for details of the Company's
agreement with Sprint.
In the event that the services provided by Sprint to the Company were
discontinued, the Company believes that it would be able to identify alternate
suppliers which would be able to provide it with sufficient levels of services
at terms similar to those of Sprint. 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 Sprint or the loss of telecommunications services from Sprint may
have a material adverse effect on the Company's results of operations and
financial condition.
The Company provides its Internet Service Provider Access services pursuant to
an agreement with an outside company for the provisioning of the Company's
Internet Service Provider Access service. See Note 10 for details of the
Company's agreement with its Internet service provider.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of 3
to 5 years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the related
asset. During the years ended June 30, 2004 and 2003, total depreciation expense
was $298,056 and $149,248, 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 - In July 2001, the Financial Accounting Statements Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144
("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS 144 addresses financial accounting
and reporting for the impairment of disposal of long-lived assets. SFAS 144
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
SFAS 144 also requires companies to separately report discontinued operations
and extends that reporting requirement to a component of an entity that either
has been disposed of (by sale, abandonment or a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to sell. The
Company adopted SFAS 144 on July 1, 2002. The provisions of this statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated commitments to plan to
sell or dispose of such assets by management. As a result, the Company cannot
determine the potential effects that adoption of SFAS 144 will have on the
F-8
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
financial statements with respect to future disposal decisions, if any. As of
June 30, 2004, management has determined that no such impairment exists and
therefore, no adjustments have been made to the carrying values of long-lived
assets. There can be no assurance, however, that market conditions or demand for
the Company's products or services will continue which could result in
impairment of long-lived assets in the future.
REVENUE AND RELATED COST RECOGNITION - The Company recognizes revenue during the
month in which services or products are delivered, as follows:
TELECOMMUNICATIONS RELATED SERVICES
The Company's long distance telecommunications service revenues are generated
when customers make long distance telephone calls from their business or
residential telephones or by using any of the Company's telephone calling cards.
Telecommunication services cost of sales consists of the cost of long distance
service provided by Sprint 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 consists of the cost of providing Internet
access.
BPO SERVICES
BPO service revenues consist of amounts billed each month based on a client
contract that provides for either a dedicated or per minute rate as the services
are rendered. BPO service cost of sales consists of labor and its related
support costs directly associated with a service contract.
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. SAB 101 was amended and superceded by SAB 104. Management believes
the Company's revenue recognition policies conform to SAB 104.
DEFERRED INCOME - Deferred income represents proceeds from prepaid telephone
calling cards which are recorded as deferred income when the cash is received.
The Company recognizes the revenue in the statement of operations as the
telephone service is utilized or when the calling card expires.
ADVERTISING COSTS - Advertising costs are expensed as incurred. Advertising
expense was approximately $30,000 and $44,000 for fiscal 2004 and 2003,
respectively.
INCOME TAXES - The Company accounts for income taxes under SFAS 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.
F-9
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," 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.
SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123," was issued in December
2002 and is effective for fiscal years ending after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.
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.
At June 30, 2004, the Company has two stock-based employee compensation plans
(see Note 6). For fixed awards with pro-rata vesting, the Company recognizes
compensation cost ratably over the vesting period. Stock-based employee
compensation cost totaling $110,251 and $113,925 is reflected in net loss for
the years ended June 30, 2004 and 2003, respectively, as certain options granted
under those plans had an exercise price less than the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
Years Ended June 30
2004 2003
---------- ----------
Net loss $(552,267) $ (29,106)
As reported
Deduct: total stock-based employee compensation expense
Determined under fair value based method for all awards (237,507) (251,600)
---------- ----------
Pro-forma $(789,774) $(280,706)
========== ==========
Basic and diluted net loss per share:
As reported $ (0.03) $ (0.00)
========== ==========
Pro-forma $ (0.04) $ (0.01)
========== ==========
LOSS PER SHARE - Statement of Financial Accounting Standards ("SFAS") No. 128
("SFAS 128"), "Earnings Per Share," requires basic earnings per share to be
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period of
computation. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive
(using the treasury stock method, zero and 51,806 shares were potential
additional common shares as of June 30, 2004 and 2003, respectively). Pro forma
per share data has been computed using the weighted average number of common
shares outstanding during the periods. For the years ended June 30, 2004 and
2003, because the Company had incurred net losses, basic and diluted loss per
share are the same as additional potential common shares would be anti-dilutive
(see Note 11).
FAIR VALUES OF FINANCIAL INSTRUMENTS - SFAS 107, "Disclosures About Fair Value
of Financial Instruments," 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, accounts receivables, trade payables,
accrued expenses, and notes payables approximates their estimated fair values
due to the short-term maturities of those financial instruments. The fair value
of long term debts approximates its carrying value because their rates of
interest approximate current market rates. In the opinion of management, the
fair value of the note receivable from officer cannot be estimated without
incurring excessive costs; for that reason, the Company has not provided such
disclosure. Other information about such related-party receivable (such as the
carrying amount, the interest rate, and maturity) is provided elsewhere in these
notes to consolidated financial statements.
F-10
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
COMPREHENSIVE INCOME - SFAS 130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Total comprehensive loss
represents the net change in stockholders' equity during a period from sources
other than transactions with stockholders and as such, includes net earnings.
For the Company, the components of other comprehensive loss are the changes in
the cumulative foreign currency translation adjustments and are recorded as
components of stockholders' deficit.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," 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
(see Note 13).
TRANSLATION OF FOREIGN CURRENCIES - GTC uses the U.S. dollar as its functional
currency while the Company's foreign subsidiary uses the Indian Rupee as its
functional currency. Assets and liabilities of foreign subsidiary are translated
into U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average rates prevailing during the year or other period
presented. In accordance with SFAS No. 52, "Foreign Currency Translation", net
exchange gains or losses resulting from such translation are excluded from net
loss, but are included in comprehensive loss and accumulated in a separate
component of stockholders' deficit. The Company recorded a foreign translation
loss of $58,146 for the year ended June 30, 2004 and a foreign translation gain
of $10,010 for the year ended June 30, 2003.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid financial
instruments with an original maturity of three months or less to be cash
equivalents. The Company had no cash equivalents at June 30, 2004.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
financial statements to conform to current year presentation.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, while the disclosure
requirements became applicable in 2002. The Company is complying with the
disclosure requirements of FIN No. 45. The other requirements of this
pronouncement did not materially affect the Company's financial statements.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123," was issued in December 2002
and is effective for fiscal years ending after December 15, 2002. SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this pronouncement amends the disclosure requirements of SFAS No. 123 to require
more prominent disclosure in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company is complying with the
disclosure requirements of SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." The primary objectives of FIN No. 46
are to provide guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities, or
"VIEs"), and not to determine when and which business enterprise should
consolidate the VIE. Management has determined that the Company does not have
any VIEs.
F-11
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. This pronouncement is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions), and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and is
effective (except for certain mandatorily redeemable noncontrolling interests)
for financial instruments entered into or modified after May 31, 2003. The
Company adopted SFAS No. 150 on June 1, 2003. The adoption of this pronouncement
did not have a material impact on the Company's results of operations or
financial condition.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by Management to have a material impact on the Company's present or
future financial statements.
NOTE 2 PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2004:
Computer equipment $ 641,736
Furniture and office equipment 198,833
Telephone equipment 346,742
Leasehold Improvements 235,656
Automobiles 51,382
----------
1,474,349
Less accumulated depreciation (853,878)
----------
$ 620,471
==========
NOTE 3 OBLIGATION UNDER CAPITAL LEASES
The Company is a lessee of certain property and equipment under capital lease
obligations that expire on various dates through August 2008. The terms of the
capital lease obligations provide for monthly lease payments ranging from
approximately $200 to $865. The assets and liabilities 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 asset. The assets are depreciated over the
shorter period of the lease term or the estimate useful life.
Future minimum annual commitments under lease arrangements are as follows:
Years Ending
June 30,
2005 $ 18,088
2006 13,647
2007 11,859
2008 10,380
2009 1,730
-------
Total minimum future lease payments 55,704
Less: Amounts representing interest (10,772)
-------
F-12
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
Present value of net minimum lease payments $44,932
=======
The following is an analysis of the leased equipment under capital leases as of
June 30, 2004, which is included in property and equipment (Note 2).
Computer equipment $24,536
Telephone equipment 48,180
-------
72,716
Less: Accumulated depreciation (34,120)
-------
$38,596
=======
Interest incurred pursuant to the capital lease obligations was $3,600 and
$3,039 for fiscal years 2004 and 2003, respectively.
NOTE 4 RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE OFFICER
As of June 30, 2004, the Company has net advances to an officer of $60,306.
Advances were made prior to enactment of the Sarbanes-Oxley Act of 2002. The
advances accrue interest at 10% (no interest income has been recorded as of June
30, 2004) and are due on demand. The Company has reclassified the note
receivable as an increase to stockholders' deficit in the accompanying
consolidated balance sheet at June 30, 2004.
NOTE 5 NOTES PAYABLE
On February 12, 2004, the Company borrowed $450,000 for working capital purposes
from an unrelated third party. The note was to be repaid plus interest of
$48,000 upon maturity at June 11, 2004. In the event of default, the investor
shall be entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 150,000 shares of the Company's
restricted common stock valued at $11,688 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in February 2004. On
May 5, 2004, the note, as amended, was extended to July 15, 2004. In
consideration of the extension, the Company agreed to pay an additional $13,280
in interest and issue an additional 300,000 shares of the Company's restricted
common stock valued at $45,000 (based on the market price on the date of grant).
The Company recorded the value of the common stock to interest expense in May
2004.
On November 5, 2003, the Company borrowed $350,000 for working capital purposes
from an unrelated third party. The note was to be repaid plus interest of
$37,333 upon maturity at March 5, 2004. In the event of default, the investor
shall be entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 20,000 shares of the Company's
restricted common stock valued at $2,581 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in November 2003. On
March 5, 2004, the Company defaulted on the note and issued 100,000 shares of
the Company's restricted common stock valued at $8,000 (based on the market
price on the date of issuance) in accordance with the default terms of the note.
The note was renegotiated and $75,000 of the note plus interest of $37,333 were
repaid. The new note of $275,000 was to be repaid plus interest of $14,667 upon
maturity at May 5, 2004. In the event of default, the investor shall be entitled
to 100,000 shares of the Company's restricted common stock. In addition, the
Company issued to the third party 275,000 shares of the Company's restricted
common stock valued at $20,370 (based on the market price on the date of grant
and the related pro-rata value of the common stock). The Company recorded the
value of the common stock to interest expense in March 2004. On May 5, 2004, the
note, as amended, was extended to July 15, 2004. In consideration of the
extension, the Company has agreed to pay an additional $15,448 in interest and
issue the additional 100,000 shares of the Company's restricted common stock
valued at $15,000 (based on the market price on the date of grant). The Company
recorded the value of the common stock to interest expense in May 2004.
On August 18, 2004, these 2 notes, as amended, were combined into one note
totaling $816,395, incorporating all principal and interest owed, and extended
to November 30, 2004. In consideration of the extension, the Company has agreed
to pay an additional $73,350 in interest and issue an additional 250,000 shares
of the Company's restricted common stock valued at $17,133 (based on the market
price on the date of grant). The Company will record the value of the common
stock to interest expense in August 2004.
F-13
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
On June 8, 2004, the Company borrowed $50,000 for working capital purposes from
an unrelated third party. The note is to be repaid plus interest of $7,500 upon
maturity at September 7, 2004. In the event of default, the investor shall be
entitled to accelerate the repayment of the note. In addition, the Company
issued to the third party 50,000 shares of the Company's restricted common stock
valued at $4,128 (based on the market price on the date of grant and the related
pro-rata value of the common stock). The Company recorded the value of the
common stock to interest expense in June 2004. The Company is currently past due
on this note and is in discussions to restructure the terms of the note.
On December 9, 2003, the Company borrowed $200,000 for working capital purposes
from an unrelated third party. The note was to be repaid plus interest of
$21,333 upon maturity at April 8, 2004. In the event of default, the investor
shall be entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 40,000 shares of the Company's
restricted common stock valued at $4,305 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in December 2003. On
May 17, 2004, the note, as amended, was extended to July 19, 2004. In
consideration of the extension, the Company has agreed to pay an additional
$18,667 in interest and issue an additional 200,000 shares of the Company's
restricted common stock valued at $22,000 (based on the market price on the date
of grant). The Company recorded the value of the common stock to interest
expense in May 2004. As of June 30, 2004, the Company has repaid $100,000. The
principal balance due at June 30, 2004 is $100,000. The note is in default and
the Company is currently in discussions to restructure the terms of the note.
On October 9, 2003, the Company borrowed $300,000 for working capital purposes
from an unrelated third party. The note was repaid plus interest of $32,000 upon
maturity at February 17, 2004. In the event of default, the investor was
entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 60,000 shares of the Company's
restricted common stock valued at $6,458 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in October 2003.
There were no defaults under this note.
In connection with the notes payable discussed above, the Company incurred
finder's fees in the amount of approximately $202,000. As a result, for the year
ended June 30, 2004, the Company recorded a debt discount of approximately
$202,000 to interest expense in the accompanying consolidated statements of
operations and comprehensive loss.
On October 2, 2002, and amended on April 1, 2004, the Company renegotiated a
previous note payable (the "Previous Note") due to an unrelated third party into
a new note payable (the "New Note"). The Previous Note had an outstanding
balance of $45,000 on the date of renegotiation. The New Note, as amended, pays
simple interest of 12% per annum with principal and interest due upon maturity
at May 21, 2004. In addition, the Company issued to the third party 45,000
shares of the Company's restricted common stock valued at $4,821 (based on the
market price on the date of grant and the related pro-rata value of the common
stock). The Company recorded the value of the common stock to interest expense
in April 2004. On July 21, 2004, the note, as amended and extended, calls for
payments of $20,000 due on July 21, 2004, $15,000 due on August 21, 2004, and
$10,000 due on September 21, 2004. In consideration of the extension, the
Company has agreed to issue an additional 45,000 shares of the Company's
restricted common stock valued at $2,944 (based on the market price on the date
of grant). The Company will record the value of the common stock to interest
expense in July 2004. As of August 29, 2004, the Company has not made the August
21 and September 21 payments pursuant to the extension. The Company is currently
in discussions to restructure the terms of the note.
On April 15, 2004, the Company borrowed $25,000, bearing no interest, from an
employee of the Company for working capital purposes. The borrowing was repaid
on April 26, 2004. In addition, the Company issued to the employee 25,000 shares
of its restricted common stock valued at $2,273 (based on the market price on
the date of grant and the related pro-rata value of the common stock). The
Company amortized the value of the related common stock to interest expense in
April 2004.
In September 2003, the Company borrowed $25,000 for working capital purposes
from a third party. The note pays simple interest of 8% per annum with principal
and interest due upon maturity at December 3, 2003. In the event of default, the
investor shall be entitled to accelerate the repayment of the note. In addition,
the Company issued to the third party 25,000 shares of the Company's restricted
common stock valued at $3,070 (based on the market price on the date of grant
and the related pro-rata value of the common stock). The Company recorded the
value of the common stock to interest expense in September 2003. On December 3,
2003, the note plus interest of $504 were repaid.
F-14
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
In April 2003, Perfexa-U.S. issued a short-term convertible note with a
principal amount of $125,000 to an unrelated third party investor. The note
provides for simple interest of 10% per annum with principal and interest due
upon maturity at July 31, 2003. Pursuant to the terms of the note, the note may
be converted, at the election of the noteholder prior to the maturity of the
note, into shares of common stock of Perfexa-U.S. at the rate of $0.50 per share
(estimated to be the fair market value on the date of issuance, based on current
third party transaction). In August 2003, the Company repaid $100,000 of the
principal balance and issued 8,152 shares of Perfexa-U.S. restricted common
stock valued at $4,076 (based on the terms of the note) in lieu of an equivalent
amount of interest due on the note. In the three month period ended December 31,
2003, the Company repaid the remaining $25,000 of the principal balance.
The Company maintains a revolving line of credit of $20,000 to finance the
purchase of computer equipment. The revolving line of credit provides for the
Company to make monthly payments of $451, including interest at a rate of
12.99%. The total outstanding balance on the revolving line of credit was
$14,139 and is included in notes payable in the accompanying consolidated
balance sheet at June 30, 2004. As of the date of this report, the Company has
made all payments as required in the revolving line of credit.
The Company from time to time borrows funds from the Company's Chief Executive
Officer ("CEO") for working capital purposes. Amounts accrue no interest and are
payable on demand. On April 15, 2004, the Company borrowed $12,000 from its CEO.
As of August 29, 2004, the Company has repaid $8,000 of the amount borrowed.
On September 30, 2002, and amended on May 30, 2003, the Company renegotiated a
previous note payable due to MCI into a new note payable (the "New Note"). As of
June 30, 2004, the New Note has an outstanding balance of $4,925,437. On July 1,
2004, the Company received notice from MCI that it was in default of the terms
of the above note as well as the Telecommunications Services Agreement and Data
Services Agreement between MCI and GTC. According to MCI, GTC has a total
balance due MCI of approximately $5,679,329. The Company is attempting to
resolve its outstanding balance and the amounts past due with MCI. However,
there can be no guarantees that the Company will be successful in its efforts to
reach an amicable resolution with MCI regarding the amounts past due. Failure to
successfully restructure the amounts due MCI will have a material adverse effect
on the Company's operations.
Future minimum principal payments on notes payable approximate the following for
the years ending June 30:
2005 $ 5,868,597
2006 21,826
2007 1,739
------------
$ 5,892,162
============
NOTE 6 STOCK OPTIONS
From time to time, the Company issues stock options pursuant to various
agreements and other compensatory arrangements to employees and third parties.
2001 Stock Incentive Plan
On October 17, 2001, the Company's Board approved the GTC Telecom Corp. Stock
Incentive Plan (the "SIP Plan"), effective January 1, 2002. The SIP Plan was
approved and ratified by the shareholders on December 13, 2001 at the Company's
2001 annual shareholder's meeting. The SIP Plan provides for the grant of
various types of equity based incentives, including qualified and non-qualified
stock options, stock appreciation rights, restricted stock, bonuses, and other
awards. A maximum of 5,000,000 shares of the Company's common stock may be
issued pursuant to the SIP Plan. The SIP plan is administered by the Board of
Directors.
F-15
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
During the year ended June 30, 2004, the Company issued options to certain
employees to purchase an aggregate of 56,000 shares of common stock at a
weighted average exercise price of $0.12 per share pursuant to the SIP Plan
(each issuance exercise priced at the estimated fair market value of the
Company's common stock on the date of grant). As of August 29, 2004, 50,000 of
these options have been forfeited. The remaining options vest over five years
from the date of grant and are exercisable through December 2013.
During the year ended June 30, 2004, the Company issued options pursuant to the
SIP Plan to certain board of directors to purchase an aggregate of 30,000 shares
of common stock, at a weighted average exercise price of $0.12 per share (each
issuance exercise priced at the estimated fair market value of the Company's
common stock on the date of grant). As of August 29, 2004, these options have
been forfeited.
No employee compensation expense was recognized under APB 25 for options issued
to employees under the SIP Plan during the year ended June 30, 2004.
1999 Stock Option Plan
On September 20, 1999, the Company's Board approved the GTC Telecom Corp. 1999
Omnibus Stock Option Plan, effective October 1, 1999. 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.
Upon the approval and ratification of the SIP Plan , the Company elected to
terminate the 1999 Omnibus Stock Option Plan.
Non-Plan Issuances
In February 2004, the Company's Chief Financial Officer exercised options
(previously granted pursuant to his director compensation plan) to purchase a
total of 2,500 shares of the Company's common stock for $25.
The Company recorded compensation expense for the vesting of previously issued
"in the money" options to employees of $110,251 and $113,925 in the fiscal years
ended June 30, 2004 and 2003, respectively.
A following is a status of the stock options outstanding at June 30, 2004 and
2003 and the changes during the years then ended:
2004 2003
--------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------------ --------- ----------- ------
Outstanding, beginning of year 3,356,900 $ 0.80 4,592,600 $ 0.75
Granted 86,000 0.12 475,000 0.18
Exercised (see Note 8) (2,500) 0.01 (42,500) 0.01
Expired/Forfeited (1,176,400) 0.57 (1,668,200) 0.86
------------ --------- ----------- ------
Outstanding, end of year 2,264,000 $ 0.62 3,356,900 $ 0.62
============ ========= =========== ======
Exercisable at end of year 1,477,560 $ 0.75 1,819,580 $ 0.80
============ ========= =========== ======
Wtd avg fair value of options granted $ 0.10 $ 0.17
--------- ------
F-16
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
The following table summarizes information concerning currently outstanding and
exercisable options at June 30, 2004:
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
PRICE RANGE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------------- ---------- ------------ ---------
0.01 - $1.00 1,540,600 6.21 years $ 0.29 842,360 $ 0.28
1.01 - $2.00 671,400 3.89 years $ 1.15 585,000 $ 1.14
2.94 - $5.00 52,000 0.89 years $ 3.93 50,200 $ 3.97
----------- -----------
2,264,000 4.22 years $ 0.66 1,477,560 $ 0.86
=========== ===========
Other Information:
The fair market value of each option granted in 2004 and 2003 is estimated using
the Black-Scholes option pricing model per SFAS 123. The Black-Scholes
option-pricing model used the following weighted average assumptions for the
years ended June 30, 2004 and 2003, respectively: (i) no dividend yield for each
year, (ii) volatility of 287 percent and 173 percent, respectively, (iii)
risk-free interest rate of 3.00 percent and 3.13 percent, respectively, and (iv)
expected life of 5.0 years and 4.8 years, respectively.
NOTE 7 WARRANTS
From time to time, the Company issues warrants pursuant to various consulting
agreements.
In April 2004, the Company entered into an agreement with an outside consultant
for investor relations services. Pursuant to the agreement, the Company agreed
to pay $10,000 per month for services and following an initial term of twelve
(12) months, the agreement shall automatically terminate. In addition, the
Company agreed to issue to the investor relations company, warrants to purchase
up to 500,000 shares of the Company's common stock. The warrants have an
exercise price of $0.13 per share and are valued at approximately $65,000 (based
on the Black Scholes pricing model) which the Company recorded to consulting
expense in April 2004, since management believes the services were substantially
provided in the Company's fourth quarter. The warrants vest immediately and are
exercisable for a period of three years from the date of issuance.
In March 2003, pursuant to an agreement with an outside consultant for investor
services, the Company issued warrants to purchase up to 40,000 shares of the
Company's restricted common stock at an exercise price of $0.25 per share valued
at approximately $6,400 (based on the Black-Scholes pricing model) which the
Company recorded to consulting expense in April 2003. The warrants vested in
April 2003 and are exercisable for a period of two years from the date of
issuance.
In October 2002, pursuant to a note with a third party (see Note 5), the Company
granted warrants to purchase 25,000 shares of the Company's restricted common
stock at an exercise price of $0.25 per share valued at approximately $2,595
(based on the Black-Scholes pricing model and the related pro-rata value of the
warrants). The warrants vest immediately and are exercisable for a period of two
years from the date of issuance. The amount was amortized to interest expense in
the accompanying consolidated statements of operations for the fiscal year ended
June 30, 2003.
In September 2002, pursuant to an agreement with an outside consultant for
investor and public relations services, the Company issued warrants to purchase
up to 25,000 shares of the Company's restricted common stock at an exercise
price of $0.20 per share valued at approximately $4,500 (based on the
Black-Scholes pricing model), which was recorded to consulting expense in the
accompanying consolidated statement of operations for the fiscal year ended June
30, 2003. The warrants vest immediately and are exercisable for a period of
three years from the date of issuance and contain piggyback registration rights.
F-17
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
In August 2002, pursuant to an agreement with an outside consultant for investor
and public relations services, the Company issued warrants to purchase up to
100,000 shares of the Company's restricted common stock at an exercise price of
$0.17 per share valued at approximately $16,000 (based on the Black-Scholes
pricing model). The warrants vest 25,000 upon execution of the agreement and
25,000 every three months thereafter, so long as the Company retains the outside
consultant. The warrants are exercisable for a period of three years from the
date of issuance and contain piggyback registration rights. During fiscal 2003,
all 100,000 warrants vested, in which the Company recorded the related value of
$16,000 as investor relations expense under selling, general and administrative
expenses in the accompanying consolidated statements of operations.
The following represents a summary of the warrants outstanding at June 30, 2004
and 2003 and changes during the years then ended:
2004 2003
-------------------------------------------------------
Weighted Weighted
Average Average
Warrants Exercise Price Warrants Exercise Price
---------- --------------- --------- ---------------
Outstanding, beginning of year 640,000 $ 0.45 490,000 $ 0.51
Granted 500,000 0.13 190,000 0.20
Exercised -- -- -- --
Expired/Forfeited (100,000) 1.02 (40,000) 0.50
---------- --------------- --------- ---------------
Outstanding, end of year 1,040,000 $ 0.22 640,000 $ 0.45
========== =============== ========= ===============
Exercisable at the end of the year 1,040,000 $ 0.22 640,000 $ 0.45
========== =============== ========= ===============
The outstanding and exercisable warrants above have prices ranging between $0.13
and $0.50, with a weighted average remaining contractual life of 3.2 years.
The fair value of each warrant granted during 2004 and 2003 is estimated using
the Black-Scholes option-pricing model on the date of grant. The Black-Scholes
option-pricing model used the following weighted average assumptions for the
years ended June 30, 2004 and 2003, respectively: (i) no dividend yield for each
year, (ii) volatility of 306 percent and 212 percent, respectively, (iii)
risk-free interest rate of 1.5 percent and 3.02 percent, respectively, and (iv)
expected life of 3.0 years and 2.8 years, respectively.
NOTE 8 COMMON STOCK ISSUANCES
In February 2004, the Company's Chief Financial Officer exercised options
(previously granted pursuant to his director compensation plan) to purchase a
total of 2,500 shares of the Company's common stock for $25.
During the year ended June 30, 2004, the Company issued 1,390,000 shares of the
Company's restricted common stock in connection with notes payable (see Note 5).
During the fourth quarter of the fiscal year ended June 30, 2003, in connection
with a note payable, the Company issued 30,000 shares of the Company's
restricted common stock valued at approximately $5,181 (based on the market
price on the dates of issuance).
In May 2003, the Company's Chief Executive Officer and the Company's President
exercised options (previously granted pursuant to their director compensation
agreement) to purchase a total of 17,500 and 25,000 shares, respectively, of the
Company's common stock for $175 and $250, respectively.
In December 2002, pursuant to a note with a third party, the Company issued
10,000 shares of the Company's restricted common stock valued at $1,485 (based
on the market price on the date of grant and the related pro-rata value of the
common stock).
In October 2002, pursuant to a note with a third party, the Company issued
25,000 shares of the Company's restricted common stock valued at $3,066 (based
on the market price on the date of grant and the related pro-rata value of the
common stock).
F-18
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 9 INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes are as
of June 30, 2004:
Deferred tax asset:
Net operating loss carryforward $9,250,000
Allowance for doubtful accounts 20,000
----------
Total gross deferred tax asset 9,270,000
Less valuation allowance (9,270,000)
----------
Net deferred tax asset $ --
==========
No current provision for income taxes for the years ended June 30, 2004 and 2003
is significant since the Company incurred taxable losses during such years.
The provision for income taxes for fiscal 2004 and 2003 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,
2004 2003
Computed tax benefit at federal statutory rate $(190,000) $(23,000)
State income tax benefit, net of federal effect (30,000) (4,000)
Change in valuation allowance 173,000 27,000
Other 60,753 2,760
_________ _________
$ 13,753 $ 2,760
As of June 30, 2004, the Company had tax net operating loss carryforwards of
approximately $23,000,000 and $11,500,000 for federal and state income tax
reporting purposes, respectively, which begin expiring in 2014 and 2005,
respectively. Effective September 11, 2002, pursuant to California revenue and
tax code section 24416.3, no net operating loss deduction would be allowed for
any taxable year beginning on or after January 1, 2002, and before January 1,
2004. For any suspended losses, the carryover period would be extended by one
year for losses incurred in tax years beginning on or after January 1, 2002, and
before January 1, 2003; and by two years for losses incurred in taxable years
beginning before January 1, 2002.
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.
NOTE 10 COMMITMENTS AND CONTINGENCIES
PAYROLL TAXES -At June 30, 2004, the Company has accrued approximately $28,000
related to penalties and interest in connection with past due payroll taxes of
prior periods. This accrual was repaid in July 2004. The Company has verbal
confirmation from the IRS that this matter has been settled with no additional
amounts owed to the IRS.
F-19
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
STOCK PURCHASE AGREEMENT - Pursuant to a common stock purchase agreement
("Agreement") with Bluefire Capital, Inc. ("Bluefire"), the Company is entitled
to issue and sell common stock to Bluefire in the form of draws for up to an
aggregate of $20,000,000, as defined in the Agreement, from time to time during
a three year period beginning on the date of the filing of an effective
registration statement. On November 20, 2001, the Company filed a registration
statement under the Securities Act with the Securities and Exchange Commission
("SEC") for 15,000,000 shares available to be issued to Bluefire under the
Agreement should the Company choose to draw down on these shares and on January
23, 2002, the registration statement was declared effective. Pursuant to the
Agreement, the Company must draw a minimum of $500,000 over the term of the
Agreement, or the Company shall pay liquidated damages equal to one-half of the
amount not drawndown, in an amount up to $250,000. As of August 29, 2004, the
Company has not drawn under this Agreement.
OPERATING LEASES - The Company leases a total of 7,651 square feet of office
space for its headquarters and customer service operations in Costa Mesa,
California at a monthly rental rate of $14,745 pursuant to a six month lease
agreement ending February 28, 2005.
Effective October 1, 2002, Perfexa-U.S.'s Indian subsidiary, Perfexa Solutions
Pvt. Ltd. ("Perfexa-India"), began leasing approximately 15,422 square feet of
office space in Gurgaon, India, a suburb of New Delhi, at a monthly rate of Rs.
524,348 (approximately $11,400) per month. This facility serves as
Perfexa-India's call center, IT development center, and administrative offices.
The lease is for a term of three years with an option to renew for an additional
three year term with an increase in the rental rate of 20%. Effective October 1,
2002, Perfexa-India also entered into a maintenance agreement for its New Delhi
facility. Pursuant to the terms of the agreement, Perfexa-India is obligated to
pay a monthly maintenance fee of Rs. 138,798 (approximately $3,000) per month
for the first twelve months. Thereafter, the monthly fee will be calculated
based on the actual costs of maintenance (including electricity and water) plus
a 20% mark-up.
Future minimum annual commitments under long-term facility lease and supplier
arrangements (see below) approximate the following:
Years Ending Facility Leases Internet Telecom
June 30, and Other Commitments Supplier Supplier Total
- ------------- ---------------------- --------- ---------- ----------
2005 $ 295,000 $ 525,000 $ 369,000 $1,189,000
2006 43,000 -- 323,000 366,000
2007 -- -- 50,000 50,000
---------------------- --------- ---------- ----------
$ 338,000 $ 525,000 $ 742,000 $1,605,000
====================== ========= ========== ==========
Rent expense for the fiscal years ended June 30, 2004 and 2003 was $433,953 and
$408,065, respectively.
CONTRACTS AND AGREEMENTS - The Company does not own its own long distance
network and currently depends upon third parties to provide for the transmission
of phone calls by its customers and to provide the call detail records upon
which the Company bases its customer's billings. Previously, the Company
contracted with MCI WorldCom Network Services, Inc. ("MCI") as its underlying
carrier. On July 1, 2004, the Company received notice from MCI that it was in
default of the terms of its Promissory Note with MCI as well as the
Telecommunications Services Agreement and Data Services Agreement between MCI
and GTC. According to MCI, GTC has a total balance due MCI of approximately
$5,679,329 at June 30, 2004. The Company is attempting to resolve its
outstanding balance and the amounts past due with MCI. However, there can be no
guarantees that the Company will be successful in its efforts to reach an
amicable resolution with MCI regarding the amounts past due. Failure to
successfully restructure the amounts due MCI will have a material adverse effect
on the Company's operations.
In order to minimize service disruptions to the Company's customers, on July 7,
2004, the Company transferred its customer accounts to its alternate supplier,
Sprint Communications Company L.P. ("Sprint"). As a consequence of this
conversion, a not yet determined number of the Company's long distance customers
have either left the Company or were not successfully converted due to technical
issues. As a result, the Company has experienced an approximate 16% reduction in
its call volumes and corresponding revenues. The Company is attempting to
resolve all outstanding technical issues relating to this conversion and will
continue to market its services in order to re-acquire or add new customers.
Pursuant to the terms of its agreement with Sprint, as amended, the Company is
obligated to a monthly minimum of $25,000 through July 26, 2006. For any period
during which the Company fails to meet its monthly minimum, the Company would be
liable for 25% of the difference between the Company's actual usage and the
stated minimum. The Company may terminate the agreement upon ninety (90) days
written notice provided that the Company pays a termination fee equal to 50% of
the aggregate minimum revenue requirement for the remaining term of the contract
if the Company terminates for convenience or by default of the Company prior to
the expiration date which was $371,000 as of June 30, 2004. Sprint may terminate
the agreement upon thirty (30) days written notice and then only in the event
that the Company is in material breach of the agreement. However, in cases of
nonpayment, Sprint may elect to immediately terminate the Agreement.
F-20
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
The termination of the Company's contract with Sprint, the loss of
telecommunications services provided by Sprint, or a reduction in the quality of
service the Company receives from Sprint 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 Sprint. There can be no
assurance that accurate information will be provided by Sprint on a timely
basis, the failure of which would have a material adverse effect on the
Company's results of operations.
In the event that the services provided by Sprint to the Company were
discontinued, the Company believes that it would be able to identify alternate
suppliers which would be able to provide it with sufficient levels of services
at terms similar to those of Sprint. 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 Sprint or the loss of telecommunications services from Sprint may
have a material adverse effect on the Company's results of operations and
financial condition.
GTC does not currently have its own Internet Network. Currently, the Company
provides its Internet Service Provider Access services pursuant to an agreement
with a third party company for the provisioning of the Company's Internet
Service Provider Access service. The Company is not obligated to any monthly
minimums under its agreement with its underlying Internet service provider.
Although the Company believes that its relationship with its third-party
provider is strong and should remain so with continued contract compliance, the
termination of the Company's contract with its underlying provider, the loss of
Internet services provided by these companies, or a reduction in the quality of
service the Company receives from these companies could have an adverse effect
on the Company's internet operations. In the event that its underlying provider
was 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.
ACQUISITION - On April 23, 2004, the Company entered into an agreement for the
acquisition of Telspan, Inc., a California corporation ("Telspan"). Pursuant to
the Reorganization and Stock Purchase Agreement (the "Acquisition Agreement")
entered into between the Company, Telspan, Inc. and its shareholders, the
Company agreed to acquire 100% of the outstanding capital stock of Telspan in
exchange for that number of shares of the Company's common stock which would
equate to 84% of the outstanding capital stock of the Company on a fully diluted
basis following the acquisition. Closing of the acquisition is conditioned upon
various events, including the approval of the Company's stockholders and upon
Telspan's successful acquisition of certain telecommunications assets. As of
August 29, 2004, Telspan has not completed the acquisition of the
telecommunications assets. There can be no assurances that Telspan Acquisition
will be successfully completed.
In a related agreement, the Company on April 23, 2004 agreed to sell a
controlling interest in its Perfexa subsidiary to the shareholders of Infospan,
Inc., a California company commonly controlled by some of the shareholders of
TelSpan. Closing of the sale of the controlling interest is conditioned, in
part, upon the approval of the Company's stockholders as well as the generation
of certain amounts of business for Perfexa. As of August 29,2004, these
conditions have not been completed and therefore, there can be no assurances
that the Infospan transaction will be successfully completed.
F-21
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 11 LOSS PER SHARE
The following is a reconciliation of the number of shares used in the
calculation of basic earnings per share and diluted earnings per share for the
years ended June 30, 2004 and 2003:
2004 2003
------------ ------------
Net loss $ (552,267) $ (29,106)
Weighted average number of common shares outstanding 21,096,423 20,634,314
Incremental shares from the assumed exercise of dilutive
stock options and warrants -- 51,806
------------ ------------
Dilutive potential common shares 21,096,423 20,686,120
============ ============
Net earnings per share:
Basic $ 0.03 $ 0.00
============ ============
Diluted $ 0.03 $ 0.00
============ ============
For the years ended June 30, 2004 and 2003, potentially dilutive incremental
shares totaling 0 and 51,806, respectively, (based on the assumed exercise of
dilutive stock options and warrants to acquire 0 and 277,500 shares,
respectively, of the Company's common stock) were not included in the
computation of diluted net loss per share because the Company had a net loss,
which would make their inclusion antidilutive. Options and warrants to purchase
3,304,000 and 3,719,400 shares of the Company's common stock that were
outstanding at June 30, 2004 and 2003, respectively, were not considered
potentially dilutive because the exercise price of the options and warrants was
greater than the average market price of the common shares and, therefore, the
effect of their inclusion would be antidilutive.
NOTE 12 - PERFEXA SOLUTIONS SUBSIDIARY
In October 2003, Perfexa issued 15,000 shares of restricted common stock,
resulting in net proceeds to Perfexa of $15,000, to an "accredited" investor at
a price of $1.00 per share.
On June 3, 2003, Perfexa-U.S. issued a confidential private placement memorandum
("PPM") of 2,000,000 shares of Perfexa's restricted common stock at $1.00 per
share. As of September 30, 2003, Perfexa had sold 60,000 shares pursuant to this
offering, resulting in net proceeds of $54,000 which were transferred to GTC as
partial repayment of accrued advances. The PPM closed on August 31, 2003 with no
additional investments.
During fiscal year 2003, Perfexa-U.S. issued an aggregate of 210,000 shares of
its restricted common stock to third party investors at a price of $0.50 per
share, resulting in cash of $92,900, net of offering costs of $12,100.
F-22
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 13 BUSINESS SEGMENT INFORMATION
Segment and geographical information is assigned by region based upon management
responsibility for such items. The following table presents information about
the Company's operations by geographical area for the years ended June 30, 2004
and 2003.
2004 2003
--------------- ------------
Revenues
--------
Telecommunications and Internet $ 10,878,944 $15,147,658
BPO
Perfexa-U.S. 78,644 --
Perfexa-India -- --
--------------- ------------
Total $ 10,957,588 $15,147,658
=============== ============
Cost of Sales
- -------------
Telecommunications and Internet $ 4,777,138 $ 7,410,590
BPO
Perfexa-U.S. 59,239 --
Perfexa-India -- --
--------------- ------------
Total $ 4,836,377 $ 7,410,590
=============== ============
Operating Income (Loss)
- -----------------------
Telecommunications and Internet $ 3,013,166 $ 1,813,280
BPO
Perfexa-U.S. (2,396,369) (1,341,974)
Perfexa-India 84,500 (476,904)
--------------- ------------
Total $ 701,297 $ (5,598)
=============== ============
Capital Expenditures
- --------------------
Telecommunications and Internet $ 146,181 $ 18,090
BPO
Perfexa-U.S. 7,864 28,609
Perfexa-India 163,784 496,997
--------------- ------------
Total $ 317,829 $ 543,696
=============== ============
Identifiable assets are assigned by region based upon management responsibility.
The following table presents information about the Company's identifiable assets
by geographic region:
June 30, 2004 June 30, 2003
Assets
- ------
Telecommunications and Internet $ 1,002,223 $ 1,222,734
BPO
Perfexa-U.S. 28,549 26,130
Perfexa-India 553,714 569,862
--------------- ------------
Total $ 1,584,486 $ 1,818,726
=============== ============
F-23
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 14 SUBSEQUENT EVENTS
On August 18, 2004, the Company amended 2 notes totaling $816,395 note payable
(see Note 5), extending the note to November 30, 2004. In consideration of the
extension, the Company has agreed to pay an additional $73,350 in interest and
issue an additional 250,000 shares of the Company's restricted common stock
valued at $17,133 (based on the market price on the date of grant). The Company
will record the value of the common stock to interest expense in August 2004.
On July 21, 2004, the Company amended a $45,000 note payable (see Note 5). The
amended note calls for payments of $20,000 due on July 21, 2004, $15,000 due on
August 21, 2004, and $10,000 due on September 21, 2004. In consideration of the
extension, the Company has agreed to issue an additional 45,000 shares of the
Company's restricted common stock valued at $2,944 (based on the market price on
the date of grant). The Company will record the value of the common stock to
interest expense in July 2004. As of August 29, 2004, the Company has not made
the August 21 and September 21 payments pursuant to the extension. The Company
is currently in discussions to restructure the terms of the note.
In July 2004, the Company financed additional upgrades to its existing telephone
system by entering into a term note in the amount of $23,357. The note provides
for the Company to make 11 monthly payments of $2,123, with no interest charged,
commencing August 2004.
F-24
GTC TELECOM CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2005 2004
----------------------------
(Unaudited) (Audited)
ASSETS
Cash $ 22,956 $ 73,572
Accounts receivable, net of allowance for doubtful accounts of
approximately $241,000 and $49,000 at
March 31, 2005 and June 30, 2004, respectively 889,771 691,749
Deposits 56,672 57,587
Prepaid expenses 62,530 64,899
----------------------------
Total current assets 1,031,929 887,807
Property and equipment, net 456,769 620,471
Other assets 75,933 76,208
----------------------------
Total assets $ 1,564,631 $ 1,584,486
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 2,896,933 $ 1,998,130
Accrued payroll and related taxes 229,487 210,997
Obligation under capital leases 10,604 13,394
Notes payable 5,815,935 5,868,597
Deferred income 4,560 4,560
----------------------------
Total current liabilities 8,957,519 8,095,678
Long-term liabilities:
Obligation under capital leases, net of current portion 23,687 31,538
Notes payable, net of current portion 32,861 23,565
----------------------------
Total Liabilities 9,014,067 8,150,781
Commitments and contingencies
Minority interest in consolidated subsidiary 91,983 112,114
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;
23,426,622 and 23,106,622 shares issued and outstanding at
March 31, 2005 and June 30, 2004, respectively 23,427 22,107
Additional paid-in-capital 9,370,972 9,208,778
Note receivable officer (60,306) (60,306)
Accumulated other comprehensive loss (349,407) (48,136)
Accumulated deficit (16,526,105) (15,800,852)
----------------------------
Total stockholders' deficit (7,541,419) (6,678,409)
----------------------------
Total liabilities and stockholders' deficit $ 1,564,631 $ 1,584,486
============================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-25
GTC TELECOM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Revenues:
Telecommunications $ 2,153,735 $ 2,393,543 $ 6,085,513 $ 7,972,348
Internet services 136,669 174,663 443,018 568,844
BPO services 47,668 33,022 129,560 42,722
---------------------------------------------------------------------
Total revenues 2,338,072 2,601,228 6,658,091 8,583,914
Cost of sales:
Telecommunications 904,222 938,484 2,772,196 3,376,774
Internet services 40,676 116,174 139,903 441,705
BPO services 28,728 21,733 86,184 28,117
---------------------------------------------------------------------
Total cost of sales 973,626 1,076,391 2,998,283 3,846,596
---------------------------------------------------------------------
Gross profit 1,364,446 1,524,837 3,659,808 4,737,318
---------------------------------------------------------------------
Operating expenses:
Payroll and related 585,271 716,549 1,765,572 2,184,038
Selling, general, and administrative 624,404 833,272 1,779,230 2,934,568
---------------------------------------------------------------------
Total operating expenses 1,209,675 1,549,821 3,544,802 5,118,606
---------------------------------------------------------------------
Operating income/(loss) 154,771 (24,984) 115,006 (381,288)
Interest expense, net (270,941) (421,957) (851,021) (842,750)
---------------------------------------------------------------------
Loss before provision for income taxes
and minority interest (116,170) (446,941) (736,015) (1,224,038)
Provision for income taxes 1,833 10,203 9,369 12,446
---------------------------------------------------------------------
Loss before minority interest (118,003) (457,144) (745,384) (1,236,484)
Minority interest in loss of consolidated
subsidiaries, net of taxes 6,108 16,285 20,131 54,630
---------------------------------------------------------------------
Net loss available to common stockholders (111,895) (440,859) (725,253) (1,181,854)
Foreign currency translation adjustment (144,909) 11,588 (301,271) 13,810
---------------------------------------------------------------------
Comprehensive loss $ (256,804) $ (429,271) $(1,026,524) $(1,168,044)
=====================================================================
Basic and diluted net loss available
to common stockholders per common
share $ (0.00) $ (0.02) $ (0.03) $ (0.06)
=====================================================================
Basic and diluted weighted average common
shares outstanding 23,426,622 20,986,759 22,713,575 20,860,922
=====================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
GTC TELECOM CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
----------------------
2005 2004
----------------------
Cash Flows From Operating Activities:
Net loss $ (725,253) $(1,181,854)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Estimated fair market value of options granted to
employees for compensation 82,687 82,688
Estimated fair market value of stock issued in
connection with notes payable 20,827 56,473
Depreciation and amortization 227,951 219,594
Bad debt expense 287,304 142,285
Minority interest in loss of consolidated subsidiaries (20,131) (54,630)
Amortization of debt discount -- 154,317
Loss on sale of equipment -- 11,392
Changes in operating assets and liabilities:
Accounts receivable and other current assets (481,767) 109,430
Accounts payable and accrued expenses 901,142 1,131,325
Accrued payroll and related taxes 18,490 (17,461)
Deferred income -- 1,315
----------------------
Net cash provided by operating activities 311,250 654,874
----------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (29,463) (146,464)
----------------------
Net cash used in investing activities (29,463) (146,464)
----------------------
Cash Flows From Financing Activities:
Proceeds from sale of stock 60,000 --
Principal repayments on notes payable (80,491) (1,740,261)
Principal payments under capital lease obligations (10,641) (10,484)
Principal borrowings on notes payable, net of fees of $202,000 -- 1,159,500
Proceeds from issuance of stock of subsidiary, net of -- 69,000
offering costs of $6,000
Proceeds from exercise of stock options -- 25
----------------------
Net cash used in financing activities (31,132) (522,220)
Effect of exchange rate on cash (301,271) 13,810
----------------------
Net decrease in cash (50,616) --
Cash at beginning of period 73,572 500
----------------------
Cash at end of period $ 22,956 $ 500
======================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,902 $ 296,846
======================
Income taxes $ 9,369 $ 12,448
======================
During the nine month period ended March 31, 2005, the Company financed the
purchase of equipment totaling $37,125 with notes payable.
See accompanying notes to condensed consolidated financial statements for other
non-cash investing and financing activities.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
NOTE 1 - MANAGEMENT'S REPRESENTATION:
The management of GTC Telecom Corp. and its subsidiaries (the "Company" or
"GTC") without audit has prepared the condensed consolidated financial
statements included herein. The accompanying unaudited condensed financial
statements consolidate the accounts of the Company and its wholly and/or
majority owned subsidiaries and have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Certain information and note disclosures normally
included in the condensed consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted. In the opinion of the management of the Company, all
adjustments considered necessary for fair presentation of the condensed
consolidated financial statements have been included and were of a normal
recurring nature, and the accompanying condensed consolidated financial
statements present fairly the financial position as of March 31, 2005, the
results of operations for the three and nine months ended March 31, 2005 and
2004, and cash flows for the nine months ended March 31, 2005 and 2004.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the audited consolidated financial statements and notes for
the year ended June 30, 2004, included in the Company's Form 10-KSB filed with
the Securities and Exchange Commission on September 28, 2004. The interim
results are not necessarily indicative of the results for a full year.
NOTE 2 - DESCRIPTION OF BUSINESS:
GTC - GTC provides various services including, telecommunication services such
as long distance and local telephone services, Internet related services,
including Internet Service Provider access, and business process outsourcing
("BPO") services. GTC Telecom Corp. was organized as a Nevada Corporation on May
17, 1994 and is currently based in Costa Mesa, California. The Company is quoted
on the Over-The-Counter Bulletin Board under the symbol "GTCC".
The Company has formed four wholly owned subsidiaries, of which only one is
active (see below), that offer different products and services. They are managed
separately because each business requires different technology and/or marketing
strategies.
The four subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com, Inc.,
Curbside Communications, Inc., and Perfexa Solutions, Inc.
CallingPlanet.com, Inc. was set up to offer international calling using a PC to
phone connection. It is currently inactive. ecallingcards.com, Inc. was set up
to offer prepaid calling cards purchased over the internet. It is currently
inactive. Curbside Communications, Inc., currently inactive, has been set up for
future strategic purposes which the Company is currently in the planning
process.
PERFEXA - Perfexa Solutions, Inc. ("Perfexa" or "Perfexa-U.S."), a majority
owned subsidiary of the Company, currently provides customer service for the
Company's telecommunication and Internet users. Perfexa's Information Technology
("IT") group currently develops IT solutions for GTC's customer care needs and
the integration of GTC's customer care system with those of Perfexa's New Delhi
Center. Additionally, Perfexa offers outsourced call center and IT development
services to third parties.
NOTE 3 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GOING CONCERN - The accompanying condensed 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. As of March 31, 2005, the Company
has negative working capital of $7,925,590, an accumulated deficit of
$16,526,105, a stockholders' deficit of $7,541,419, and the Company is in
default on several notes payable, including approximately $5 million to MCI (see
Note 5). In addition, through March 31, 2005, the Company historically had
losses from operations and a lack of profitable operational history, among other
matters, that raise doubt about its ability to continue as a going concern. The
Company hopes to continue to increase revenues from additional revenue sources
F-28
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
and/or increase margins through continued negotiations with Sprint (see Note 7)
and other cost cutting measures. In the absence of significant increases in
revenues and margins, the Company intends to fund operations through additional
debt and equity financing arrangements. The successful outcome of future
activities cannot be determined at this time and there are no assurances that if
achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
These circumstances raise doubt about the Company's ability to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
PRINCIPLES OF CONSOLIDATION - The accompanying condensed consolidated financial
statements include the accounts of GTC Telecom Corp. and its subsidiaries,
CallingPlanet.com, Inc., ecallingcards.com, Inc., Curbside Communications, Inc.,
and Perfexa Solutions, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
MINORITY INTEREST - Minority interest represents the minority stockholders'
proportionate share of the equity of Perfexa Solutions, Inc. At March 31, 2005
and June 30, 2004, the Company owned approximately 97% of Perfexa Solutions,
Inc.'s common stock. The Company's controlling interest requires that Perfexa
Solutions, Inc.'s operations be included in the condensed consolidated financial
statements of the Company. The 3% equity interest of Perfexa Solutions, Inc.
that is not owned by the Company at March 31, 2005 and June 30, 2004 is shown as
minority interest in consolidated subsidiary in the accompanying condensed
consolidated financial statements.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates made by management are,
among others, provisions for losses on accounts receivable, realizability of
long-lived assets and estimates for deferred income tax asset valuations.
COMPREHENSIVE INCOME - SFAS 130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Total comprehensive loss
represents the net change in stockholders' equity during a period from sources
other than transactions with stockholders and as such, includes net earnings.
For the Company, the components of other comprehensive loss are the changes in
the cumulative foreign currency translation adjustments and are recorded as
components of stockholders' deficit.
TRANSLATION OF FOREIGN CURRENCIES - GTC uses the U.S. dollar as its functional
and reporting currency while the Company's foreign subsidiary uses the Indian
Rupee as its functional currency. Assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at year-end or period-end exchange
rates, and revenues and expenses are translated at average rates prevailing
during the year or other period presented. In accordance with SFAS No. 52,
"Foreign Currency Translation", net exchange gains or losses resulting from such
translation are excluded from net loss, but are included in comprehensive loss
and accumulated in a separate component of stockholders' deficit. The Company
recorded a foreign translation loss of $301,271 for the nine months ended March
31, 2005 and a translation gain of $13,810 for the nine months ended March 31,
2004.
STOCK-BASED INCENTIVE COMPENSATION - The Company has two stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of Accounting Principles Board ("APB") Opinion No.25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based employee compensation cost approximating $27,562 is reflected in net
loss for each of the three month periods ended March 31, 2005 and 2004,
respectively, as certain options granted under those plans had an exercise price
less than the market value of the underlying common stock on the date of grant.
F-29
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
The following table illustrates the effect on loss and loss per common share as
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, for all of its stock-based employee compensation plans.
Three Months Ended Nine Months Ended
March 31, December 31,
------------------------------------------------
2005 2004 2005 2004
------------------------------------------------
Net loss available to common stockholders:
As reported $(111,895) $(440,859) $(725,253) $(1,181,854)
Deduct total stock-based employee compensation
expense determined under fair based method for
all awards (69,000) (30,000) (183,000) (110,000)
---------- ---------- ---------- ------------
Pro-forma $(180,895) $(470,859) $(908,253) $(1,291,854)
========== ========== ========== ============
Basic and diluted net loss available to
common stockholders per common share
As reported $ (0.00) $ (0.02) $ (0.03) $ (0.06)
========== ========== ========== ============
Pro-forma $ (0.01) $ (0.02) $ (0.04) $ (0.06)
========== ========== ========== ============
LOSS PER SHARE - Statement of Financial Accounting Standards ("SFAS") No. 128
("SFAS 128"), "Earnings Per Share" requires that basic earnings per share be
computed by dividing income available to common shareholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive (using the treasury stock method, no shares were potential additional
common shares as of March 31, 2005 and 2004, respectively). Pro forma per share
data has been computed using the weighted average number of common shares
outstanding during the periods. For the three and nine months ended March 31,
2005 and 2004, respectively, because the Company had incurred net losses, basic
and diluted loss per share are the same as additional potential common shares.
The following table sets forth the computation of basic and diluted loss per
common share:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Net loss available to common stockholders $ (111,895) $ (440,859) $ (725,253) $(1,181,854)
=====================================================================
Weighted average number of common shares outstanding 23,426,622 20,986,759 22,713,575 20,860,922
Incremental shares from the assumed exercise of
dilutive stock options and warrants -- -- -- --
---------------------------------------------------------------------
Dilutive potential common shares 22,426,622 20,986,759 22,713,575 20,860,922
=====================================================================
Basic and diluted net loss available to common
stockholders per common share $ (0.00) $ (0.02) $ (0.03) $ (0.06)
=====================================================================
F-30
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB issued
SFAS No. 123-R, "Share-Based Payment," which requires that the compensation cost
relating to share-based payment transactions (including the cost of all employee
stock options) be recognized in the financial statements. That cost will be
measured based on the estimated fair value of the equity or liability
instruments issued. SFAS No. 123-R covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. SFAS No.123-R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." As originally issued, SFAS No.
123 established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of APB Opinion
25, provided that the financial statements disclosed the pro forma net income or
loss based on the preferable fair-value method.
Small Business Issuers are required to apply SFAS No. 123-R in the first annual
reporting period that begins after December 15, 2005. Thus, the Company's
consolidated financial statements will reflect an expense for (a) all
share-based compensation arrangements granted after July 1, 2006 and for any
such arrangements that are modified, cancelled, or repurchased after that date,
and (b) the portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-date estimated
fair value.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by Management to have a material impact on the Company's present or
future financial statements.
NOTE 4 - RELATED PARTY TRANSACTIONS:
NOTE RECEIVABLE OFFICER
As of March 31, 2005, the Company has net advances to an officer of $60,306 made
prior to the enactment of the Sarbanes-Oxley Act. The advances accrue interest
at 10% (no interest income has been recorded as of March 31, 2005) and are due
on demand. The Company has classified the note receivable as an increase to
stockholders' deficit in the accompanying condensed consolidated balance sheet
at March 31, 2005.
NOTE 5 - NOTES PAYABLE AND CAPITAL LEASES:
On February 12, 2004, the Company borrowed $450,000 for working capital purposes
from an unrelated third party. The note was to be repaid plus interest of
$48,000 upon maturity at June 11, 2004. In the event of default, the investor
shall be entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 150,000 shares of the Company's
restricted common stock valued at $11,688 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in February 2004. On
May 5, 2004, the note, as amended, was extended to July 15, 2004. In
consideration of the extension, the Company agreed to pay an additional $13,280
in interest and issue an additional 300,000 shares of the Company's restricted
common stock valued at $45,000 (based on the market price on the date of grant).
The Company recorded the value of the common stock to interest expense in May
2004.
On November 5, 2003, the Company borrowed $350,000 for working capital purposes
from an unrelated third party. The note was to be repaid plus interest of
$37,333 upon maturity at March 5, 2004. In the event of default, the investor
shall be entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 20,000 shares of the Company's
restricted common stock valued at $2,581 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in November 2003. On
March 5, 2004, the Company defaulted on the note and issued 100,000 shares of
the Company's restricted common stock valued at $8,000 (based on the market
price on the date of issuance) in accordance with the default terms of the note.
The note was renegotiated and $75,000 of the note plus interest of $37,333 were
repaid. The new note of $275,000 was to be repaid plus interest of $14,667 upon
maturity at May 5, 2004. In the event of default, the investor shall be entitled
to 100,000 shares of the Company's restricted common stock. In addition, the
Company issued to the third party 275,000 shares of the Company's restricted
common stock valued at $20,370 (based on the market price on the date of grant
and the related pro-rata value of the common stock). The Company recorded the
value of the common stock to interest expense in March 2004. On May 5, 2004, the
note, as amended, was extended to July 15, 2004. In consideration of the
extension, the Company has agreed to pay an additional $15,448 in interest and
issue the additional 100,000 shares of the Company's restricted common stock
valued at $15,000 (based on the market price on the date of grant). The Company
recorded the value of the common stock to interest expense in May 2004.
F-31
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
On August 18, 2004, these two notes, as amended, were combined into one note
totaling $816,395, incorporating principal of $725,000 and interest owed of
$91,395, and extended to November 30, 2004. In consideration of the extension,
the Company agreed to pay an additional $73,350 in interest and issue an
additional 250,000 shares of the Company's restricted common stock valued at
$17,133 (based on the market price on the date of grant). The Company recorded
the value of the common stock to interest expense in August 2004. On May 12,
2005, the Company restructured all amounts due under these notes into a new
convertible note, principal amount $1,200,000. The convertible note bears simple
interest of twelve (12%) per annum with a term of eighteen (18) months. The
convertible note may, at the election of the holder, on the date of the note's
maturity, be converted into shares of the Company's common stock at the rate of
$0.13 per share.
On June 8, 2004, the Company borrowed $50,000 for working capital purposes from
an unrelated third party. The note is to be repaid plus interest of $7,500 upon
maturity at September 7, 2004. In addition, the Company issued to the third
party 50,000 shares of the Company's restricted common stock valued at $4,128
(based on the market price on the date of grant and the related pro-rata value
of the common stock). The Company recorded the value of the common stock to
interest expense in June 2004.
On November 18, 2004, the previously issued note payable of $50,000 was
restructured. Pursuant to the restructuring, the Company began repayment of the
note January 22, 2005 at the rate of $5,000 per month until all principal and
accrued interest are repaid. As of the date of this filing, the Company has made
all payments as required under this agreement. The outstanding portions of the
note shall continue to accrue simple interest at the rate of 10% per annum. In
consideration for the restructuring, the Company agreed to issue the noteholder
twenty-five thousand (25,000) shares of the Company's restricted common stock
valued at $750 (based on the market price on the date of grant and the related
pro-rata value of the common stock). The Company recorded the value of the
common stock to interest expense in November 2004.
On December 9, 2003, the Company borrowed $200,000 for working capital purposes
from an unrelated third party. The note was to be repaid plus interest of
$21,333 upon maturity at April 8, 2004. In the event of default, the investor
shall be entitled to 100,000 shares of the Company's restricted common stock. In
addition, the Company issued to the third party 40,000 shares of the Company's
restricted common stock valued at $4,305 (based on the market price on the date
of grant and the related pro-rata value of the common stock). The Company
recorded the value of the common stock to interest expense in December 2003. On
May 17, 2004, the note, as amended, was extended to July 19, 2004. In
consideration of the extension, the Company agreed to pay an additional $18,667
in interest and issue an additional 200,000 shares of the Company's restricted
common stock valued at $22,000 (based on the market price on the date of grant).
The Company recorded the value of the common stock to interest expense in May
2004. As of March 31, 2005, the Company has repaid $100,000. The principal
balance due at March 31, 2005 is $100,000. The Company is currently past due on
this note and is in discussions to restructure the terms of the note.
On October 2, 2002, and amended on April 1, 2004, the Company renegotiated a
previous note payable (the "Previous Note") due to an unrelated third party into
a new note payable (the "New Note"). The Previous Note had an outstanding
balance of $45,000 on the date of renegotiation. The New Note, as amended, pays
simple interest of 12% per annum with principal and interest due upon maturity
at May 21, 2004. In addition, the Company issued to the third party 45,000
shares of the Company's restricted common stock valued at $4,821 (based on the
market price on the date of grant and the related pro-rata value of the common
stock). The Company recorded the value of the common stock to interest expense
in April 2004. On July 21, 2004, the note, as amended and extended, calls for
payments of $20,000 due on July 21, 2004, $15,000 due on August 21, 2004, and
$10,000 due on September 21, 2004. In consideration of the extension, the
Company has agreed to issue an additional 45,000 shares of the Company's
restricted common stock valued at $2,944 (based on the market price on the date
of grant). The Company will record the value of the common stock to interest
expense in July 2004. As of November 15, 2005, the Company has not made the
August 21 and September 21 payments pursuant to the extension. The Company is
currently in discussions to restructure the terms of the note.
The Company maintains a revolving line of credit of $45,000 ("Equipment Line of
Credit") to finance the purchase of computer equipment. The revolving line of
credit provides for the Company to make monthly payments of $795, including
interest at a rate of approximately 14.74%. The total outstanding balance on the
revolving line of credit was $29,797 and is included in notes payable in the
accompanying condensed consolidated balance sheet at March 31, 2005. As of the
date of this report, the Company has made all payments as required in the
revolving line of credit.
F-32
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
The Company from time to time borrows funds from the Company's Chief Executive
Officer ("CEO") for working capital purposes. Amounts accrue no interest and are
payable on demand. On April 15, 2004, the Company borrowed $12,000 from its CEO.
As of the date of this filing, the Company has repaid $11,000 of the amount
borrowed.
On September 30, 2002, and amended on May 30, 2003, the Company renegotiated a
previous note payable due to MCI into a new note payable (the "New Note"). On
July 1, 2004, the Company received notice from MCI that it was in default of the
terms of the above note as well as the Telecommunications Services Agreement and
Data Services Agreement between MCI and GTC. As of March 31, 2005, the New Note
has an outstanding balance of $4,925,437. On March 6, 2005, the Company
negotiated a settlement with MCI providing for the full satisfaction of the New
Note as well as all other outstanding amounts due MCI in exchange for the
payment of $750,000 on or before March 31, 2005 (the "Settlement Amount").
Subsequently, MCI agreed to extend the deadline for the payment of the
Settlement Amount until April 30, 2005, provided that the Settlement Amount
accrue interest in the amount of $187.50 per day until paid. On April 30, 2005,
MCI agreed to further extend the due date for payment of the Settlement Amount
until May 15, 2005, which was further extended on May 13, 2005, until May 18,
2005, in exchange for an additional $10,000.
With the exception of the MCI New Note and the Equipment Line of Credit, all of
the above notes are unsecured.
NOTE 6 - STOCKHOLDERS' DEFICIT:
On May 12, 2005, the Company issued 2,400,000 shares of the Company's restricted
common stock in connection with the issuance of a convertible note (see Note 5).
In December 2004, the Company sold 1,000,000 shares of restricted common stock
to an unrelated accredited third-party investor for $60,000. In addition, the
Company agreed to issue to the third party, warrants to purchase up to 250,000
shares of the Company's common stock. The warrants have an exercise price of
$0.11 per share. The warrants vest immediately and are exercisable for two (2)
years from the date of issuance and contain piggy-back registration rights. No
consulting expense was recognized due to the fact the warrants were issued in
connection with equity fund raising activities.
During the nine months ended March 31, 2005, the Company issued 320,000 shares
of the Company's restricted common stock in connection with notes payable (see
Note 5).
On December 21, 2004, the Company's Board granted, pursuant to the SIP Plan,
Incentive Stock Options (as defined by the SIP Plan), to purchase an aggregate
of 1,375,000 shares of the Company's common stock at an exercise price of $0.10
per share (the fair market value of the Company's common stock on the day of
grant), to certain employees of the Company. In addition, on December 21, 2004,
the Company's Board granted to the Company's CEO, pursuant to the SIP Plan,
options to purchase 925,000 shares of the Company's common stock at an exercise
price equal to 110% of the fair market value on the date of grant ($0.11 per
share). The options vest equally over a period of five years from the date of
grant and are exercisable through December 2013.
The Company recorded compensation expense for previously issued "in the money"
options of $82,687 and $82,688 in the nine month periods ended March 31, 2005
and 2004, respectively.
NOTE 7 - CONTRACTS AND CONTINGENCIES:
The Company does not own its own long distance network and currently depends
upon third parties to provide for the transmission of phone calls by its
customers and to provide the call detail records upon which the Company bases
its customer's billings. Previously, the Company contracted with MCI WorldCom
Network Services, Inc. ("MCI") as its underlying carrier. On July 1, 2004, the
Company received notice from MCI that it was in default of the terms of its New
Note with MCI as well as the Telecommunications Services Agreement and Data
Services Agreement ("TSA") between MCI and the Company ("Default"). The total
outstanding balance due MCI was approximately $7,656,313 at March 31, 2005,
including $4,925,437 due on the New Note, $1,103,927 of accrued interest on the
New Note, and $1,626,949 owed on the TSA both of which are included in accounts
payable in the accompanying condensed consolidated balance sheet at March 31,
2005. As discussed in Note 5, on March 6, 2005, the Company negotiated a
settlement with MCI providing for the full satisfaction of all amounts due MCI
in exchange for payment of the Settlement Amount. Failure to pay the Settlement
Amount or otherwise successfully restructure the amounts due MCI will have a
material adverse effect on the Company's operations.
F-33
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
In order to minimize service disruptions to the Company's customers, on July 7,
2004, the Company transferred its customer accounts to its alternate supplier,
Sprint Communications Company L.P. ("Sprint"). As a result, the Company
initially experienced an approximate 16% reduction in its call volumes and
corresponding revenues. The Company believes that it has resolved all
outstanding technical issues relating to this conversion and continues to market
its services in order to re-acquire or add new customers. Pursuant to the terms
of its agreement with Sprint, as amended, the Company is obligated to a monthly
minimum of $25,000 through July 26, 2006. For any period during which the
Company fails to meet its monthly minimum, the Company would be liable for 25%
of the difference between the Company's actual usage and the stated minimum. The
Company may terminate the agreement upon ninety (90) days written notice
provided that the Company pays a termination fee equal to 50% of the aggregate
minimum revenue requirement for the remaining term of the contract if the
Company terminates for convenience or by default of the Company prior to the
expiration date which was approximately $255,000 as of March 31, 2005. Sprint
may terminate the agreement upon thirty (30) days written notice and then only
in the event that the Company is in material breach of the agreement. However,
in cases of nonpayment, Sprint may elect to immediately terminate the Agreement.
The termination of the Company's contract with Sprint, the loss of
telecommunications services provided by Sprint, or a reduction in the quality of
service the Company receives from Sprint 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 Sprint. There can be no
assurance that accurate information will be provided by Sprint on a timely
basis, the failure of which would have a material adverse effect on the
Company's results of operations.
In the event that the services provided by Sprint to the Company were
discontinued, the Company believes that it would be able to identify alternate
suppliers which would be able to provide it with sufficient levels of services
at terms similar to those of Sprint. 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 Sprint or the loss of telecommunications services from Sprint may
have a material adverse effect on the Company's results of operations and
financial condition.
GTC does not currently have its own Internet Network. Currently, the Company
provides its Internet Service Provider Access services pursuant to an agreement
with a third party company for the provisioning of the Company's Internet
Service Provider Access service. The Company is not obligated to any monthly
minimums under its agreement with its underlying Internet service provider.
Although the Company believes that its relationship with its third-party
provider is strong and should remain so with continued contract compliance, the
termination of the Company's contract with its underlying provider, the loss of
Internet services provided by this company, or a reduction in the quality of
service the Company receives from this company could have an adverse effect on
the Company's internet operations. In the event that its underlying provider was
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.
Previously, pursuant to an agreement with MCI for the provisioning of the
Company's Internet Service Provider Access service, the Company was required to
pay the greater of actual incurred usage or a minimum monthly fee. In December
2003, the Company renegotiated its agreement with MCI. Under the terms of the
revised agreement, the Company was no longer obligated to monthly minimums.
However, the Company was subject to an aggregate usage minimum of $525,000
during the term of the agreement which was set to expire on June 1, 2006. As of
March 31, 2005, the Company had accrued $528,000 which is included in accounts
payable.
F-34
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
STOCK PURCHASE AGREEMENT - Pursuant to a common stock purchase agreement
("Agreement") with Bluefire Capital, Inc. ("Bluefire"), the Company is entitled
to issue and sell common stock to Bluefire in the form of draws for up to an
aggregate of $20,000,000, as defined in the Agreement, from time to time during
a three year period beginning on the date of the filing of an effective
registration statement. On November 20, 2001, the Company filed a registration
statement under the Securities Act with the Securities and Exchange Commission
("SEC") for 15,000,000 shares available to be issued to Bluefire under the
Agreement should the Company choose to draw down on these shares and on January
23, 2002, the registration statement was declared effective. Pursuant to the
Agreement, the Company must draw a minimum of $500,000 by January 23, 2005, or
the Company shall be required to pay liquidated damages equal to one-half of the
amount not drawn-down.
On December 14, 2004, the Company and Bluefire agreed to terminate the
agreement. In addition, Bluefire agreed to waive the Liquidated Damages in
exchange for a one time payment by the Company of $10,000, to be paid by January
17, 2005. On January 17, 2005, the Company paid the $10,000 termination fee.
NOTE 8 - BUSINESS SEGMENT INFORMATION:
Segment and geographical information is assigned by region based upon management
responsibility for such items. The following table presents information about
the Company's operations by geographical area for the three and nine months
ended March 31, 2005 and 2004.
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
March 31, 2005 March 31, 2004 March 31, 2005 March 31, 2004
-----------------------------------------------------------------------------------
REVENUES
Telecommunications and Internet $ 2,290,404 $ 2,568,206 $ 6,528,531 $ 8,541,192
BPO
Perfexa-U.S. 47,668 33,022 129,560 42,722
Perfexa-India -- -- -- --
------------------- ------------------- ------------------ ------------------
Total $ 2,338,072 $ 2,601,228 $ 6,658,091 $ 8,583,914
=================== =================== ================== ==================
COST OF SALES
Telecommunications and Internet $ 944,898 $ 1,054,658 $ 2,912,099 $ 3,818,479
BPO
Perfexa-U.S. 28,728 21,733 86,184 28,117
Perfexa-India -- -- -- --
------------------- ------------------- ------------------ ------------------
Total $ 973,626 $ 1,076,391 $ 2,998,283 $ 3,846,596
=================== =================== ================== ==================
OPERATING INCOME/(LOSS)
Telecommunications and Internet $ 359,007 $ 797,572 $ 787,949 $ 2,358,435
BPO
Perfexa-U.S. (241,115) (533,781) (730,078) (1,870,815)
Perfexa-India 36,879 (288,775) 57,135 (868,908)
------------------- ------------------- ------------------ ------------------
Total $ 154,771 $ (24,984) $ 115,006 $ (381,288)
=================== =================== ================== ==================
CAPITAL EXPENDITURES
Telecommunications and Internet $ 16,239 $ 27,250 $ 40,849 $ 132,207
BPO
Perfexa-U.S. 1,293 -- 1,293 7,864
------------------- ------------------- ------------------ ------------------
Perfexa-India -- 37,705 24,446 153,282
------------------- ------------------- ------------------ ------------------
Total $ 17,532 $ 64,955 $ 66,588 $ 293,353
=================== =================== ================== ==================
Identifiable assets are assigned by region based upon management responsibility.
The following table presents information about the Company's identifiable assets
by geographic region:
March 31, 2005 June 30, 2004
-------------------------------
ASSETS
Telecommunications and Internet $ 1,109,428 $ 1,002,223
BPO
Perfexa-U.S. 27,835 28,549
Perfexa-India 427,368 553,714
-------------------------------
Total $ 1,564,631 $ 1,584,486
===============================
F-35
GTC TELECOM CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Quarter Ended March 31, 2005
NOTE 9 -- SUBSEQUENT EVENTS
In May 2005, we restructured $927,524 in amounts due on a past due note
payable and corresponding accrued interest and penalties into a new long term
note payable, principal amount $1,200,000. The new note accrues simple interest
in the amount of 12% per annum. We are obligated to pay accrued interest
monthly, but then only if, after deducting all then current obligations, we at
that time have at least $300,000 in available cash.
In February 2005, we negotiated the settlement of all amounts due to MCI
Worldcom, our former underlying network provider, totaling approximately
$7,700,000 in exchange for the payment of $769,000. On May 23, 2005, we paid
the settlement amount and satisfied the terms of the settlement agreement.
On May 23, 2005, we entered into a subscription agreement with Alpha
Capital Aktiengesellschaft, DCOFI Master LDC, SCG Capital, LLC, Silver Oak
Investments, Inc., and Ellis International LTD for the purchase of certain
securities. This agreement was amended on July 5, 2005 and July 14, 2005 to
increase the amount of the securities purchased. The total securities purchased
in the amended agreement are as follows:
- - Convertible Notes, $2,000,000 principal amount, convertible into shares of
our common stock as provided for in the notes;
- - Two shares of our common stock for each principal amount purchased,
resulting in a total of 4,000,000 shares;
- - Six Class A Warrants for each principal amount purchased, which entitles
the holder to purchase our common stock for an exercise price of $0.22 per
share, resulting in a total of 12,000,000 Class A Warrants; and
- - Five Class B Warrants for each principal amount purchased, which entitles
the holder to purchase our common stock for an exercise price of $0.20 per
share, resulting in a total of 10,000,000 Class A Warrants.
In conjunction with above subscription agreement, we issued warrants as
compensation to Hunter Wise Financial Group, LLC, to purchase a total of 120,000
shares of our common stock, at an exercise price of $0.20 per share, exercisable
for a period of five (5) years from the date of issuance.
On December 9, 2003, we borrowed $200,000 for working capital purposes from
an unrelated third party. The note was to be repaid plus interest of $21,333 on
April 8, 2004. On May 17, 2004, the note, as amended, was extended to July 19,
2004. On July 1, 2005, we agreed to resolve all outstanding amounts owed under
the note via the payment of $30,000 plus bi-weekly payments of $8,000. The
outstanding principal and accrued interest, which, at the time of the agreement
totaled $167,000 will accrue simple interest at the rate of 10% per annum until
fully repaid.
F-36
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Use Of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Plan Of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Directors, Executive Officers, Promoters And Control Persons . . . . . . . . 10
Security Ownership Of Certain Beneficial Owners And Management . . . . . . . 11
Description Of Securities . . . . . . . . . . . . . . . . . . . . . . . . . 12
Interests Of Named Experts And Counsel . . . . . . . . . . . . . . . . . . . 14
Disclosure Of Commission Position On Indemnification For Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Description Of Business . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management's Discussion And Analysis Or Plan Of Operation . . . . . . . . . 22
Description Of Property . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Certain Relationships And Related Transactions . . . . . . . . . . . . . . . 30
Market Price Of And Dividends On The Registrant's . . . . . . . . . . . . . 31
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure . . . . . . . . . . . . . . . . . . . . 35
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Index To Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 36
58,625,770
SHARES
GTC TELECOM CORP.
[GRAPHIC OMITED]
-------------------------
PROSPECTUS
-------------------------
_______, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of Nevada Revised Statutes provides, in effect, that any person
made a party to any action by reason of the fact that he is or was a director,
officer, employee or agent of our company may and, in certain cases, must be
indemnified by our company against, in the case of a non-derivative action,
judgments, fines, amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred by him as a result of such action, and in the case of
a derivative action, against expenses (including attorneys' fees), if in either
type of action he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of our company and in any criminal
proceeding in which such person had reasonable cause to believe his conduct was
lawful. This indemnification does not apply, in a derivative action, to matters
as to which it is adjudged that the director, officer, employee or agent is
liable to our company, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnification for expenses.
As authorized by Section 78.037 of Nevada Revised Statutes, our Articles of
Incorporation eliminate or limit the personal liability of a director to our
company or to any of its shareholders for monetary damage for a breach of
fiduciary duty as a director, except for:
- - Acts or omissions which involve intentional misconduct, fraud or knowing
violation of law; or
- - The payment of distributions in violation of Section 78.300 of Nevada
Revised Statutes.
Our Articles of Incorporation provide for indemnification of officers and
directors to the fullest extent permitted by Nevada law. Such indemnification
applies in advance of the final disposition of a proceeding.
We maintain an insurance policy that provides protection, within the maximum
liability limits of the policy and subject to a deductible amount for certain
claims, to our company.
At present, there is no pending litigation or proceeding involving any director
or officer as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director or officer.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered.
Securities and Exchange Commission Registration Fee $ 1,128
Printing and Engraving Expenses $ 1,000
Accounting Fees and Expenses $ 10,000
Legal Fees and Expenses $ 50,000
Blue Sky Qualification Fees and Expenses $ 1,500
Miscellaneous $ 5,000
TOTAL $ 68,628
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
DURING THE PRIOR THREE YEARS, WE ISSUED THE FOLLOWING UNREGISTERED SECURITIES:
On July 11, 2005, we issued to an unrelated third party the following
unregistered securities: (i) $117,647 principal amount of our convertible
promissory notes; (ii) two shares of our common stock for each dollar of note
principal; (iii) six Class A warrants for each dollar of note principal to
purchase shares for $0.22 per share; and (iv) five Class B warrants for each one
dollar of note principal to purchase shares for $0.20 per share, exercisable
until a registration statement covering the warrants has been effective for a
period of 120 days. The notes bear simple interest of twelve (12%) per annum
and may be converted into shares of our common stock pursuant to the terms of
the note. The issuance was an isolated transaction not involving a public
offering conducted without general solicitation to "accredited investors"
pursuant to Rule 506 and Section 4(2) of the Securities Act of 1933.
II-1
On July 5, 2005, we amended a previously entered into subscription
agreement (see below) to issue an additional $794,118 principal amount of our
convertible promissory notes; (ii) two shares of our common stock for each
dollar of note principal; (iii) six Class A warrants for each dollar of note
principal to purchase shares for $0.22 per share; and (iv) five Class B warrants
for each one dollar of note principal to purchase shares for $0.20 per share,
exercisable until a registration statement covering the warrants has been
effective for a period of 120 days. The notes bear simple interest of twelve
(12%) per annum and may be converted into shares of our common stock pursuant to
the terms of the note. The issuance was an isolated transaction not involving a
public offering conducted without general solicitation to "accredited investors"
pursuant to Rule 506 and Section 4(2) of the Securities Act of 1933.
In conjunction with above amendment agreement, we issued warrants as
compensation to Hunter Wise Financial Group, LLC, to purchase 55,000 shares of
our common stock, at an exercise price of $0.20 per share, exercisable for a
period of five (5) years from the date of issuance. The issuance was an
isolated transaction not involving a public offering conducted pursuant to
Section 4(2) of the Securities Act of 1933.
On May 23, 2005, we issued to five unrelated third parties, the following
unregistered securities: (i) $1,088,235 principal amount of our convertible
promissory notes; (ii) two shares of our common stock for each dollar of note
principal; (iii) six Class A warrants for each dollar of note principal to
purchase shares for $0.22 per share; and (iv) five Class B warrants for each one
dollar of note principal to purchase shares for $0.20 per share, exercisable
until a registration statement covering the warrants has been effective for a
period of 120 days. The notes bear simple interest of twelve (12%) per annum
and may be converted into shares of our common stock pursuant to the terms of
the note. The issuance was an isolated transaction not involving a public
offering conducted without general solicitation to "accredited investors"
pursuant to Rule 506 and Section 4(2) of the Securities Act of 1933.
In conjunction with above subscription agreement, we issued warrants as
compensation to Hunter Wise Financial Group, LLC, to purchase 65,000 shares of
our common stock, at an exercise price of $0.20 per share, exercisable for a
period of five (5) years from the date of issuance. The issuance was an
isolated transaction not involving a public offering conducted pursuant to
Section 4(2) of the Securities Act of 1933.
On May 12, 2005, we issued the following unregistered securities an
unrelated third party: (i) $1,200,000 principal amount of our convertible note
and 2,400,000 shares of our common stock. The note bears simple interest of
twelve (12%) per annum with a term of eighteen months. The note may, at the
election of the holder, on the date of the note's maturity, be converted into
shares of our common stock at the rate of $0.13 per share. The issuance was an
isolated transaction not involving a public offering conducted without general
solicitation to "accredited investors" pursuant to Rule 506 and Section 4(2) of
the Securities Act of 1933.
On November 18, 2004, we amended a previously issued note payable of
$50,000. Pursuant to the restructuring, we agreed to begin repayment of the
note, beginning January 22, 2005 at the rate of $5,000 per month until all
principal and accrued interest are repaid. The outstanding portions of the note
shall continue to accrue simple interest at the rate of 10% per annum. In
exchange for the restructuring, we agreed to issue the noteholder twenty-five
thousand (25,000) shares of the our common stock. The issuance was an isolated
transaction not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933.
On December 28, 2004, we agreed to issue to an unrelated "accredited"
third-part investor (i) One Million shares of our common stock; and (ii)
warrants to purchase up to two hundred and fifty thousand (250,000) shares of
common stock at an exercise price of $0.11 per share, in exchange for $60,000.
The issuance was an isolated transaction not involving a public offering
pursuant to Section 4(2) of the Securities Act of 1933.
On August 18, 2004, two notes, as amended, were combined into one note
totaling $816,395, incorporating all principal and interest owed, and extended
to November 30, 2004. In consideration of the extension, we agreed to pay an
additional $73,350 in interest and issue an additional 250,000 shares of our
restricted common stock. The issuance was an isolated transaction not involving
a public offering pursuant to Section 4(2) of the Securities Act of 1933.
On July 21, 2004, a note payable of $45,000, as amended, was extended to
allow for payments of $20,000 due on July 21, 2004, $15,000 due on August 21,
2004, and $10,000 due on September 21, 2004. In consideration of the extension,
we agreed to issue an additional 45,000 shares of our common stock. The
issuance was an isolated transaction not involving a public offering pursuant to
Section 4(2) of the Securities Act of 1933.
II-2
On June 8, 2004, in connection with a note payable for $50,000, we issued
50,000 shares of our common stock to a third-party accredited investor. The
issuance was an isolated transaction not involving a public offering pursuant to
Section 4(2) of the Securities Act of 1933.
On May 17, 2004, a note payable of $200,000, as amended, was extended to
July 19, 2004. In consideration of the extension, we agreed to pay an additional
$18,667 in interest and issue an additional 200,000 shares of our common stock.
The issuance was an isolated transaction not involving a public offering
pursuant to Section 4(2) of the Securities Act of 1933.
On April 15, 2004, we borrowed $25,000, bearing no interest, from one of
our employees for working capital purposes. The borrowing was repaid on April
26, 2004. In addition, we issued to the employee 25,000 shares of our common
stock. The issuance was an isolated transaction not involving a public offering
pursuant to section 4(2) of the Securities Act of 1933.
On April 12, 2004, we entered into an agreement with an outside
consultant for investor relations services. Pursuant to the agreement, we
agreed, in addition to certain cash consideration, to issue to the investor
relations company, warrants to purchase up to 500,000 shares of our common
stock. The warrants have an exercise price of $0.13 per share. The issuance was
an isolated transaction not involving a public offering pursuant to section 4(2)
of the Securities Act of 1933.
On April 1, 2004, we renegotiated and amended a prior note, dated
October 2, 2002, due to an unrelated third party into a new note payable. The
previous note had an outstanding balance of $45,000 on the date of
renegotiation. The new note, as amended, pays simple interest of 12% per annum
with principal and interest due upon maturity at May 21, 2004. In addition, we
issued to the third party 45,000 shares of our restricted common stock. The
issuance was an isolated transaction not involving a public offering pursuant to
section 4(2) of the Securities Act of 1933.
On February 12, 2004, we issued a promissory note in the amount of
$450,000 for working capital purposes from an unrelated third party. In
conjunction with the note issuance, we issued to the third party 150,000 shares
of our common stock. On May 5, 2004, the note, as amended, was extended to July
15, 2004. In consideration of the extension, we agreed to pay an additional
$13,280 in interest and issue an additional 300,000 shares of our restricted
common stock. The issuances were isolated transactions not involving a public
offering pursuant to Section 4(2) of the Securities Act of 1933.
On December 9, 2003, we borrowed $200,000 for working capital purposes from
an unrelated third party. In conjunction with the note issuance, we issued to
the third party 40,000 shares of our common stock. The issuance was an isolated
transaction not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933.
On November 5, 2003, we issued a promissory note in the amount of $350,000
for working capital purposes from an unrelated third party maturing at March 5,
2004. In conjunction with the note, we issued the noteholder 20,000 shares of
our common stock. On March 5, 2004, we defaulted on the note and issued 100,000
shares of our common stock in accordance with the default terms of the note. In
conjunction with the renegotiation of the note, we issued to the third party
275,000 shares of our common stock. On May 5, 2004, we amended the note again,
extending the note until July 15, 2004. In consideration of the extension, we
issued an additional 100,000 shares of our common stock valued. The issuance
was an isolated transaction not involving a public offering pursuant to Section
4(2) of the Securities Act of 1933.
On October 9, 2003, we borrowed $300,000 for working capital purposes from
an unrelated third party. The note is to be repaid plus interest of $32,000
upon maturity at February 17, 2004. In conjunction with the note issuance, we
issued to the third party 60,000 shares of our common stock. The issuance was
an isolated transaction not involving a public offering pursuant to Section 4(2)
of the Securities Act of 1933.
In September 2003, we borrowed $25,000 for working capital purposes from a
third party. In conjunction with the note issuance, we issued to the third
party 25,000 shares of our common stock. The issuance was an isolated
transaction not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933.
Previously, in August 2002, pursuant to an agreement with an outside
consultant for investor and public relations services, we issued warrants to
purchase up to 100,000 shares of our common stock at an exercise price of $0.17
per share. The warrants vest 25,000 upon execution of the agreement and 25,000
every three months thereafter, so long as we retained the outside consultant.
On May 31, 2003 the final 25,000 of the warrants vested. The warrants are
exercisable for a period of three years from the date of issuance. The issuance
was an isolated transaction not involving a public offering pursuant to Section
4(2) of the Securities Act of 1933.
II-3
In March 2003, pursuant to an agreement with an outside consultant for
investor services, we issued warrants to purchase up to 40,000 shares of our
common stock at an exercise price of $0.25 per share. The warrants vest in
April 2003 and are exercisable for a period of two years from the date of
issuance. The issuance was an isolated transaction not involving a public
offering pursuant to Section 4(2) of the Securities Act of 1933.
During the fourth quarter of the fiscal year ended June 30, 2003, in
connection with a note payable, we issued 30,000 shares of our common stock to a
third-party accredited investor. The issuance was an isolated transaction not
involving a public offering pursuant to Section 4(2) of the Securities Act of
1933.
On December 5, 2002, in conjunction with the issuance of a note with a
third party, we issued 10,000 shares of our common stock to an unrelated
accredited investor. The issuance was an isolated transaction not involving a
public offering pursuant to Section 4(2) of the Securities Act of 1933.
On October 2, 2002, pursuant to a note with an accredited third party, we
issued 25,000 shares of our common stock and granted warrants to purchase 25,000
shares of our common stock at an exercise price of $0.25 per share. The
issuance was an isolated transaction not involving a public offering pursuant to
Section 4(2) of the Securities Act of 1933.
In September 2002, pursuant to an agreement with an outside consultant for
investor and public relations services, we issued warrants to purchase up to
25,000 shares of our common stock at an exercise price of $0.20 per share. The
warrants vested immediately and are exercisable for a period of three years from
the date of issuance and contain piggyback registration rights. The issuance
was an isolated transaction not involving a public offering pursuant to Section
4(2) of the Securities Act of 1933.
In April 2002, we entered into an agreement with a third party for
investment banking services. Pursuant to the agreement, we issued to the
investment banking firm 100,000 shares of our common stock and granted warrants
valued at approximately $14,000 to purchase 100,000 shares of our common stock
at an exercise price of $0.50 per share. The warrants vested immediately and
are exercisable through April 2005. The agreement also provides for us to issue
the investment banking firm on a monthly basis 25,000 shares of restricted
common stock over the term of the agreement. During the year ended June 30,
2002, we issued an additional 50,000 shares of restricted common stock. During
the period ended September 30, 2002, we issued an additional 50,000 shares of
our common stock, pursuant to the investment banking agreement.
DURING THE PRIOR THREE YEARS, OUR SUBSIDIARY, PERFEXA-U.S. ISSUED THE FOLLOWING
UNREGISTERED SECURITIES:
In October 2003, Perfexa issued 15,000 shares of restricted common stock,
resulting in net proceeds to Perfexa of $15,000, to an accredited investor at a
price of $1.00 per share. The issuance was an isolated transaction not
involving a public offering pursuant to Section 4(2) of the Securities Act of
1933.
In June 2003, Perfexa-U.S. initiated a private placement offering of
2,000,000 shares of its common stock at a price of $1.00 per share. A total of
60,000 shares were issued to three investors pursuant to the offering. The
issuances were conducted without general solicitation to "accredited investors"
pursuant to Rule 506 of Regulation D of the Securities Act of 1933.
On April 23, 2003, Perfexa-U.S. issued a short-term convertible note,
principal amount of $125,000, to an unrelated third-party investor. The note
bears simple interest of 10% per annum, interest and principal due upon maturity
on July 31, 2003. Pursuant to the terms of the note, the note is convertible
(prior to maturity) at the election of the holder into shares of Perfexa-U.S.'s
common stock at the rate of $0.50 per share. In August 2003, we repaid $100,000
of the principal balance and issued 8,152 shares of Perfexa-U.S. common stock.
The issuance was an isolated transaction not involving a public offering
pursuant to Section 4(2) of the Securities Act of 1933.
On March 1, 2003, Perfexa-U.S. issued 50,000 shares of its common stock to
an unrelated "accredited" third-party investor at a price of $0.50 per share,
resulting in cash of $22,500, net of offering costs of $2,500. The issuance was
an isolated transaction not involving a public offering pursuant to Section 4(2)
of the Securities Act of 1933.
In May 2003, Perfexa-U.S. issued an aggregate of 160,000 shares of its
common stock to two "accredited" unrelated third-party investors at a price of
$0.50 per share, resulting in cash of $70,400, net of offering costs of $9,600.
The issuance was an isolated transaction not involving a public offering
pursuant to Section 4(2) of the Securities Act of 1933.
II-4
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of this registration
statement:
Exhibit No. Description
3.1 Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on June 21, 2005 increasing the authorized shares of common
stock from 50,000,000 to 100,000,000.
3.2* Restated Articles of Incorporation filed with the Nevada Secretary of
State on January 4, 2001 (incorporated by reference to Exhibit 3.1 in
the Company's 2000 Proxy Statement filed on November 15, 2000).
3.2* Restated Bylaws of GTC Telecom Corp. adopted on September 20, 1999
(incorporated by reference to Exhibit 3.5 in the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1999 filed on October 13,
1999).
4.1* Form of 12% Convertible Promissory Note issued pursuant to Subscription
Agreement dated May 23, 2005(incorporated by reference to Exhibit 4.1 in
the Company's Registration Statement on Form SB-2 filed on July 19,
2005).
4.2* Form of Class A Warrant -- Exhibit A1 to Subscription Agreement dated
May 23, 2005 (incorporated by reference to Exhibit 10.1.1 of the
Company's Form 8-K filed on May 24, 2005).
4.3* Form of Class B Warrant -- Exhibit A2 to Subscription Agreement dated
May 23, 2005 (incorporated by reference to Exhibit 10.1.2 of the
Company's Form 8-K filed on May 24, 2005).
5.1 Opinion of Counsel
10.1* Subscription Agreement by and between GTC Telecom Corp. and
Bumper Fund, LP dated July 11, 2005 (incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K filed on July 15, 2005).
10.2* Amendment Agreement by and between GTC Telecom Corp. and Alpha Capital
Alpha Capital Aktiengesellschaft, DCOFI Master LDC, SCG Capital, LLC,
Silver Oak Investments, Inc., and Ellis International Ltd. dated June
28, 2005 (incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed on July 11, 2005).
10.3* Subscription Agreement by and between GTC Telecom Corp. and Alpha
Capital Alpha Capital Aktiengesellschaft, DCOFI Master LDC, SCG Capital,
LLC, Silver Oak Investments, Inc., and Ellis International Ltd. dated
May 23, 2005 (incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed on May 23, 2005).
10.3.1* Escrow Agreement -- Exhibit B to Subscription Agreement dated May 23,
2005 (incorporated by reference to Exhibit 10.1.3 of the Company's Form
8-K filed on May 23, 2005).
10.3.2* Security Agreement by GTC Telecom Corp. -- Exhibit C1 to Subscription
Agreement dated May 23, 2005 (incorporated by reference to Exhibit
10.1.4 of the Company's Form 8-K filed on May 23, 2005).
10.3.3* Collateral Agent Agreement -- Exhibit D to Subscription Agreement
dated May 23, 2005. (incorporated by reference to Exhibit 10.1.5 of the
Company's Form 8-K filed on May 23, 2005).
10.4* Lease dated March 1, 2005 by and between the Company and Southern
California Sunbelt Developers, Inc. for Suite P-3, Costa Mesa, CA 92626
(incorporated by reference to Exhibit 10.1 of the Company's Form 10-QSB
filed on May 16, 2005).
10.5* Lease dated March 1, 2005 by and between the Company and Southern
California Sunbelt Developers, Inc. for Suite K-103, Costa Mesa, CA
92626 (incorporated by reference to Exhibit 10.2 of the Company's Form
10-QSB filed on May 16, 2005).
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10.6* Addendum No. 1 to Subscription Agreement dated May 12, 2005 by and
between the Company and the Rapaport Family Trust (incorporated by
reference to Exhibit 10.1.5 of the Company's Form 8-K filed on May 23,
2005).
10.7* Subscription Agreement dated May 13, 2005 by and between the Company
and the Rapaport Family Trust (incorporated by reference to Exhibit 10.3
of the Company's Form 10-QSB filed on May 16, 2005).
10.8* Wholesale Solutions Switched Services Agreement by and between the
Company and Sprint Communications Company L.P. dated July 26, 2002
(incorporated by reference to Exhibit 10.9 of the Company's Form 10-KSB
filed on September 28, 2004).
10.9* Employment Agreement by and between GTC Telecom Corp., a Nevada
corporation and Eric Clemons, dated December 1, 1998 (incorporated by
reference to Exhibit 10.6 in the Company's Form 10 SB/A filed April 2,
1999).
10.10* Employment Agreement by and between GTC Telecom Corp., a Nevada
corporation and Jerry DeCiccio, dated December 1, 1998 (incorporated by
reference to Exhibit 10.7 in the Company's Form 10 SB/A filed April 2,
1999).
10.11* Employment Agreement by and between GTC Telecom Corp., a Nevada
corporation and Paul Sandhu, dated December 1, 1998 (incorporated by
reference to Exhibit 10.8 in the Company's Form 10 SB/A filed April 2,
1999).
21.1* Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1n the Company's Registration Statement on Form SB-2 filed on Ju
ly 19, 2005)
23.1 Consent of Registered Public Accounting Firm
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* Previously filed and incorporated by reference as indicted.
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ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be a bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the bona fide
offering thereof.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the City of Costa
Mesa, California, on July 26, 2005.
GTC TELECOM CORP.
/s/ S. Paul Sandhu
By: Name: S. Paul Sandhu
Title: Chief Executive Officer
By:/s/ Gerald A. DeCiccio
Name: Gerald A DeCiccio
Title: Chief Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.
SIGNATURE TITLE DATE
/s/ S. Paul Sandhu
____________________ Chief Executive Officer and Director July 26, 2005
S. Paul Sandhu
/s/ Eric A. Clemons
____________________ President, Secretary and Director July 26, 2005
Eric A. Clemons
/s/ Gerald A. DeCiccio
____________________ Chief Financial Officer and Director July 26, 2005
Gerald A. DeCiccio
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