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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 September 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 November 4, 2002 - 36,884,204 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 September 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 - September 30, 2002 3
Consolidated Statements of Operations--for the
three months and nine months ended
September 30, 2002 and September 30, 2001 4
Consolidated Statements of Cash Flows - for the
nine months ended September 30, 2002 and
September 30, 2001 5
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
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Page
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Item 1. Legal Proceedings 28
Item 2. Changes in the Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to Vote of Security Holders 29
Item 5. Other Information 29
Item 6(a). Exhibits 29
Item 6(b). Reports on Form 8-K 29
Signatures 30
Certifications 31
PART I - FINANCIAL INFORMATION
ITEM 1
Financial Statements
CCC GLOBALCOM CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
- --------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 957,399
Restricted cash 564,638
Accounts receivable, net of allowance
of $1,507,137 4,607,133
Prepaid expenses 167,946
-------------------
Total current assets 6,297,116
Property and equipment, net 2,791,465
Intangibles, net 1,440,374
Other 446,445
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Total assets $ 10,975,400
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Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Line of credit $ 16,598,304
Accounts payable 14,471,699
Accrued compensation and other 563,667
Current portion of long-term debt 1,166,549
Excise taxes payable 3,135,910
Accrued expenses 1,260,980
Deferred income 426,570
-------------------
Total current liabilities 37,623,679
Long-term debt 685,732
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Total liabilities 38,309,411
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Commitments and contingencies -
Stockholders' deficit:
Common stock, $.001 par value, authorized 100,000,000
shares; issued and outstanding 37,214,098 shares 37,215
Additional paid-in capital 9,709,655
Accumulated deficit (37,080,881)
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Total stockholders' deficit (27,334,011)
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$ 10,975,400
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- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
3
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -------------------------
2002 2001 2002 2001
------------ -------------- ------------ -----------
Net sales $ 6,836,281 3,087,026 $ 21,207,222 6,316,100
Cost of services (4,916,818) (2,007,495) (16,054,755) (3,861,525)
SG&A expenses (4,179,905) (2,444,111) (14,653,167) (5,091,962)
Depreciation and
amortization expenses (893,392) (633,805) (2,866,216) (1,154,761)
------------ -------------- ------------ -----------
------------ -------------- ------------ -----------
Loss from operations (3,153,834) (1,998,385) (12,366,916) (3,792,148)
------------ -------------- ------------ -----------
Other income (expense):
Interest income 73 445 11,778 1,688
Interest expense (349,149) (240,096) (1,027,228) (380,491)
Loss on abandonment of
fixed assets (2,312,266) - (2,312,266) -
Other, net (4,655) 1,038 (68,252) 24,353
------------ -------------- ------------ -----------
(2,665,997) (238,613) (3,395,968) (354,450)
------------ -------------- ------------ -----------
Loss before provision
for income taxes: (5,819,831) (2,236,998) (15,762,884) (4,146,598)
Income taxes 350 - (10,255) -
------------ -------------- ------------ -----------
Net loss $(5,819,481) (2,236,998) $(15,773,139) (4,146,598)
------------ -------------- ------------- -----------
Loss per share -
basic and diluted $ (0.16) (0.07) $ (0.44) (0.13)
------------ -------------- ------------ -----------
Weighted average shares -
basic and diluted 36,671,000 32,766,000 35,863,000 32,766,000
------------ -------------- ------------ -----------
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
4
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2002 2001
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Cash flows from operating activities:
Net loss $ (15,773,139) $ (4,146,598)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,866,216 1,154,761
Bad debt expense 1,260,767 177,444
Stock issued for services 420,000 -
Interest and fees added to
line of credit 993,072 -
Loss on sale/Abandonment of
fixed assets 2,312,266 5,805
(Increase) decrease in:
Restricted cash (154,307) (375)
Accounts receivable (22,204) (672,359)
Prepaid expenses 460,651 (338,485)
Other assets (122,662) 19,242
Increase (decrease) in:
Accounts payable 8,257,170 1,272,371
Accrued compensation and other (49,532) 554,481
Excise taxes payable 1,893,172 -
Accrued expenses 206,810 -
Deferred income 139,688 (75,915)
Net cash provided by (used in) ------------------------------------------
operating activities 2,687,968 (2,049,628)
------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (130,936) (104,608)
Acquisition of customer base - (26,000)
Purchase of Equalnet assets - (500,000)
Purchase of Omniplex assets - (173,704)
Purchase of switching equipment - (750,000)
Proceeds from sale of equipment - 1,851
------------------------------------------
Net cash used in investing activities (130,936) (1,552,461)
------------------------------------------
Cash flows from financing activities:
Payments on debt (212,440) (10,000)
Net increase (decrease) in line of
credit (2,129,954) 326,596
Proceeds from issuance of stock - 2,343,176
------------------------------------------
Net cash (used in) provided by
financing activities (2,342,394) 2,659,772
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Net increase (decrease) in cash 214,638 (942,317)
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 $ 957,399 $ 171,442
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- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
6
CCC GLOBALCOM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
CONTINUED
(UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2002 2001
-----------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 61,674 $ 380,491
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Income taxes $ 0.00 $ 0.00
------------------------------------------
During the nine months ended September 30, 2002, the Company:
o Satisfied payables with the issuance of common stock for $442,496.
o Issued common stock to employees for compensation totaling
$371,200.
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.
o Satisfied a carrier payable with the transfer of customer base for
$100,000.
During the nine months ended September 30, 2001, the Company:
o Purchased the assets of EqualNet Communications Corporation for
$500,000 cash and assumption of $7,661,511 of debt.
o Purchased the assets of Omniplex Communications Corporation for
$173,704 cash and assumption of $8,125,000 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 nine months of
2002 were $343,582 and its net income was $16,379. It has a working capital
deficit of $12,509 as of September 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 Item 310 of Regulation S-B. 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 September 30, 2002 and the results of
operations and changes in financial position for the three months and nine month
periods ended September 30, 2002 and 2001. Operating results for the three
months and nine months ended September 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
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
8
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 915,000 shares of common stock at a
range of $3.50 to $5.00 per share were outstanding at September 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 September
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.
4. PROPERTY AND EQUIPTMENT
Property and equipment consists of the following:
9
Switch equipment $ 1,279,011
Computer hardware and software 2,529,209
Office equipment and other 186,118
Furniture and fixtures 431,811
Leasehold improvements 49,831
-----------------
4,475,980
Less accumulated depreciation and amortization (1,684,515)
-----------------
$ 2,791,465
-----------------
Depreciation and amortization expense of fixed assets totaled
$1,669,216 and $285,468 for the nine month periods ending September 30, 2002 and
2001, respectively.
5. INTANGIBLES
Intangibles consists of the following as of September 30, 2002:
Customer base 3,089,374
Less accumulated amortization (1,649,000)
-----------------
Intangibles, net $ 1,440,374
-----------------
Amortization expense of intangible assets totaled $1,197,000 and
$869,293 for the nine month periods ending September 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 September 30, 2002 the principal amount exceeded the
availability formula by $2,922,561. The EqualNet Loan and Revolving Facility
bears interest at prime plus 1.75% per annum (6.5% as of 09/30/02). The
principal is due April 2, 2005. The Company is paying interest on a monthly
basis. Beginning April 3, 2002, the Company began making twelve monthly
installments of the deferred 1.75% interest. At September 30, 2002 the loan was
in default on a number of covenants and the balance due was $8,516,329 (see
discussion below).
The Omniplex Loan and Revolving Facility bears interest at prime plus
2% per annum (6.75% as of 09/30/02). The principal is due August 31, 2005.
Interest was deferred through February 28, 2002 and was repaid in six monthly
installments that began March 1, 2002 with current interest charges paid
monthly. At September 30, 2002 the loan was in default on a number of covenants
and the balance due was $8,081,975 (see discussion below). Under the Loan and
Security Agreement the principal amount of the Omniplex Loan is not to exceed
10
the lesser of (A) $10,000,000 as reduced pursuant to the terms of the Warrant
Agreement ($9,500,000 as of September 30, 2002) and (B) the Omniplex Borrowing
Formula. As of September 30, 2002 the principal amount exceeded the availability
formula by $4,951,076.
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 agreed to restructure the two revolving agreements. At
the time of this filing, the Company has not received the loan documents. The
restructuring should move a majority of the agreement to long-term debt and
potentially resolve some of the violations of the loan covenants. At September
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 $7.9 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, with the exception
of its interest payment, transferred to the Company all cash receipts processed
through their lockboxes. 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.
As of September 30, 2002, 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 $387,573 and deposits to secure letters of credit
issued for the benefit of vendors in the amount of $177,065.
7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
September 30, 2002
------------------
Accrued billing fees $ 185,184
Customer deposits and accrued discounts 133,537
Accrued professional fees 129,159
Accrued interest expense 302,983
Accrued commissions 215,030
Reserve for carrier disputes 295,087
------------------
$ 1,260,980
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8. LONG-TERM DEBT
Our long-term debt consists of the following as of September 30, 2002:
11
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 31, 2005. 727,360
Capitalized lease obligations 456,487
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 1,852,281
Less current portion (1,166,549)
----------------
Long-term Debt $ 685,732
----------------
Future maturities of long-term debt are as follows:
Years Ending September 30:
2003 $ 1,166,549
2004 344,386
2005 250,426
2006 90,920
2007 -
-----------------
$ 1,852,281
-----------------
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 and Qwest, which provide for a minimum commitment
of $150,000 and $50,000 per month respectively for 12 months, 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. In
September 2002, MCI disconnected service to Ciera. The Company had become
delinquent on its payments and was unable to make satisfactory payment
arrangements with the carrier. MCI represented approximately 24% of our long
distance service. Where possible, we were able to move the existing business to
other carriers.
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
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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 12 months with a monthly minimum of
$2,000.
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. The Company approved the issuance
of an additional 400,000 shares of common stock for additional consulting work
performed in 2002. The Company recorded consulting expense of $48,000 in the
third quarter 2002, related to these consulting services and all obligations
with the party have been fulfilled.
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.
Consulting Agreement
On September 1, 2002, the Company entered into a consulting agreement
with the former Chief Executive Officer and current Chairman of the Board of CCC
GlobalCom. The agreement called for consulting to be provided to the Company in
exchange for cash compensation, expense reimbursement and office facilities. The
Company recorded operating expenses of $16,000 in the third quarter 2002,
related to this agreement. The Company also provides office facilities for
another member of the Board of Directors.
13
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 September 30, 2002 and the results of operations for the three
months and nine months ended September 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.
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
14
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 agreed to restructure the two revolving agreements. At
the time of this filing, the Company has not received the loan documents. The
restructuring should move a majority of the agreement to long-term debt and
potentially resolve some of the violations of the loan covenants. At September
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 $7.9 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, with the exception
of its interest payment, 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.
As of September 30, 2002, restricted cash represents deposits in lock
boxes setup for the benefit of RFC Capital that have not been swept at month-end
in the amount of $387,573 and deposits to secure letters of credit issued for
the benefit of vendors in the amount of $177,065.
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. As a result of changing economic conditions that have forced changes
to the proposed business plan, the company has decided not to pursue this
strategy.
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 September 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, a former officer of
the Company, and former Emerald Capital Investments, Inc. shareholder that were
not under the Plan.
15
On August 7, 2002, the Company signed a Letter of Intent to acquire
Choctaw Communications Corporation, Inc., DBA Smoke Signal Communications. On
September 3, 2002, the Company and Choctaw Communications agreed to mutually
cancel the Letter of Intent.
On August 22, 2002, the Company announced the Board of Directors had
been expanded from three to ten members. The Company also announced the
appointment of Paul E. Licata as Chief Executive Officer.
In September 2002, the Company engaged a telecommunications consulting
company, to help identify and correct billing processes. The engagement is
focused on measuring and improving the accuracy and timeliness of customer
billing and provisioning. We anticipate an increase in billing as a result of
this initiative.
During the nine months ended September 30, 2002, the Company issued
800,000 shares of common stock to employees for a cost of $371,200.
In the quarter ended June 30, 2002, the Company purchased two long
distance switches located in Miami, FL and plans to have operational during the
first quarter 2003. In the Company's international operations, GlobelTel has
grown the number of retail call centers to approximately 422. In November 2002,
the Company added a number of specialty carriers for terminating services, which
are expected to lower our cost.
During the first nine months of 2002, CCC GlobalCom issued 2,287,768
shares of common stock to certain Directors, Officers and vendors. The issuance
of these shares has been accounted for in the consolidated financial statements.
The Company has had operating losses for every quarter since it began
operations in June 2000. The auditor's opinion on the consolidated 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 our belief that certain amounts included in
these past due balances are in error and are being disputed. As of September
30,2002, we had disputed $1,012,000 with various carriers. The financial
statements do not reflect any adjustments to reduce liabilities for the impact
of the unresolved claims. 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 that we can successfully dispute
the balance identified as in error or negotiate favorable payment terms for the
remaining undisputed balances.
In September 2002, MCI disconnected service to Ciera. The Company had
become delinquent on its payments and was unable to make satisfactory payment
arrangements with the carrier. MCI represented approximately 24% of our long
distance service. Where possible, we were able to move the existing business to
other carriers.
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 September 30, 2002.
16
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 SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001
NET SALES. Revenues for the three months ended September 30, 2002 were
$6,836,281 compared to $3,087,026 for the three months ended September 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
$3,749,255 in revenues for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001 is mainly due to the acquisitions of
Omniplex and Incomnet.
COST OF SERVICES. For the three months ended September 30, 2002, the
cost of services were $4,916,818 or 71.9% of sales compared to $2,007,495 or
65.0% of sales for the three months ended September 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 $1,919,463 for the three months ended
September 30, 2002 compared to $1,079,531 for the three months ended September
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 $4,179,905 or 61.1% of revenues for the
three months ended September 30, 2002 compared to $2,444,111 or 79.2% of
revenues for the three months ended September 30, 2001. The increase in SG&A
expenses is due mainly to increased staffing, rent and professional fees.
Although the total dollar amount of SG&A expenses are anticipated to increase as
volume grows, management is aggressively looking at ways to reduce the cost as a
percent of revenue for services provided to its customers.
During the quarter ended September 30, 2002, the Company completed the
closure of the Irvine, CA facility, acquired in the Incomnet asset purchase. The
closure resulted in the layoff of accounting, customer service and other support
staff. The Company incurred a one-time non cash write off of $2,312,266 for the
abandonment of leasehold improvements and incurred $183,855 for certain
personnel and lease related expenses. The Company reached an agreement with the
landlord of the facility. For a $35,000 payment and forfeiture of a $48,000
security deposit, the Company was granted an early termination of the lease and
released of any further liability under the lease agreement. It is estimated
that the closing of the Irvine facility will save the company $2.4 million
annually. The company still has certain assets in the Irvine facility. They
include furniture and fixtures on the books for approximately $25,000 and a
capital lease of an office phone system of approximately $76,000. We have an
agreement with the landlord that allows us to keep the furniture, fixtures and
telephone equipment in place in order to market the lease space and those
assets.
17
During the second quarter of 2002, the Company restructured the
operations of the St. Louis, MO office. The Company vacated space that is under
a sublease. We have forfeited a $45,000 security deposit and we are negotiating
a termination to the sublease. All current liabilities related to the lease are
reflected in the financial statements.
LOSS FROM OPERATIONS. For the three months ended September 30, 2002,
there was a loss from operations of $3,153,834 compared to a loss of $1,998,385
for the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 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 nine months ended
September 30, 2002 were $21,207,222 compared to $6,316,100 for the nine months
ended September 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 refers to the direct costs of
telephone services. Cost of service for 2001 and 2002 includes primarily direct
carrier related costs. For the nine months ended September 30, 2002, cost of
services were $16,054,755 or 75.7% of sales compared to $3,861,525 or 61.1% of
sales for the first nine months ended September 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. SG&A expenses for the nine months ended September 30, 2002 were
$14,653,167 or 69.1% of sales compared to $5,091,962 or 80.6% of sales for the
nine months ended September 30, 2001. 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&A in 2002 includes approximately: (a)
$7,305,000 in payroll and benefit related expense; (b) $756,000 in supplies; (c)
$1,131,000 in facilities expense; (d) $395,000 in taxes and insurance; and (e)
$3,806,000 in administrative and professional expense. Included in these
expenses is $184,000 for personnel and facilities cost due to the closing of the
Irvine facility.
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 $3,396,000
consisted primarily of interest of which approximately $993,000 was attributable
to the RFC loan agreement, and the abandonment of the California office
leasehold improvements in the amount of $2,312,000.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2002, cash flow from
operations was approximately $2,688,000, primarily due to the substantial
increases in trade accounts payable and excise taxes payable.
18
During the nine months ended September 30, 2002, the Company acquired
approximately $131,000 in equipment, which was not financed through the issuance
of equity or capital lease arrangement. Additional cash outflows included
payments of approximately $213,000 towards our capital lease obligations and
payments on our line of credit of approximately $2,130,000.
Altogether, our net operating, investing and financing activities
during the nine months ended September 30, 2002 increased cash approximately
$215,000. Our working capital deficit at September 30, 2002 was approximately
$31,327,000. This represents an increase in deficit of approximately $9,759,000
from the working capital deficit of $21,568,000 at December 31, 2001.
The current liabilities include a total of approximately $8,751,000
owed to various carriers, most of which is significantly past credit terms. In
addition, the current liabilities include approximately $5,721,000 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 consistent positive cash flows from operations, and
reduce or eliminate 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 nine 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.
We expect our network development will require funds to build 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 as well as 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
September 30, 2002 obligations lease contractual long-term
obligation obligations obligations
2002 $ 130 $ 113 $ 694 $ 937
2003 414 158 836 1,408
2004 380 158 179 717
2005 36 27 99 162
2006 36 - 83 119
Thereafter 24 - 7 31
----------- ----------- ----------- -----------
Total future minimum long
Term obligations $ 1,020 $ 456 $ 1,898 $ 3,374
=========== =========== =========== ===========
19
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
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
20
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;
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.
21
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. 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 Losses, And We May Not Be Able To Be
Profitable In The Future. 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
nine months ended September 30, 2002, CCC GlobalCom had a net loss of
$15,773,139. 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.
We Have Limited Assets And Additional Capital Will Be Required. As of
September 30, 2002, we had, on a consolidated basis, total assets of
approximately $10,975,400. 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.
The Telecommunications Market Is Highly Competitive, And We May Not Be
Able To Effectively Compete. The telecommunications industry is highly
22
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
telecommunications industry could give rise to significant
new competitors, which could cause us to lose customers and impede
our ability to attract new customers.
We May Face Resistance By Potential Customers To Enter Into Service
Arrangements With Us May Reduce Our Ability To Increase Our Revenue. 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.
23
The Need For Adequate Back Office Operations Is Critical To Our
Success. 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 Possible Inability To Manage 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
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.
24
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 To Provide Telecommunications Products And
The Installation And Field Services That Are Critical To Our Business Success.
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 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 Could Reduce Our
Revenue And Profitability. 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.
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Successful Integration Critical To Reduce Costs And Increase Revenue.
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
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 consolidated 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
26
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
America 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
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
27
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.
ITEM 3
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were effective.
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore no corrective actions were taken.
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 of any monetary significance.
28
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 agreed to restructure the two revolving agreements. At the time of this
filing, the Company has not received the loan documents. The restructuring
should move a majority of the agreement to long-term debt and potentially
resolve some of the violations of the loan covenants. At September 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 $7.9 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, with
the exception of its interest payment, 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. None.
Item 5. Other Information. None.
Item 6(a). Exhibits.
Exhibit 99.1 Certification of Chief Executive officer
Exhibit 99.2 Certification of Chief Financial Officer
Item 6(b). Reports on Form 8-K.
On August 28, 2002, the Company filed an 8-K announcing the addition of
seven members to the Board of Directors and also announced the appointment of
Paul E. Licata as Chief Executive Officer.
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 November 14, 2002 By /s/ Paul E. Licata
-----------------------------
Paul E. Licata
Chief Executive Officer
/Principal Executive Officer
Date November 14, 2002 By /s/ Clifford J. Bottoms
----------------------------
Clifford J. Bottoms
Chief Financial Officer
/Principal Financial Officer
30
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul E. Licata, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of CCC
GlobalCom Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
o evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (September 30, 2002); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
o all significant deficiencies in the design or operation of
internal controls which would adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
o any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ Paul E. Licata
- -----------------------
Paul E. Licata
Chief Executive Officer
November 14, 2002
31
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Clifford J. Bottoms, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of CCC
GlobalCom Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (September 30, 2002); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
o all significant deficiencies in the design or operation of
internal controls which would adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
o any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ Clifford J. Bottoms
- ---------------------------
Clifford J. Bottoms
Chief Financial Officer
November 14, 2002
32