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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 033-303365-C
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CCC GLOBALCOM CORPORATION
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(Name of Small Business Issuer as specified in its charter)
Nevada 36-3693936
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
1250 Wood Branch Park Drive, 6th Floor, Houston, Texas 77079
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(Address of principal executive offices)
Registrant's telephone no., including area code: (281) 529-4600
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Not Applicable
--------------
Former name, former address, and former fiscal year, if changed
since last report.
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
Common Stock outstanding at June 30, 2002 - 36,213,918 shares of $.001 par
value Common Stock.
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FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
CCC GLOBALCOM CORPORATION
For the Quarter ended June 30, 2002
The following financial statements and schedules of the registrant are submitted
herewith:
PART I - FINANCIAL INFORMATION
------------------------------
Page of
Form 10-QSB
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Item 1. Financial Statements:
Consolidated Balance Sheet - June 30, 2002 3
Consolidated Statements of Operations--for the three 4
months and six months ended June 30, 2002 and
June 30, 2001
Consolidated Statements of Cash Flows - for the six
months ended June 30, 2002 and June 30, 2001 5
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
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Page
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Item 1. Legal Proceedings 27
Item 2. Changes in the Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to Vote of Security Holders 28
Item 5. Other Information 28
Item 6(a). Exhibits 28
Item 6(b). Reports on Form 8-K 29
Item 7 Signatures 30
Item 8 Certifications 31
PART I - FINANCIAL INFORMATION
CCC GLOBALCOM CORPORATION
CONSOLIDATED BALANCE SHEEET
JUNE 30, 2002
(UNAUDITED)
- --------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 818,251
Restricted cash 500,371
Accounts receivable, net of allowance
of $1,639,821 4,403,519
Prepaid expenses 287,628
-------------------
Total current assets 6,009,769
Property and equipment, net 5,589,299
Intangibles, net 1,939,374
Other 483,360
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$ 14,021,802
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Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Line of credit $ 16,661,202
Accounts payable 12,383,777
Accrued compensation and other 552,947
Current portion of long-term debt 1,093,674
Excise taxes payable 2,614,959
Accrued expenses 1,075,682
Deferred income 457,644
-------------------
Total current liabilities 34,839,885
Long-term debt 816,447
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Total liabilities 35,656,332
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Commitments and contingencies -
Stockholders' deficit:
Common stock, $.001 par value, authorized 100,000,000
shares; issued and outstanding 36,213,918 shares 36,215
Additional paid-in capital 9,590,655
Accumulated deficit (31,261,400)
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Total stockholders' deficit (21,634,530)
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$ 14,021,802
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- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
3
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- -------------------------
2002 2001 2002 2001
------------ -------------- ------------ -----------
Net sales $ 7,309,824 2,823,228 $ 14,370,941 3,229,074
Cost of services (5,246,683) (1,532,630) (11,137,936) (1,854,030)
SG&A expenses (5,276,909) (1,913,942) (10,473,263) (2,647,851)
Depreciation and
amortization expenses (957,013) (467,221) (1,972,824) (520,956)
------------ -------------- ------------ -----------
------------ -------------- ------------ -----------
Loss from operations (4,170,781) (1,090,565) (9,213,082) (1,793,763)
------------ -------------- ------------ -----------
Other income (expense):
Interest income 7,154 786 11,705 1,243
Interest expense (333,594) (138,921) (678,079) (140,395)
Other, net (45,367) 19,269 (63,597) 23,315
------------ -------------- ------------ -----------
(371,807) (118,866) (729,971) (115,837)
------------ -------------- ------------ -----------
Loss before provision
for income taxes: (4,542,588) (1,209,431) (9,943,053) (1,909,600)
Income taxes (10,605) - (10,605) -
------------ -------------- ------------ -----------
Net loss $(4,553,193) (1,209,431) $ (9,953,658) (1,909,600)
------------ -------------- ------------- -----------
Loss per share -
basic and diluted $ (0.13) (0.04) $ (0.28) (0.06)
------------ -------------- ------------ -----------
Weighted average shares -
basic and diluted 35,852,000 32,334,000 35,452,000 32,334,000
------------ -------------- ------------ -----------
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
4
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------
2002 2001
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Cash flows from operating activities:
Net loss $ (9,953,658) $ (1,909,600)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,972,824 520,956
Bad debt expense 805,167 64,526
Stock issued for services 300,000 -
Interest and fees added to
line of credit 600,826 -
Loss on sale of fixed assets - 5,805
(Increase) decrease in:
Restricted cash (90,040) -
Accounts receivable 109,900 (153,366)
Prepaid expenses 340,969 (312,080)
Other assets (159,576) 14,625
Increase (decrease) in:
Accounts payable 6,586,110 101,345
Accrued compensation and other (60,252) -
Excise taxes payable 1,372,221 -
Accrued expenses 21,511 546,598
Deferred income 170,762 (83,376)
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Net cash provided by (used in) 2,016,764 (1,204,567)
operating activities
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Cash flows from investing activities:
Purchase of property and equipment (122,112) (97,637)
Acquisition of customer base - (26,000)
Purchase of Equalnet assets - (500,000)
Purchase of switching equipment - (750,000)
Proceeds from sale of equipment - 1,851
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Net cash used in investing activities (122,112) (1,371,786)
------------------------------------------
Cash flows from financing activities:
Payments on debt (144,352) (10,000)
Net increase (decrease) in line of credit (1,674,810) 153,769
Proceeds from issuance of stock - 2,343,176
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Net cash (used in) provided by (1,819,162) 2,486,945
financing activities
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Net increase (decrease) in cash 75,490 (89,408)
5
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
Cash, beginning of period 742,761 1,113,759
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Cash, end of period $ 818,251 $ 1,024,351
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- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
6
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
CONTINUED
(UNAUDITED)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------
2002 2001
-----------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 43,300 $ 0.00
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Income taxes $ 0.00 $ 0.00
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During the six months ended June 30, 2002, the Company:
o Satisfied a payable with common stock for $394,496.
o Issued common stock to an employee for compensation totaling
$300,000.
o Converted $500,000 of the RFC line of credit to common stock
pursuant to the warrant agreement with RFC.
o Issued common stock in exchange for equipment totaling $162,500.
o Financed the purchase of software with debt totaling $441,119.
During the six months ended June 30, 2001, the Company:
o Purchased the assets of EqualNet Communications Corporation for
$500,000 cash and assumption of $7,661,511 of debt.
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
CCC GlobalCom Corporation, a Nevada corporation ("CCC GlobalCom" or the
"Company"), was named Emerald Capital Investments, Inc. prior to June 12, 2000.
On June 9, 2000, the Company commenced operations in the telecommunications
industry though the acquisition of CCC GlobalCom, Corp., a Texas corporation
("CCC Texas"). CCC Texas was formed in 1999 and conducted no operations except
for the acquisition of Ciera Network Systems, Inc. ("Ciera") in June 2000.
The Company's acquisition of CCC Texas, and as a result of such
acquisition, the acquisition of Ciera, was accounted for as a reverse merger.
Accordingly, for accounting purposes, Ciera is deemed to be the survivor of the
CCC Texas/Ciera merger and as such the financial statements presented are those
of the operations of Ciera. Substantially all of the Company's operations are
conducted by Ciera.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Ciera Network Systems, Inc. and CCC
Globaltel de Colombia, SA ("Globaltel").
Globaltel was organized under the laws of Colombia, to operate
franchise stores and calling centers for people who do not have personal
telephone service. The Company owns approximately 95 percent of the outstanding
common stock of Globaltel. Globaltel's revenues for the first six months of 2002
were $232,717 and its net income was $10,421. It has a working capital deficit
of $25,314 as of June 30, 2002.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States for interim financial information and are in the
form prescribed by the Securities and Exchange Commission in instructions to
Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The interim
unaudited financial statements should be read in conjunction with the Company's
audited financial statements as of and for the year ended December 31, 2001. The
unaudited financial statements include all adjustments (consisting of normal
recurring items) which are, in the opinion of management, necessary to fairly
present the financial position as of June 30, 2002 and the results of operations
and changes in financial position for the three months and six month periods
ended June 30, 2002 and 2001. Operating results for the three months and six
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
Reclassifications
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the current year presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
8
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Loss Per Common Share
The computation of basic loss per common share is based on the weighted
average number of shares outstanding during each period. The computation of
diluted earnings per common share is based on the weighted average number of
shares outstanding during the period, plus the common stock equivalents that
would arise from the exercise of stock options and warrants outstanding, using
the treasury stock method and the average market price per share during the
period. Options to purchase 915,000 and 1,355,000 shares of common stock at a
range of $3.50 to $5.00 per share were outstanding at June 30, 2002 and 2001
respectively, but were not included in the diluted loss per share calculation
because the effects would have been anti-dilutive.
3. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the purchase method of accounting for
all business combinations initiated after June 30, 2001 and that certain
acquired intangible assets in a business combination be recognized as assets
separate from goodwill. SFAS No. 142 requires an impairment test, at least
annually, of goodwill and other intangibles determined to have an indefinite
life and such assets are no longer to be amortized. SFAS No. 142 requires that
an impairment test related to the carrying values of existing goodwill be
completed within the first six months of 2002. The Company currently does not
have goodwill on the balance sheet and therefore has not performed the test. The
adoption of these accounting standards did not have a significant impact on its
results of operations and financial condition for the periods ended June 30,
2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to
be recorded at fair value during the period incurred and an equal amount
recorded as an increase in the value of the related long-lived asset. The
capitalized cost is depreciated over the useful life of the asset and the
obligation is accreted to its present value each period. SFAS No. 143 is
effective for the Company beginning January 1, 2003 with earlier adoption
encouraged. Management does not believe the adoption of this standard will have
a significant impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", effective beginning January 1,
2002. SFAS No. 144 retains the requirement to recognize an impairment loss only
where the carrying value of a long-lived asset is not recoverable from its
undiscounted cash flows and to measure such loss as the difference between the
carrying amount and fair value of the asset. SFAS No. 144, among other things,
changes the criteria that have to be met to classify an asset as held-for-sale
and requires that operating losses from discontinued operations be recognized in
the period that the losses are incurred rather than as of the measurement date.
The Company adopted the accounting standard effective January 1, 2002, which did
not have a significant impact on the Company's financial condition or results of
operations.
9
4. Property and Equipment
Property and equipment consists of the following:
Switch equipment $ 1,279,011
Computer hardware and software 2,520,384
Office equipment and other 186,118
Furniture and fixtures 431,811
Leasehold improvements 2,985,944
-----------------
7,403,268
Less accumulated depreciation and amortization (1,813,969)
-----------------
$ 5,589,299
-----------------
Depreciation and amortization expense of fixed assets totaled
$1,174,824 and $144,502 for the six month periods ending June 30, 2002 and 2001,
respectively.
5. Intangibles
Intangibles consists of the following as of June 30, 2002:
Customer base 3,189,374
Less accumulated amortization (1,250,000)
-----------------
Intangibles, net $ 1,939,374
-----------------
Amortization expense of intangible assets totaled $798,000 and $376,454
for the six month periods ending June 30, 2002 and 2001, respectively.
6. Line of Credit
The Company has an Amended and Restated Loan and Security Agreement
(the "Loan and Security Agreement") with RFC Capital Corporation ("RFC Capital")
which provides for a revolving line of credit. The Loan and Security Agreement
is comprised of two elements: The EqualNet Loan and Revolving Facility and the
Omniplex Loan and Revolving Facility. Under the Loan and Security Agreement, RFC
has a security interest in and lien on Ciera Network Systems, Inc. for assets,
including inventory, accounts receivable, intangibles, equipment, furniture and
fixtures, trade names and marks, intellectual property, customer base, deposit
accounts, and insurance proceeds.
Under the Loan and Security Agreement, the principal amount of the
EqualNet Loan is not to exceed the lesser of (A) $10,000,000 and (B) the
Availability Formula. As of June 30, 2002 the principal amount exceeded the
availability formula by $3,657,287. The EqualNet Loan and Revolving Facility
bears interest at prime plus 1.75% per annum (6.5% as of 6/30/02). The principal
is due April 2, 2005. The Company is paying interest on a monthly basis.
Beginning April 3, 2002, the Company began making payments on interest (1.75%)
that was deferred until April 3, 2002 payable in twelve monthly installments. At
June 30, 2002 the loan was in default on a number of covenants and the balance
due was $8,532,780 (see below).
The Omniplex Loan and Revolving Facility bears interest at prime plus
2% per annum (6.75% as of 6/30/02). The principal is due August 31, 2005.
Interest was deferred through February 28, 2002 and is being repaid in six
10
monthly installments that began March 1, 2002 with current interest charges paid
monthly. At June 30, 2002 the loan was in default on a number of covenants and
the balance due was $8,128,422 (see below). Under the Loan and Security
Agreement the principal amount of the Omniplex Loan is not to exceed the lesser
of (A) $10,000,000 as reduced pursuant to the terms of the Warrant Agreement
(9,500,000 as of June 30, 2002) and (B) the Omniplex Borrowing Formula. As of
June 30, 2002 the principal amount exceeded the availability formula by
$2,276,600.
The Company is in violation of certain covenants of the Amended and
Restated Loan and Security Agreement with RFC Capital Corporation. Accordingly,
the loan balance has been classified as current on the financial statements. At
the present time, the Lender has not notified the Company of an Event of Default
under the loan. RFC has prepared and delivered a document that will combines and
restructures the existing two revolving credit agreements. The Company is
currently analyzing the proposed agreement. The restructuring will increase the
Company's cash flow and reduce its current liabilities. At June 30, 2002, and as
of the date of this filing, the Company was in violation of the following
covenants: (1) the Company has withdrawn the maximum amount available under the
loan, and allowed the principal of the loan to exceed the availability formula
by approximately $5.9 million; (2) the Company is in violation of the minimum
tangible net worth covenant of $3,000,000; (3) the Company has exceeded the
allowed annual capital expenditure limit of $500,000; (4) the Company's current
ratio is less than 1.5:1.0; (5) the Company has failed to timely file and pay
federal, state and local sales and telecommunications taxes and (6) the Company
has failed to make timely payments under lease obligations.
Effective July 5, 2002, RFC Capital Corporation has made 100% of cash
receipts available to the Company. There is no guarantee that RFC Capital will
continue to do so in the future. The amount due under the revolving line of
credit has been classified as a current liability in our financial statements.
The Company is currently renegotiating the terms and conditions however, there
can be no assurance that the Company can successfully restructure its loan
agreements.
Restricted cash represents deposits in lock boxes setup for the benefit
of RFC Capital Corp. that have not been swept at month-end in the amount of
$323,306 and deposits to secure letters of credit issued for the benefit of
vendors in the amount of $177,065 as of June 30, 2002.
7. Accrued Expenses
Accrued expenses consisted of the following:
June 30, 2002
------------------
Accrued billing fees $ 204,085
Customer deposits and accrued discounts 282,774
Accrued professional fees 107,007
Accrued interest expense 364,461
Accrued commissions 117,355
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$ 1,075,682
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11
8. Long-term Debt
Our long-term debt consists of the following as of June 30, 2002:
Ironwood Note Payable, with interest at 8%. The note was
due on May 30, 2002 with any accrued interest. Monthly
payments of interest are due at month end. This
note is secured by a second lien security interest
in a portion of the Incomnet accounts receivable. $ 660,409
Unsecured note payable for priority tax claims to
various government entities with an interest rate of
8%. Payments are to be made based on a schedule
confirmed in the Incomnet bankruptcy reorganization
plan through December 21, 2005. 727,360
Capitalized lease obligations 514,327
Convertible note payable to an individual with
interest at 12%. The note and accrued interest is
due and payable in cash or the Company's common stock
at the prevailing stock market price. 8,025
----------------
Total term debt 1,910,121
Less current portion 1,093,674
----------------
Long-term Debt $ 816,447
----------------
Future maturities of long-term debt are as follows:
Years Ending June 30:
2003 $ 1,093,674
2004 352,744
2005 336,110
2006 127,593
2007 --
-----------------
$ 1,910,121
-----------------
The Company does not have the funds available to retire the $660,409
Note Payable that matured on May 30, 2002. Management is seeking additional
capital and a borrowing infusion to fund this obligation. Management is
negotiating with the note holder at this time for a complete settlement. There
can be no assurance that management will be successful with this plan.
9. Commitments
Carrier Agreements
The Company has entered, and will continue to enter, into contracts
with various service providers for services, which will be resold to customers.
The contracts currently in place have no material minimum commitment with the
exception of Global Crossing, Qwest and MCI, which provide for a minimum
commitment of $150,000, $50,000 and $50,000 per month for 12, 12 and 36 months,
respectively, and have automatic renewal provisions if prior written notice of
termination is not provided. The Company has continually exceeded the minimum
commitments of the agreements.
12
Billing Agreements
The Company has entered into two agreements that enable it to provide
call detail records and related charges to a Local Exchange Carrier and a
national billing consolidator so its customers can be billed on their local
phone bill for long distance charges. One of the agreements requires the Company
to purchase an annual minimum level of service of $157,500 and both have terms
of 12 months.
The Company has also entered into an agreement that enables it to
provide call detail records to an outside company that will invoice access
charges to other carriers. The term is for 3 years with a monthly minimum of
$15,000.
10. Related Party Transactions
Stock grants for services provided by shareholders
The Company entered into consulting agreements with a company that is a
shareholder and an affiliate of a former director and an individual that is a
shareholder. The agreements called for consulting to be provided to the Company
in exchange for stock. These services were performed during 2001. The Company
issued 112,768 shares of common stock in 2002 for services performed under these
consulting agreements. The Company recorded consulting expense of approximately
$366,000 in 2001 related to these agreements.
Settlement and Release Agreement
In August 2001 the Company entered into a Settlement and Release
Agreement with the two officers of Ciera Network Systems, Inc. to settle and
resolve differences related to the Ciera Purchase executed on May 3, 2000. The
Company agreed to issue 400,000 shares of CCC GlobalCom stock to each officer.
The shares were recorded as a liability at December 31, 2001 and March 31, 2002
and were approved for issuance in May 2002.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The following discussion and analysis relates to our financial
condition as of June 30, 2002 and the results of operations for the three months
and six months ended June 30, 2002 and 2001. This information should be read in
conjunction with the consolidated financial statements and notes thereto
contained herein as well as the "Cautionary Statement Regarding Forward-Looking
Statements" in this Form 10-QSB.
The Company, prior to June 12, 2000, was named Emerald Capital
Investments, Inc. On June 9, 2000, it commenced operations in the
telecommunications industry through the acquisition of CCC GlobalCom Corporation
a Texas corporation ("CCC Texas"). CCC Texas was formed in 1999 to commence
operations in the telecommunications industry. CCC Texas conducted no operations
except for its acquisition of Ciera Network Systems, Inc. ("Ciera"). The
acquisition of CCC Texas, and as result of such acquisition, the acquisition of
Ciera, was accounted for as a reverse merger.
13
On April 5, 2001, the Company acquired certain assets of Equalnet
Communications Corp., EqualNet Corporation and USC Telecom, Inc. (collectively
referred to as "Equalnet"). The assets purchased included various fixed assets,
contracts, receivables and other tangible and intangible assets related to
Equalnet's long distance resale business, customer service business, and
telephone debit and sales and service business. The purchase price of $8,161,511
was paid with available cash and proceeds from a revolving credit facility of
approximately $7,500,000 from RFC Capital, a division of Textron Financial. In a
related transaction, CCC GlobalCom purchased three switches used in the Equalnet
long distance business for $750,000 from d-Tel Network, L.L.C., a company
controlled by the Chairman of the Board of Equalnet. As a result of the Equalnet
acquisition, the Company increased its customer base by approximately 30,000,
acquired voice switches, and obtained back office operations based in Houston,
Texas.
On September 11, 2001, the Company acquired certain assets of Omniplex
Communications Corporation (Omniplex). The assets purchased included various
fixed assets, contracts, receivables and other tangible and intangible assets
related to Omniplex's commercial local and long distance telecommunications
business. The purchase price of $8,298,704 was paid with proceeds of $8,125,000
from a revolving credit facility from RFC Capital, a division of Textron
Financial, and the balance with available cash. In connection with the
acquisition, a term sheet was drafted whereby the lender agreed in principle to
exchange $1,000,000 of its debt for warrants to purchase our common stock at
$4.00 per share. The details of the warrants were finalized in March 2002 and
the warrant was effective on September 7, 2001. As a result of the Omniplex
acquisition, the Company increased its customer base by approximately 5,000,
enhanced its local service product offering, and obtained distribution channels
based in St. Louis, MO, Kansas City, MO and Cape Girardeau, MO.
On November 30, 2001, the Company acquired selected assets of Incomnet
Communications Corporation (Incomnet). The purchase price for the acquired
assets was $6,028,695, payable as follows: (1) $1,750,000 cash at closing from
the proceeds from a revolving line of credit from RFC Capital; (2) a note
payable for $750,000, bearing interest at 8% and maturing on May 30, 2002; (3)
125,000 shares of CCC GlobalCom common stock; and (4) the assumption of certain
liabilities which totaled $3,028,695. As a result of the Incomnet acquisition,
the Company increased its customer base by approximately 52,000, obtained new
distribution channels, and obtained back office operations in Irvine, CA.
Since the Company acquired the assets mentioned above, it has initiated
plans to improve cash flow and operating results by reorganizing and
restructuring the combined operations. These plans include workforce reductions
and other administration cost savings, consolidation of operations and the
migration of customer voice traffic to its switches. The Company believes that
these asset acquisitions combined with the successful execution of these plans
will give it some economies of scale, new product offerings and new sales
channels that will allow it to be competitive in our targeted niche markets and
profitable in the future. The asset acquisitions discussed above are
collectively referred to as the "Asset Acquisitions" in the following
discussion.
The Company is in violation of certain covenants of the Amended and
Restated Loan and Security Agreement with RFC Capital Corporation. Accordingly,
the loan balance has been classified as current on the financial statements. At
the present time, the Lender has not notified the Company of an Event of Default
under the loan. RFC has prepared and delivered a document that will combine and
restructure the existing two revolving credit agreements. The Company is
currently analyzing the proposed agreement. The restructuring should increase
14
the Company's cash flow and reduce its current liabilities. At June 30, 2002,
and as of the date of this filing, the Company was in violation of the following
covenants: (1) the Company has withdrawn the maximum amount available under the
loan, and allowed the principal of the loan to exceed the availability formula
by approximately $5.9 million; (2) the Company is in violation of the minimum
tangible net worth covenant of $3,000,000; (3) the Company has exceeded the
allowed annual capital expenditure limit of $500,000; (4) the Company's current
ratio is less than 1.5:1.0; (5) the Company has failed to timely file and pay
federal, state and local sales and telecommunications taxes and (6) the Company
has failed to make timely payments under lease obligations.
Effective July 5, 2002, RFC Capital Corporation has made 100% of cash
receipts available to the Company. There is no guarantee that RFC Capital will
continue to do so in the future. The amount due under the revolving line of
credit has been classified as a current liability in the consolidated financial
statements. The Company is currently renegotiating the terms and conditions
however, there can be no assurance that we can successfully restructure these
loan agreements.
The Company does not have the funds available to retire the $660,409
Note Payable that matured on May 30, 2002. Management is seeking additional
capital and a borrowing infusion to fund this obligation. Management is
negotiating with the note holder at this time for a complete settlement. There
can be no assurance that management will be successful with this plan.
On March 18, 2002, CCC GlobalCom entered into an agreement with PT.
Telekomunikasi Indonesia, to expand VoIP traffic distribution and marketing of
VoIP services with Indonesia-based Probis VoIP of Persero Telekomunikasi TBK
(TELKOM), (Tokyo: POWL) the principal provider of telecommunications services in
Indonesia.
In May 2002, the Board of Directors approved a Stock Incentive Plan
(Plan) to attract and retain key employees. The plan provides for 4,000,000
shares of stock to be made available for the plan. As of June 30, 2002, no
options had been granted under the plan. We have granted options to purchase a
total of 915,000 shares of our common stock to an officer and to a former
officer of the Company, that were not under the Plan.
During the first six months of 2002, CCC GlobalCom issued 1,287,768
shares of common stock to certain Directors, Officers and vendors. The issuance
of these shares has been accounted for in the financial statements.
The Company has had operating losses for every quarter since it began
operations in June 2000. The auditor's opinion on the financial statements as of
December 31, 2001, calls attention to substantial doubt about its ability to
continue as a going concern. This means that they question whether the Company
can continue in business. The Company is experiencing difficulty in paying its
vendors, carriers and lenders on time, and it may continue to experience this
difficulty in the future. If the Company is unable to pay its vendors, carriers
and lenders on time, they may stop providing critical services or repossess
critical equipment that the Company needs to stay in business.
The Company has received disconnection notices for past due balances
from significant carriers. It is the belief that certain amounts included in
these past due balances are in error and are being disputed. The Company is also
in discussions with the carriers regarding extended payment terms for the
undisputed balances. We believe that ultimately these discussions will result in
lower monthly charges for CCC GlobalCom. However, there can be no assurances
15
that we can successfully dispute the balance identified as in error or negotiate
favorable payment terms for the remaining undisputed balances.
The consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred losses
since inception and has a working capital deficit as of June 30, 2002.
Additionally, in the past the Company has had negative cash flows from
operations. For the reasons stated in Liquidity and Capital Resources and
subject to the risks referred to in Liquidity and Capital Resources, there is no
assurance that we can raise the money necessary to fund future operations.
CCC GlobalCom serves as a holding company for its subsidiaries'
operations. References herein to CCC GlobalCom, "we", "our", or "us" include CCC
GlobalCom Corporation and its subsidiaries, unless the context otherwise
requires.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 compared to June 30, 2001
NET SALES. Revenues for the three months ended June 30, 2002 were
$7,309,824 compared to $2,823,228 for the three months ended June 30, 2001.
Revenues are the result of long distance and local telephone services, private
line circuits, and pre-paid and post-paid calling cards. The increase of
$4,486,596 in revenues for the three months ended June 30, 2002 compared to the
three months ended June 30, 2001 is mainly due to the acquisitions of Omniplex
and Incomnet.
COST OF SERVICES. For the three months ended June 30, 2002, the cost of
services were $5,246,683 or 71.8% of sales compared to $1,532,630 or 54.3% of
sales for the three months ended June 30, 2001. The increased cost of services
was primarily attributable to the growth from acquisitions and the increased
overhead during the transition. The Company expects to aggressively monitor its
cost of services to obtain the lowest cost possible for providing the services
to its customers.
GROSS MARGINS. Gross margins were $2,063,141 for the three months ended
June 30, 2002 compared to $1,290,598 for the three months ended June 30, 2001.
The increase was due to the increase in customer base from the acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative (SG&A) expenses were $5,276,909 or 72.2% of revenues for the
three months ended June 30, 2002 compared to $1,913,942 or 67.8% of revenues for
the three months ended June 30, 2001. The increase in SG&A expenses is due
mainly to increased staffing, rent and professional fees. The total dollar
amount of SG&A expenses are anticipated to increase as volume grows, however
management is aggressively looking at ways to reduce the cost of providing
service to its customers.
During the quarter, the Company restructured the operations of the St.
Louis, MO office. The reductions in employees, salaries and benefits should
result in $240,000 in savings annually. The Company has also started the closing
of the Irvine, CA facility, a process that is expected to be completed by August
31, 2002. It is estimated that the net savings in personnel and overhead should
be $2.4 million annually.
The Company has reached an oral agreement and has reduced the terms to
writing with the lessor of the Irvine, CA facility. For a payment of $35,000 the
lessor, effective August 31, 2002, will grant early termination and release of
16
any further liability under the lease agreement. If completed, a determination
must still be made on the disposition of the remaining assets and leasehold
improvements at the facility.
Other accomplishments include the addition of a second long distance
switching facility in Los Angeles, CA and the purchase of two long distance
switches to be located in Miami, FL. The Company plans to have the switches
operational by the 3rd and 4th Quarter, 2002. In the Company's international
operations, Globaltel has seen its number of retail call centers grow to more
than 400.
LOSS FROM OPERATIONS. For the three months ended June 30, 2002, there
was a loss from operations of $4,170,781 compared to a loss of $1,090,565 for
the three months ended June 30, 2001. The increase in total loss from operations
is the result of increased customer base with less gross margin and increased
SG&A expenses to support the acquisitions.
Six Months Ended June 30, 2002 compared to June 30, 2001
NET SALES. Revenues primarily consist of billings for long distance
telephone services and local telephone services, private line circuits, and
pre-paid and post-paid calling cards. Revenues for the six months ended June 30,
2002 were $14,370,941 compared to $3,229,074 for the six months ended June 30,
2001. The increase in sales largely arose from the significant number of
customers acquired in the Asset Acquisitions mentioned above.
COST OF SERVICES. Cost of services includes direct costs for telephone
services. Cost of services for telephone services and data services include the
cost of service provided by other carriers and miscellaneous costs incurred to
provide service. Cost of service for 2001 and 2002 includes primarily direct
carrier related costs. For the six months ended June 30, 2002, cost of services
were $11,137,936 or 77.5% of sales compared to $1,854,030 or 57.4% of sales for
the first six months ended June 30, 2001. The increased cost of services is due
mainly to the acquisitions and management is aggressively dealing with the
increased costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative (SG&A) expenses consist of costs to provide billing and
collection of all services, support services for subscribers, cost of the
information systems, commissions and the salaries of the personnel to support
our operations. The increase in SG&A expenses is largely due to the operations
acquired in the Asset Acquisitions mentioned above and certain one time
integration costs. SG&G expenses for the six months ended June 30, 2002 were
$10,473,263 or 72.9% of sales compared to $2,647,851 or 82.0% of sales for the
six months ended June 30, 2001. SG&A in 2002 includes approximately: (a)
$5,349,000 in payroll and benefit related expense; (b) $551,000 in supplies; (c)
$782,000 in facilities expense; (d) $265,000 in taxes and insurance; and (e)
$2,722,000 in administrative and professional expense.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased primarily due to the property and equipment obtained through
the Asset Acquisitions mentioned above.
OTHER EXPENSES. For 2002, other expenses of approximately $730,000
consisted primarily of interest of which approximately $589,000 was attributable
to the RFC loan agreement.
We expect to continue to experience operating losses and negative
adjusted EBITDA as a result of our development and market expansion activities
17
in the 3rd quarter FY 2002, moving to positive EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) during the 4th quarter FY 2002. However,
there can be no assurances that the Company will be successful in generating
positive EBITDA.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2002, we generated positive cash
flow from operations of approximately $2,016,764, primarily due to the
substantial increase in trade accounts payable and excise taxes payable during
the period. The amount of cash used is primarily the result of the net loss
incurred during the period, the timing of cash receipts from our customers, the
acquisitions integration mentioned above, service of interest, as well as
activities related to payments to our vendors and tax authorities. The Company
has historically operated with negative cash flows and have sought to fund those
losses and deficits through the issuance of debt and the completion of private
equity placements.
During the six months ended June 30, 2002, the Company acquired
approximately $122,000 in equipment, which was not financed through a capital
lease arrangement. Additional cash outflows included payments of approximately
$144,000 towards our capital lease obligations and payments on our line of
credit of approximately $1,675,000.
Altogether, our net operating, investing and financing activities
during the six months ended June 30, 2002 increased cash approximately $75,000.
Our working capital deficit at June 30, 2002 was approximately $28,830,000. This
represents an increase in deficit of approximately $7,262,000 from the working
capital deficit of $21,568,000 at December 31, 2001.
The current liabilities include a total of approximately $8,673,000
owed to various carriers, most of which is significantly past credit terms. In
addition, the current liabilities include approximately $3,711,000 of amounts
owed to various other trade vendors and carriers, most of which is significantly
past credit terms. We currently do not have sufficient cash to bring our vendors
back to current terms.
Until we produce positive cash flows from operations, and reduces or
eliminates our working capital deficit, management will be faced with deciding
whether to use available funds to pay vendors and suppliers for services
necessary for operations, to service our debt requirements, or to purchase
equipment to be used in the growth of our business. We will need to raise
additional capital to pay vendors and carriers, to service debt requirements and
purchase equipment. We do not consistently pay our suppliers and carriers on
time, some of which are critical to our operations. Most of our suppliers and
carriers are significantly past credit terms. Certain vendors and suppliers have
given us payment extensions in the past, although there is no guarantee they
will do so in the future.
Since we have produced negative EBITDA results during 2001 and during
the first six months of 2002, we will most likely need to achieve positive
EBITDA in order to obtain any significant amounts of debt funding to meet our
capital expenditure and working capital needs. As such, we will need to complete
additional private placements in order to raise the funds needed. Although
capital markets have been difficult, we have shown an ability to raise funds in
the past. In May 2001, we raised, net of issuance costs, $2,331,706 through a
private placement memorandum. Although we have been successful in raising funds
in the past, there are no assurances that we will be able to continue to do so.
18
In addition, we expect our network development will require funds to
develop our comprehensive information technology platform to support and enhance
the provisioning, billing and installation of new and existing customers and to
purchase and install network equipment. We will also be required to fund our
operating losses and working capital and possible expenditures associated with
market expansions and potential acquisitions of businesses or assets. In
addition, we will require funds to pay our current future minimum lease
obligations under noncancelable operating and capital leases and future minimum
commitments under long-term contractual obligations associated with maintenance
and service agreements. Such future minimum commitments are as follows (in
thousands):
Period Ending Operating lease Capital Other long-term Total minimum
June 30, 2002 obligations lease contractual long-term
obligation obligations obligations
2002 $ 609 $ 197 $ 1,715 $ 2,521
2003 1,185 163 1,340 2,688
2004 1,154 154 240 1,548
2005 811 - 90 901
2006 778 - 90 868
Thereafter 226 - 8 234
----------- ----------- ----------- -----------
Total future minimum long
Term obligations $ 4,763 $ 514 $ 3,483 $ 8,760
=========== =========== =========== ===========
We have limited capital resources available to us, and these resources
may not be available to support our ongoing operations until such time as we are
able to generate positive cash flows from operations. There is no assurance we
will be able to achieve future revenue levels sufficient to support operations
or recover our investment in property and equipment, and other intangible
assets. These matters raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent upon the
ongoing support of our stockholders and customers, our ability to obtain capital
resources to support operations and our ability to successfully market our
services.
Management, in order to continue operations, is seeking additional
revenue generating activities, and is actively engaged in discussion to obtain
additional capital and borrowing infusion. There can be no assurance that
management will be successful with this plan.
FORWARD LOOKING STATEMENTS
From time to time, CCC GlobalCom may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological development, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, CCC GlobalCom notes that a variety of factors
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in any of our
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of CCC GlobalCom's business
include, but are not limited to, the following: (a) the failure to obtain
additional borrowed and/or equity capital on favorable terms for acquisitions
and expansion; (b) adverse changes in federal and state laws, to government
reimbursement policies, to private industry reimbursement policies and to other
19
matters affecting CCC GlobalCom's industry and business; (c) the availability of
appropriate acquisition candidates and the successful completion of
acquisitions; (d) the demand for our products and services; and (e) other risks
detailed in our Securities and Exchange Commission filings.
This Form 10-QSB contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act with respect to results of operations
and businesses of CCC GlobalCom. All statements, other than statements of
historical facts, included in this Form 10-QSB, including those regarding market
trends, CCC GlobalCom's financial position, business strategy, projected costs,
and plans and objectives of management for future operations, are
forward-looking statements. In general, such statements are identified by the
use of forward-looking words or phrases including, but not limited to,
"intended", "will", "should", "may", "expects", "expected", "anticipates", and
"anticipated" or the negative thereof or variations thereon or similar
terminology. These forward-looking statements are based on CCC GlobalCom's
current expectations. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to be correct. Because forward-looking statements
involve risks and uncertainties, CCC GlobalCom's actual results could differ
materially. Important factors that could cause actual results to differ
materially from our expectations are disclosed hereunder and elsewhere in this
Form 10-QSB. These forward-looking statements represent our judgment as of the
date of this Form 10-QSB. All subsequent written and oral forward-looking
statements attributable to CCC GlobalCom are expressly qualified in their
entirety by the Cautionary Statements. CCC GlobalCom disclaims, however, any
intent or obligation to update its forward-looking statements.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements; factors that could cause actual results to differ
materially include, but are not limited to:
o economic uncertainty;
o the effects of vigorous competition;
o the impact of technological change on our business, alternative
technologies, and dependence on availability of transmission
facilities;
o the loss of any significant numbers of customers;
o changes in business strategy or development plans;
o the cost of pursuing acquisitions and new business and
initiatives;
o an expansion of land based communications systems;
o our significant indebtedness;
o the availability and terms of capital to fund our operations and
the expansion of our businesses;
o risks of international business;
o regulatory risks in the United States and internationally;
20
o contingent liabilities;
o uncertainties regarding the collectability of receivables;
o risks associated with debt service requirements and our financial
leverage;
o uncertainties associated with the success of acquisitions;
o the ongoing war on terrorism;
o other factors referenced in this Report: and
o the other risks referenced from time to time in CCC GlobalCom's
filings with the Securities and Exchange Commission.
Potential purchasers of CCC GlobalCom capital stock are cautioned not
to place undue reliance on such statements, which speak only as of the date
thereof.
The cautionary statements contained or referred to in this section
should be considered in connection with any subsequent written or oral
forward-looking statements that may be issued by CCC GlobalCom or persons acting
on its behalf. We undertake no duty to update these forward-looking statements,
even though our situation may change in the future.
Limited Operating History. We provide voice and data services through
the use of the networks of other communication providers. We have been operating
in the telecommunications business through our wholly owned subsidiary Ciera for
approximately two years. We have limited assets, limited revenues and limited
customers. Our customer base and revenues are increasing on a monthly basis.
However, we have operated at a loss since its inception. There can be no
assurance that we will ever operate profitably. In order to significantly
increase revenues, we must acquire other companies as well as grow internally.
Although our management has conducted extensive discussions with the principals
of several acquisition targets, there can be no assurance that we can fund the
acquisitions, that we can complete the acquisitions or that the acquired
businesses will operate at a profit. As a result of our limited operating
history as a facilities based integrated communications provider, you have
limited operating and financial data on which you can predict our future
performance and base your investment decision. We cannot assure you that we can
successfully operate as a facilities based integrated communications provider.
We Have A History Of Operating. We have incurred significant operating
and net losses in the past and expect to continue to incur losses in the future
as we deploy our network, expand our service offerings and enter new markets.
For the year ended December 31, 2000, the Company had a net loss of $1,789,567.
For the year ended December 31, 2001, CCC GlobalCom had a net loss of
$18,790,367. For the six months ended June 30, 2002, CCC GlobalCom had a net
loss of $9,953,658. As we expand our operations, we expect our negative cash
flow, operating losses and net losses to continue for the foreseeable future. We
cannot assure you that our revenues will grow or that we will achieve
profitability in the future. If we continue to generate losses without obtaining
additional funding, our ability to pursue our business strategy may be
restricted. We have never been profitable and do not expect to become profitable
in the near future. We have invested and will continue to invest significant
amounts of money in our network and personnel in order to maintain and develop
the infrastructure we need to compete in the markets for our services and
achieve profitability.
21
Limited Assets And Additional Capital Required. As of June 30, 2002,
we had, on a consolidated basis, total assets of approximately $14,022,000.
There can be no assurance that we will realize positive cash flow from
operations in the foreseeable future. Furthermore our business plan provides
that we will attempt to complete additional acquisitions. We believe that we
will be required to raise additional capital in order to fund our
business plan during the next 24 months. There can be no assurance that
additional financing would be available to us, or, if available, that it could
be obtained on acceptable terms. We have financed our operations almost
exclusively through debt and private sales of securities. Since we are losing
money, we must raise the money we need to continue operations and expand our
network either by selling more securities or borrowing money. If we are not able
to raise additional money, we will not be able to implement our strategy for the
future, and we will either have to scale back our operations or shut down all of
our operations. Failure to obtain such financing could result in the delay or
abandonment of some or all of our development and expansion plans and
expenditures and could have a material adverse effect on us.
We Must Expand And Operate Our Network. Our success and ability to
increase our revenues depends upon our ability to deliver telecommunication
services, which in turn, depends on our ability to integrate new and emerging
technologies and equipment into our network and to successfully expand our
network and to increase the number of our customers significantly.
Highly Competitive Industry. The telecommunications industry is highly
competitive and is affected by the introduction of new services by, and the
market activities of, major industry participants. Most of our other current
competitors are substantially larger and have greater financial, technical and
marketing resources than we do. We have not achieved, and do not expect to
achieve, a significant market share for any of the telecommunication services we
offer. Many of our competitors have the following advantages over us:
o long-standing relationships and brand recognition with customers;
o financial, technical, marketing, personnel and other resources
substantially greater than ours;
o more funds to deploy telecommunication services;
o potential to lower prices of competitive telecommunication
services that compete with ours;
o fully deployed and operational networks; and
o benefits from existing regulations that favor the incumbent
telephone companies.
We face, and expect to continue to face, competition from current and
potential market entrants, including:
o long distance providers seeking to enter, re-enter or expand entry
into the local telecommunications marketplace; and
o other domestic and international integrated communication
providers, resellers, Internet companies, cable television
companies, electric utilities and municipalities, which are using
their rights-of-way and other assets to enter the
telecommunication services market. In addition, a continuing trend
toward combinations and strategic alliances in the
22
telecommunications industry could give rise to significant new
competitors, which could cause us to lose customers and impede our
ability to attract new customers.
Resistance By Potential Customers To Enter Into Service Arrangements.
The success of our telecommunications service offerings will be dependent upon,
among other things, the willingness of customers to accept us as a new provider
of voice and data services. Many of our potential customers have entered into
term contracts with incumbent telephone providers that have penalties for early
termination, which our potential customers may not want to incur. In addition,
potential customers may not want to change their existing service providers for
a variety of reasons such as:
o longstanding service relationships with existing providers;
o potential service interruptions in switching to a new provider;
and
o existing providers having financial, technical, marketing and
other resources that are substantially greater than ours.
We cannot assure you that we will be successful in overcoming the
resistance of customers to change their current integrated communication
providers, particularly those that purchase services from incumbent telephone
companies. The lack of such success would reduce our ability to increase our
revenue.
Need For Adequate Back Office Operations. Sophisticated back office
processes and information management systems are vital to our growth and our
ability to bill customers accurately, initiate service for customers, achieve
operating efficiencies and improve our operating margins. Our plans to develop
and implement these back office and customer service systems rely, for the most
part, on choosing products and services offered by third-party vendors and
integrating these products and services into our operations. We cannot assure
you that these systems will perform as expected as we grow our customer base. In
addition, our right to use these systems depends upon license agreements with
third-party vendors. If these vendors elect to cancel or not renew some or all
of these license agreements, our business may be adversely affected. Some of the
risks associated with our back office and customer service systems include:
o the failure by third-party vendors to deliver their products and
services in a timely and effective manner and at acceptable costs;
o our failure to identify key information and processing needs;
o our failure to integrate our various information management
systems effectively;--our failure to maintain and upgrade systems
as necessary; and
o our failure to attract and retain qualified systems support
personnel.
Development And Management Growth. We are in the early stages of
operations. Our success will depend, among other things, on substantial
increases in customer base, on our ability to engage in business in foreign
markets, on the execution of agreements with the owners of long distance lines
or distribution channels, on obtaining of governmental permits, and on
subsequent developments in state and federal regulations. In addition, the
expansion of our business will involve acquisitions, which could divert the
23
resources and management time and require integration with our then existing
operations. There can be no assurance that any acquired business will be
successfully integrated into our operations or that any such acquisition will
meet our expectations. Our future performance will depend, in part, upon our
ability to manage our growth effectively, which will require us to implement and
improve our operating, financial and accounting systems, to expand, train and
manage its employee base and to effectively manage the integration of acquired
businesses. These factors and others could adversely affect the expansion of our
customer base and service offerings. Our inability either to expand in
accordance with our plans or to manage our growth could have a material adverse
effect on our business, financial condition and results of operations.
Reliance On Incumbent Local Exchange Carriers (ILEC). We are, and will
continue to be, dependent on the ILEC's and, as we expand our network, on other
incumbent telephone companies that operate in our target market areas to assure
that we can provide our customers uninterrupted service and competitive
services. The Telecommunications Act of 1996 requires the largest incumbent
telephone companies to lease or "unbundle" their network elements and make them
available to others and us for purchase, as well as provide their
telecommunications services to others and us at wholesale prices. We cannot,
however, assure you that these elements and services will be provided in a
commercially viable manner or at reasonable prices. Many new integrated
communication providers have experienced difficulties in working with incumbent
telephone companies. Problems have arisen in installing access lines,
implementing interconnection and co-location and integrating the preordering,
ordering, repairing and billing systems used by new integrated communication
providers with the systems of incumbent telephone companies. These problems may
impair our reputation with customers who can easily switch back to incumbent
telephone companies or to other telecommunications service providers.
Coordination and cooperation with incumbent telephone companies are necessary
for new integrated communication providers such as us to provide local service
to customers on a timely, cost-effective and competitive basis. In addition, our
ability to implement successfully our switched and enhanced telecommunication
services will require the negotiation of interconnection and co-location
agreements with incumbent telephone companies. Interconnection agreements set
forth the terms and conditions governing how local integrated communication
providers interconnect their networks and/or purchase or lease network
facilities and services. These negotiations may require considerable time,
effort and expense and the agreements will be subject to federal and state
regulation. The terms of interconnection agreements, such as our agreements with
ILEC's, typically cover a two-to three-year period, requiring us to renegotiate
them frequently. We cannot assure you that we will be able to renegotiate these
interconnection agreements or negotiate new agreements in our existing and new
markets on favorable terms. Delays in obtaining interconnection agreements may
delay our entry into new markets. In addition, the prices set forth in the
interconnection agreements may be subject to significant rate increases at the
discretion of the regulatory authority in each of the states in which we do
business. A significant part of our cost structure depends on these
state-regulated rate structures. We cannot assure you that the rates charged to
us under our interconnection agreements will allow us to offer usage rates low
enough to attract a sufficient number of customers to operate our business
profitably.
Reliance In Third Parties For Services. Because we depend on
third-party vendors, we do not have guaranteed capacity or control over delivery
schedules, quality assurance, production yields and costs. If any of our vendors
reduces or interrupts its supply of products, or if any significant installer or
24
field service provider interrupts its service to us or fails to perform to
required specifications, our business could be disrupted, which could cause us
to lose customers. In addition, our suppliers may be unable to manufacture and
deliver the telecommunications products we require. If this were to occur, we
might be unable to deploy our network in a timely manner, thus reducing our
ability to compete.
Declining Prices For Telecommunication Services. The telecommunications
business is extremely competitive. Long distance prices have decreased
substantially in recent years and are expected to continue to decline in the
future. In addition, the long distance industry has historically experienced
high customer attrition, as customers frequently change their chosen long
distance providers in response to lower rates or promotional incentives by
competitors. We rely on other companies to provide service for all of our long
distance traffic. As we enter additional markets, we will need to negotiate
resale agreements with other telephone companies to provide us with long
distance services. Such agreements typically provide for the resale of long
distance services on a per-minute basis and may contain minimum volume
commitments. Negotiation of these agreements involves estimates of future supply
and demand for long distance services and estimates of the calling patterns and
traffic levels of our customers. If we fail to meet our minimum volume
commitments, we may be obligated to pay under-utilization charges, and if we
underestimate our need for long distance services, we may be required to obtain
capacity through more expensive means, which would raise our costs and reduce
our revenues. Our failure to achieve acceptable profits from our long distance
business could have a material adverse effect on us. Trends in the pricing for
long distance services may be indicative of trends in the telecommunications
industry. If this is the case, revenue from our other service offerings may be
subject to significant price pressure.
An increase in the capacity of our competitors could adversely affect
our business. Furthermore, the marginal cost of carrying an additional call over
existing fiber optic cable is extremely low. As a result, within a few years,
there may be dramatic and substantial price reductions.
Successful Integration Critical. As part of our business strategy, we
seek to expand through investments in or the acquisition of other businesses
that we believe are complementary to our business. Although we regularly engage
in discussions relating to potential acquisitions, we are unable to predict
whether any acquisitions will actually occur. If we acquire companies, networks
or other complementary assets as part of our expansion plan, we will be subject
to the risks generally associated with acquisitions. Our ability to complete
acquisitions will depend, in part, on our ability to finance the acquisitions
(including the costs of acquisition and integration). Our ability may be
constrained by our cash flow, the level of our indebtedness at the time,
restrictive covenants in the agreements governing our indebtedness, conditions
in the securities markets and other factors, some of which are not within our
control. If we proceed with one or more acquisitions in which the consideration
consists of cash, we may use a substantial portion of our available cash to
complete the acquisitions. If we finance one or more acquisitions with the
proceeds of indebtedness, our interest expense and debt service requirements
could increase materially. Furthermore, if we use our common stock as
consideration for acquisitions, our stockholders would experience dilution of
their ownership interests represented by their shares of common stock. The
financial impact of acquisitions could materially affect our business and could
cause substantial fluctuations in our quarterly and yearly operating results.
Rapidly Changing Technology. The telecommunications industry is subject
to rapid and significant changes in technology and in customer requirements and
preferences. We have developed our business based, in part, on traditional
25
telephone technology. Subsequent technological developments may reduce the
competitiveness of our network and require expensive unbudgeted upgrades or
additional telecommunication products that could be time consuming to integrate
into our business, and could cause us to lose customers and impede our ability
to attract new customers. We may be required to select one technology over
another at a time when it might be impossible to predict with any certainty
which technology will prove to be more economic, efficient or capable of
attracting customers. In addition, even if we acquire new technologies, we may
not be able to implement them as effectively as other companies with more
experience with those new technologies.
Ability To Continue As A Going Concern. As a result of our financial
condition, our independent auditor included an explanatory paragraph in its
report on our financial statements for the period ended December 31, 2001, with
respect to our ability to continue as a going concern. Our ability to continue
in the normal course of business is dependent upon its access to additional
capital and the success of future operations. Uncertainties as to these matters
raised substantial doubt about our ability to continue as a going concern at the
date of such report.
Marketing Risks. Although we expect to market a variety of
telecommunications services to customers and prospective customers there can be
no assurance that we will be able to attract and retain new customers or retain
and sell additional services to existing customers.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions about the effect of matters that are inherently
uncertain. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities that exist at the date of our financial statements. While we
believe our estimates are appropriate, actual results can, and often do, differ
from those estimates.
Our critical accounting policies are discussed below. Each of these
areas involves complex situations and a high degree of judgment either in the
application and interpretation of existing literature or in the development of
estimates that impact our financial statements.
Revenue Recognition. We recognize revenue in accordance with all
applicable accounting principles generally accepted in the United States of
American including SEC Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" (SAB 101), which provides additional guidance on
revenue recognition as well as criteria for when revenue is realized and earned
and related costs are incurred. The application of SAB 101 requires management's
judgment on the amount and timing of revenue recognition. Should changes in
conditions cause management to determine the revenue recognition criteria are
not met for certain future transactions, revenue recognized for any reporting
period could be adversely affected.
The assessment of collectability is particularly critical in
determining whether or not revenue should be recognized. A portion of our
revenue is for reciprocal compensation generated by calls placed to Internet
service providers who are our customers. In addition, a portion of our revenue
is access charge revenue for connecting our voice service customers to their
selected long distance carriers for outbound calls or for delivering inbound
26
long distance traffic to our voice service customers. Our ability to earn local
reciprocal compensation revenues and access revenues is the subject of numerous
regulatory and legal challenges. Until these issues are ultimately resolved, our
policy is to recognize these revenues only when realization is reasonably
assured.
Accounts Receivable. A considerable amount of judgment is required in
assessing the ultimate realization of our accounts receivable. We evaluate the
collectability of our accounts receivable based on a combination of factors. We
recognize allowances for doubtful accounts based on the length of time the
receivables are past due, the current business environment and our historical
experience. In circumstances where we are aware of a specific customer's or
carrier's inability to meet its financial obligations to us, we record a
specific allowance against amounts due, to reduce the net recognized receivable
to the amount we reasonably believe will be collected. If the financial
condition of our customers or carriers were to deteriorate or if economic
conditions worsened, additional allowances may be required in the future.
Intangibles. The Company had significant intangible assets consisting
of acquired customer bases. (See note 5 in Notes to Consolidated Financial
Statements.) The determination of related estimated useful lives and whether or
not these assets are impaired involves significant judgment by management. The
Company periodically evaluate acquired businesses for potential impairment
indicators. Our judgments regarding the existence of impairment are based on
market conditions, legal factors and operational performance of our acquired
businesses. Future events could cause us to conclude that customer bases
associated with our acquired businesses are impaired. Any resulting impairment
loss could have a significant impact on our financial condition and results of
operations.
Network Expenses. The recognition of network expense and the related
liabilities for network expense requires certain estimates and assumptions to be
made by management. Our accruals for unbilled leased network facilities, network
access charges, and equipment co-location charges are based on circuit counts,
estimated usage, and active co-location sites. Additionally, our accrual
includes charges invoiced by carriers, which are probable network expenses but
have not yet been paid due to rate or volume disputes with other carriers.
Should changes in conditions or facts cause us to revise our estimates, our
financial condition and results of operations could be significantly impacted.
Other Matters. We do not have any of the following:
o Off-balance sheet financial arrangements
o Trading activities that include non-exchange traded contracts
accounted for at fair value
o Relationships and transactions with persons or entities that
derive benefits from any non-independent relationship other than
the related party transactions discussed in footnote 10.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. To the best knowledge of the Company's
management, the Company is not a party to any legal proceeding or litigation.
However, the Company is a party to litigation in efforts to collect monies due
the Company.
27
Item 2. Changes in Securities and Use of Proceeds. None
Item 3. Defaults by the Company on its Senior Securities. The Company
is in violation of certain covenants of the Amended and Restated Loan and
Security Agreement with RFC Capital Corporation. Accordingly, the loan balance
has been classified as current on the financial statements. At the present time,
the Lender has not notified the Company of an Event of Default under the loan.
RFC has prepared and delivered a document that combine and restructure the
existing two revolving credit agreements. The Company is currently analyzing the
proposed agreement. The restructuring will increase the Company's cash flow and
reduce its current liabilities. At June 30, 2002, and as of the date of this
filing, the Company was in violation of the following covenants: (1) the Company
has withdrawn the maximum amount available under the loan, and allowed the
principal of the loan to exceed the availability formula by approximately $5.9
million; (2) the Company is in violation of the minimum tangible net worth
covenant of $3,000,000; (3) the Company has exceeded the allowed annual capital
expenditure limit of $500,000; (4) the Company's current ratio is less than
1.5:1.0; (5) the Company has failed to timely file and pay federal, state and
local sales and telecommunications taxes and (6) the Company has failed to make
timely payments under lease obligations.
Recently RFC Capital Corporation has made 100% of cash receipts
available to the Company. There is no guarantee that RFC Capital will continue
to do so in the future. The amount due under the revolving line of credit has
been classified as a current liability in our financial statements. There can be
no assurance that the Company can successfully restructure its loan agreements.
The Company has not obtained a waiver and has classified the loan as
current.
Item 4. Submission of Matters to Vote of Security Holders.
(a) The registrant held its 2002 Annual Meeting of the Stockholders on
June 21, 2002.
(b) Proxies for the Annual Meeting were solicited by management there
was no solicitation in opposition to management's nominees for
directors as listed in the Proxy Statement. All such nominees were
elected pursuant to the following votes:
Number of Votes
---------------
DIRECTORS FOR WITHHELD
--------- --- --------
Z. Hakim 23,164,872 24,896
Paul Licata 23,164,872 24,896
Number of votes FOR 23,164,872
Number of votes AGAINST 0
Number of votes ABSTAINING 24,896
Item 5. Other Information. None.
Item 6(a). Exhibits. None.
28
Item 6(b). Reports on Form 8-K.
On February 14, 2002, the Company filed an 8-K/A amending the
announcement of the acquisition of selected assets from Incomnet Communications
Corporation in an 8K previously filed on December 18, 2001. The amendment
provided the financial information of the acquired company.
On March 28, 2002, the Company filed an 8-K announcing the signing of
an agreement with PT. Telekomonikasi Indonesia, PLC, a telecommunication service
provider in Indonesia.
29
SIGNATURES
- ---------
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CCC GLOBALCOM CORPORATION
Date August 19, 2002 By /s/ Z. Hakim
-----------------------------
Z. Hakim
Chief Executive Officer
/Principal Executive Officer
Date August 19, 2002 By /s/ Clifford J. Bottoms
----------------------------
Clifford J. Bottoms
Chief Financial Officer
/Principal Financial Officer
30
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Z. Hakim, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge
and belief:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Z. Hakim
___________________________________
Z. Hakim
Chief Executive Officer
August 19, 2002
31
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Clifford J. Bottoms, Sr. VP/Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge and belief:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Clifford J. Bottoms
___________________________________
Clifford J. Bottoms
Sr. VP/Chief Financial Officer
August 19, 2002
32
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Paul Licata, President of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and
belief based on what I have been told by others:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Paul Licata
___________________________________
Paul Licata
President
August 19, 2002
33
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Mario Hernandez, Controller of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and
belief:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Mario Hernandez
___________________________________
Mario Hernandez
Controller
August 19, 2002
34
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Yolanda Tincher, Treasury/Budget
Manager of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge and belief:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Yolanda Tincher
___________________________________
Yolanda Tincher
Treasury/Budget Manager
August 19, 2002
35
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Robert W. Livingston, E.V.P./Chief
Operating Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge and belief:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Robert W. Livingston
___________________________________
Robert W. Livingston
E.V.P./Chief Operating Officer
August 19, 2002
36
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Sonya Presley, V.P. of Administration
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge
and belief:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Sonya Presley
___________________________________
Sonya Presley
V.P. of Administration
August 19, 2002
37
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CCC GlobalCom Corporation on form
10QSB for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Gary D. Pentecost, Director of
mergers and Acquisitions of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge and belief as to the information furnished by
Gard D. Pentecost:
(1) the Report complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange act of 1934; and
(2) the information in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
By /s/ Gary D. Pentecost
___________________________________
Gary D. Pentecost
Director of Mergers and Acquisitions
August 19, 2002
38