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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, 2003
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
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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 August 15, 2003, 32,213,918 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, 2003
The following financial statements and schedules of the registrant
are submitted herewith:
PART I - FINANCIAL INFORMATION
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Page of
Form 10-QSB
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Item 1. Financial Statements:
Consolidated Balance Sheet - June 30, 2003 and December 31, 2002 3
Consolidated Statement of Operations - for the three
and six months ended June 30, 2003 and June 30, 2002 4
Consolidated Statement of Cash Flows - for the
six months ended June 30, 2003 and June 30, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Controls and Procedures 25
PART II - OTHER INFORMATION
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Page
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Item 1. Legal Proceedings 26
Item 2. Changes in the Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to Vote of Security Holders 26
Item 5. Other Information 27
Item 6(a). Exhibits 27
Item 6(b). Reports on Form 8-K 27
Signatures 27
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
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June 30, December 31,
Assets 2003 2002
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Current assets:
Cash and cash equivalents $ 185,471 $ 212,730
Restricted cash 335,971 389,138
Accounts receivable, net of allowance for doubtful
accounts of $1,897,253 and $1,639,821 respectively 2,086,728 3,008,240
Inventory 109,368 -
Prepaid expense and other current assets 317,657 134,525
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Total current assets 3,035,195 3,744,633
Property and equipment, net 1,556,801 2,293,825
Intangibles, net 694,857 1,042,624
Other assets 204,089 214,089
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Total assets $ 5,490,942 $ 7,295,171
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Liabilities and Stockholders' Deficit
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Current liabilities:
Note payable $ 2,811,212 $ 2,762,609
Accounts payable 16,170,586 14,430,550
Accrued expenses 2,085,666 2,127,858
Excise taxes payable 3,342,507 2,457,696
Accrued compensation and other 275,451 395,684
Current portion of long-term debt, net of discount
of $712,250 and $777,000 respectively 14,461,857 14,684,318
Deferred revenue 258,323 183,843
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Total current liabilities 39,405,602 37,042,558
Long-term debt 549,446 549,446
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Total liabilities 39,955,048 37,592,004
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Commitments and contingencies - -
Stockholders' deficit:
Common stock, $.001 par value, authorized 100,000,000 shares;
issued and outstanding 32,213,918 and 37,213,918 respecitvely 32,214 37,214
Additional paid-in capital 10,740,325 10,684,656
Accumulated deficit (45,236,645) (41,018,703)
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Total stockholders' deficit (34,464,106) (30,296,833)
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$ 5,490,942 $ 7,295,171
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See accompanying notes to consolidated financial statements. 3
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
Three and Six Months Ended June 30, 2003 and 2002
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Three Months Ended Six Months Ended
June 30, June 30,
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2003 2002 2003 2002
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Net sales $ 4,039,109 $ 7,309,824 $ 9,262,130 $ 14,370,941
Expenses:
Cost of services (2,854,754) (5,246,683) (6,690,467) (11,137,936)
Selling, general and
administrative expenses (2,155,994) (5,276,909) (4,726,172) (10,473,263)
Depreciation and
amortization expense (709,928) (957,013) (1,493,914) (1,972,824)
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Loss from operations (1,681,567) (4,170,781) (3,648,423) (9,213,082)
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Other income (expense):
Interest income 43 7,154 85 11,705
Interest expense (424,356) (333,594) (701,987) (678,079)
Other, net - (45,367) 183,052 (63,597)
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(424,313) (371,807) (518,850) (729,971)
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Loss before income taxes (2,105,880) (4,542,588) (4,167,273) (9,943,053)
Income taxes - - - (10,605)
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Net loss (2,105,880) (4,542,588) (4,167,273) (9,953,658)
Preferential dividend - - (50,669) -
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Net loss applicable to
common shareholders $ (2,105,880) $ (4,542,588) $ (4,217,942) $ (9,953,658)
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Net loss per share - basic and diluted $ (0.07) $ (0.13) $ (0.13) $ (0.28)
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Weighted average shares -
basic and diluted 32,214,000 35,852,000 32,992,000 35,452,000
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See accompanying notes to consolidated financial statements. 4
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Six Months Ended June 30,
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2003 2002
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Cash flows from operating activities:
Net loss $ (4,167,273) $ (9,953,658)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,493,914 1,972,824
Bad debt expense 173,854 805,167
Stock issued for services - 300,000
Interest and fees added to line of credit - 600,826
Amortization of warrant costs 103,600 -
Gain from disposal of subsidiary (183,052) -
(Increase) decrease in:
Restricted cash 53,167 (90,040)
Accounts receivable 747,658 109,900
Prepaid expenses (170,080) 340,969
Inventory (94,903) -
Other assets 10,000 (159,576)
Increase (decrease) in:
Accounts payable 1,740,036 6,586,110
Accrued compensation and other (120,233) (60,252)
Excise taxes payable 884,811 1,372,221
Accrued expenses (42,192) 21,511
Deferred revenue 74,480 170,762
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Net cash provided by operating activities 503,787 2,016,764
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Cash flows from investing activities:
Proceeds from sale of subsidiary 170,000 -
Purchase of property and equipment (23,588) (122,112)
Net cash paid in acquisition (140,000) -
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Net cash provided by (used in) investing activities 6,412 (122,112)
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Cash flows from financing activities:
Payments on long-term debt (326,061) (144,352)
Net decrease on line of credit (211,397) (1,674,810)
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Net cash used in financing activities (537,458) (1,819,162)
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Net change in cash (27,259) 75,490
Cash and cash equivalents at beginning of period 212,730 742,761
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Cash and cash equivalents at end of period $ 185,471 $ 818,251
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 245,096 $ 43,300
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Income taxes $ - $ -
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See accompanying notes to consolidated financial statements. 5
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2003 and 2002
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1. Organization CCC GlobalCom Corporation, a Nevada corporation ("CCC
GlobalCom" or the "Company"), conducts operations in the
telecommunications industry through its wholly-owned
subsidiary, Ciera Network Systems, Inc. ("Ciera"). The
Company provides local and long-distance communications
services in the United States.
2. Principles of The consolidated financial statements include the
Consolidation accounts of the Company and its wholly owned
subsidiaries, Ciera Network Systems, Inc, and Equalnet,
Inc. All significnat intercompany balances and
transactions have been elimiated in consolidation.
3. Basis of The accompanying unaudited consolidated financial
Presentation 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,
2002. 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, 2003 and
the results of operations for the periods ended June 30,
2003 and 2002. Operating results for the three and six
months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the
year ending December 31, 2003.
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6
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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4. Stock-Based The Company accounts for stock-based compensation under
Compensation the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has
adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". In accordance with the provisions of SFAS
123, the Company has elected to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB Opinion No. 25"),
and related interpretations in accounting for its stock
option plans. In accordance with APB Opinion No. 25, no
compensation cost has been recognized for these plans.
Had compensation cost for these plans been determined
based upon the fair value at the grant date consistent
with the methodology prescribed under SFAS No. 123, the
Company's net earnings would have been changed by the
following:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
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Net loss, as reported $ (2,106,000) $ (4,543,000) $(4,218,000) $ (9,954,000)
Add: Stock-based
employee compensation
expense included in
reported net income, net
of related tax effects - - - -
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects (286,000) (286,000) (286,000) (286,000)
----------------------------- -----------------------------
Pro forma net loss $ (2,392,000) $ (4,829,000) $ (4,504,000) $ (10,240,000)
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Earnings per share-
Basis - as reported $ (0.07) $ (0.13) $ (0.13) $ (0.28)
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Basis - pro forma $ (0.08) $ (0.14) $ (0.14) $ (0.29)
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7
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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5. Loss per The computation of basic earnings (loss) per common
Common share is based on the weighted average number of shares
Share outstanding during each quarter. The computation of
diluted earnings per common share is based on the
weighted average number of shares outstanding during the
year, 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 year. Options
to purchase 822,000 and 915,000 shares of common stock
at a range of $1.00 to $3.75 per share were outstanding
at June 30, 2003 and 2002 respectively, but were not
included in the diluted loss per share calculation
because the effects would have been anti-dilutive.
6. Commitments The Company is in default on substantially all of its
and notes payable which are secured by substantially all of
Contingencies the assets of the Company.
In March 2003, the Company entered into a carrier
agreement with a local service reseller. If the Company
is unable to pay for the services as they are due, the
carrier has the right to take over the customer base.
Subsequent to the end of the quarter, this customer base
was repossessed by Textron Financial due to defaults by
the Company on its debt with Textron Financial.
7. Return of During the six months ended June 30, 2003, a major
Shares and shareholder of the Company returned 5,000,000 shares of
Preferential the Company's common stock to the Company.
Dividend
The major shareholder also agreed to give up to
3,000,000 shares of the Company's common stock to
another significant shareholder as reimbursement for
shares given to certain other shareholders who had
purchased shares of the Company's common stock in
previous periods. As of June 30, 2003, approximately
2,413,000 shares had been distributed. The transaction
was treated as a preferential dividend.
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8
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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8. Supplemental During the six months ended June 30, 2003, the Company:
Disclosure of
Cash Flow o Had 5,000,000 shares of the Company's common stock
Information returned by a major Information shareholder causing
an increase in additional paid-in-capital and a
decrease in common stock of $5,000.
o Recorded a preferential dividend of $50,669 caused
by a major shareholder giving shares of stock to
other shareholders. The shares were valued at the
fair market price on the date of the agreement.
o The Company sold it's interest in GlobalTel in
exchange for cash of $170,000 and a note receivable
of $20,000 included on the Company's balance sheet
under the caption other assets.
o Acquired certain assets of Tele-Direct as follows:
Customer base $ 374,835
Furniture and equipment 10,700
Inventory 14,465
Advance from line of credit (260,000)
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Net cash paid in acquisition $ 140,000
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 Issued common stock in exchange for equipment
totaling $162,500.
o Purchased software financed with a $441,119 capital
lease.
o Textron Financial Corp. exercised a warrant and
received 125,000 shares of Company stock for a
$500,000 reduction in the line of credit.
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9
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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9. Revenue Revenues are derived primarily from sales of local and
Recognition long-distance telephone services to residential and
commercial customers, prepaid calling cards, and prepaid
cellular cards. Revenues for sales of local and
long-distance telephone services to residential and
commercial customers and prepaid calling cards are
recognized as services are provided to customers that
have entered into binding agreements with a price that
is fixed and determinable and when collection is
reasonably assured. Deferred revenues arise primarily
from pre-billing for local telephone services. These
amounts are recognized over the period for which the
services are provided.
Revenues for prepaid cellular cards are recognized at
the time of the sale of the card since the Company is
acting as a pass-through agent for the cellular carrier
and has no further obligation after the sale is made. At
the time of the sale of the prepaid cellular card, the
Company has provided its service, a binding agreement
has been enterded into, a price is fixed and
determinable and collection is reasonable assured
10. Going The accompanying consolidated financial statements have
Concern been prepared assuming the Company will continue as a
going concern. However, the Company has incurred
significant recurring net losses, has a working capital
deficit, and has a stockholders' deficit. These
conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management is
working to raise capital through a private placement to
fund operations until the Company can achieve positive
cash flows from operations.
There can be no assurance that management's plans will
be successful. The accompanying consolidated financial
statements do not include any adjustments relating to
the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities
that might result should the Company be unable to
continue as a going concern.
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10
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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11. Subsequent On July 3, 2003, the Company entered into an agreement
Events with Mr. Hakim, the former chairman of the board and CEO
of the Company, to return 6,939,428 shares of common
stock to the Company. In the agreement, the two parties
also agreed to terminate Mr. Hakim's employment
agreement and for Mr. Hakim to resign as an officer and
director of the Company.
On August 15, 2003, in connection with the voluntary
surrender of collateral securing Ciera Network Systems,
Inc. and CCC GlobalCom Corporation's obligations under
the Loan Agreement and Textron Financial Corporation's
proposed foreclosure upon such collateral by a public
disposition of collateral under the Uniform Commercial
Code, the Company (Ciera and CCC GlobalCom) and Textron
Financial Corporation agreed to adjust all claims,
disputes and causes for action which had arisen or could
have arisen as to the Loan Documents and events prior to
the execution of this Mutual Limited Release. The
Company is still liable for $260,000 payable to Textron
Financial Corporation related to the acquisition of
certain assets of Tele-Direct Inc.
12. Recent In April 2003, the FASB issued SFAS No. 149, "Amendment
Accounting of Statement 133 on Derivative Instruments and Hedging
Pronounce- Activities." SFAS 149 provides for certain changes in
ments the accounting treatment of derivative contracts. SFAS
No. 149 is effective for contracts entered into or
modified after June 30, 2003, except for certain
provisions that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to
be applied in accordance with their respective effective
dates. The guidance should be applied prospectively.
Management anticipates that the adoption of SFAS No. 149
will not have a material impact on the Company's
consolidated financial statements.
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11
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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12. Recent In May 2003, the FASB issued SFAS No. 150, Accounting
Accounting for Certain Financial Instruments with Characteristics
Pronounce- of both Liabilities and Equity. This new statement
ments changes the accounting for certain financial instruments
Continued that, under previous guidance, issuers could account for
as equity. It requires that those Continued instruments
be classified as liabilities in balance sheets. Most of
the guidance in SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the
Company's third quarter of fiscal 2003. Management
anticipates that the adoption of SFAS No. 150 will not
have a material impact on the Company's consolidated
financial statements.
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12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
CCC GlobalCom Corporation has been an Integrated Communications
Provider (ICP) that has provided a range of communication services to both U.S.
and international residential and business customers. We have primarily been a
switch-based company, which means we use a strategic deployment of network
switches to provide communication services to our long-distance customers. We
also purchase local telephone communication services from Incumbent Local
Exchange Carriers (ILECs) on a wholesale basis. In most cases, these other
providers are transparent to our customers. The use of our own switches reduces
our overall service costs. Our core business has been communication services,
which includes long-distance voice and data, local service, and calling cards.
The telecommunications industry has experienced a great deal of
instability during the past several years. During the 1990s, forecasts of very
high levels of future demand brought a significant number of new entrants and
new capital investments into the industry. However, those forecasts have not
materialized, many industry participants have gone through bankruptcy,
telecommunications capacity now far exceeds actual demand and, as a result, the
marketplace is characterized by fierce price competition as traditional and next
generation carriers and Integrated Communications Providers compete to secure
market share. Resulting lower prices have eroded margins and have kept many
industry participants, including the Company, from attaining ongoing positive
cash flow from operations. Many industry participants and their customers have
gone and are undergoing reorganizations through bankruptcy, contemplating
bankruptcy, or experiencing significant operating losses while consuming much of
their remaining liquidity. We do not know if and when the current state of
aggressive pricing will end.
We have had operating losses for every quarter since we began
operations in June 2000. The auditors' opinion on our consolidated financial
statements as of December 31, 2002, calls attention to substantial doubts about
our ability to continue as a going concern. This means that they question
whether we can continue in business. We have experienced difficulty in paying
our vendors, lenders, and taxing authorities on time in the past, and may
experience difficulty in the future. If we are unable to pay our vendors,
lenders, taxes, and taxing authorities on time, they may stop providing critical
services or repossess critical equipment that we need to stay in business.
Textron Loan Matters
We have conducted operations primarily through our subsidiaries. Most
of our operations have been conducted through our subsidiary, Ciera Network
Systems, Inc. ("Ciera"). On December 31, 2002, we signed an Amended and Restated
Loan Agreement ("Loan Agreement") with Textron Financial Corporation
("Textron"), as successor to RFC Financial Corporation, that provided for a
revolving line of credit.
Under the Loan Agreement, Textron has a security interest in and lien
on Ciera Network Systems, Inc. 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 Agreement the principal amount of the revolving line of
credit was not to exceed the lesser of (a) $6,000,000 and (b) the Availability
Formula. We borrowed in excess of the full amount available under the
Availability Formula. In addition, we were able to refinance $14,000,000 of the
line of credit to term notes. The notes have a number of loan covenants, one of
which requires the Company to pay all required federal and state taxes in a
timely manner. We are delinquent in the payment of federal and state excise
taxes.
At June 30, 2003, Ciera owed $16,098,962, to Textron Financial
Corporation pursuant to an Amended and Restated Loan Agreement (the "Loan
Agreement").
13
On July 2, 2003, we received a notice of an Event to Default under the
Loan Agreement from Textron. Textron demanded that Ciera immediately pay or
cause to be paid to Textron the sum of $1,214,222, which was the amount of the
outstanding over advance per the Loan Agreement as of July 2, 2003. Neither
Ciera nor CCC GlobalCom has the financial ability to pay or cause to be paid to
Textron the amount demanded.
On August 5, 2003, Textron Financial Corporation sent notice in
accordance with provisions of Section 9-610 et seq. of the Uniform Commercial
Code as in effect in the State of Texas to certain vendors and taxing
authorities of its intent to conduct a public foreclosure sale of its Collateral
under the Loan Agreement on August 18, 2003. Upon completion of this foreclosure
sale, Ciera would have no operating assets. Ciera has vendor liabilities, tax
liabilities and other liabilities of approximately $22,800,000 at June 30, 2003,
exclusive of the $16,098,962 amount owed to Textron. Ciera does not have
existing liquidity sufficient to satisfy all amounts owed. The Company is
considering its options, including seeking protection under the U.S. Bankruptcy
Code.
In lieu of going through the foreclosure proceeding, we voluntarily
surrendered all of the collateral securing Ciera's and CCC GlobalCom's
obligations under the Loan Agreement. In consideration for our voluntarily
agreeing to surrender the assets of Ciera to Textron in lieu of the foreclosure,
Textron agreed to adjust all claims, disputes and causes for action that had
arisen or could have arisen as to the Loan Documents and events prior to the
execution of this Mutual Limited Release. According, subsequent to June 30,
2003, our assets were reduced by the amount of approximately $4,026,000,
representing the transfer of all of Ciera's assets to Textron in lieu of a
foreclosure, and our liabilities were reduced by approximately $15,800,000
representing the amount we owed Textron under the Loan Agreement.
We are still liable for $260,000 payable to Textron related to the
acquisition of certain assets of Tele-Direct Inc., which is further described
below.
Restructuring
Since December 31, 2002, we have taken significant restructuring steps
to reduce our expenses, eliminate debt and restructure our size applicable to
our remaining business. Since December 31, 2002, the Company and its Ciera
subsidiary have reduced the number of employees by 92% to seven employees. We
have closed the Chairman's office at 16350 Park Ten Place, Houston, Texas and
are in negotiation with our landlord to significantly reduce our office space
and rent at 1250 Wood Branch Park Drive, Houston, Texas. However, these
restructuring steps do not ensure that we will continue as a going concern.
Current Business Plan
We have determined that our best chance of success as a
telecommunications company at the current time is to engage in the business of
selling debit cards and prepaid cellular cards. On May 30, 2003, our, EqualNet,
Inc. subsidiary acquired certain assets of Tele-Direct, Inc. (Tele-Direct) an
affiliate of Telefyne, Inc. The assets purchased included various fixed assets,
inventory, contracts, and other tangible and intangible assets related to
Tele-Direct's business of reselling common carrier telecommunications, including
both domestic and international services and cellular services. The purchase
price of $400,000 was paid with available cash of $140,000 and proceeds from
Textron Financial Corporation of $260,000. The Company will also pay to Telefyne
a percentage of a certain customer's collected revenues for a specific period of
time. We currently estimates this contingent liability at approximately
$200,000. As a result of the Tele-Direct acquisition, we have entered the debit
card and prepaid cellular card business with a distribution channel of over
2,500 convenience stores throughout the U.S. We will provide a sales channel for
the debit and prepaid cellular cards. We will purchase telecommunications
services from Telefyne, Inc. including i) network services, ii) switching
services, iii) use of software required to make, track, and manage calls, iv)
Point of Sale (POS) equipment and software, and v) provision of technical and
management personnel to ensure that calls are carried and terminated with
quality of no less than industry standards. We gained eighteen sales and
administrative personnel with the purchase of Telefyne assets.
Inasmuch as we have essentially terminated Ciera's operations pursuant
to the transfer of Ciera's assets to Textron, we currently intend to focus our
efforts on the business which we have entered as the result of our purchase of
certain assets of Tele-Direct.
14
We are in an extremely difficult financial position. We are in a
turn-around and workout mode at this time. We intend to continue to reduce
operating expenses while attempting to generate revenues from the debit card and
prepaid cellular card business. We intend to attempt to get to a breakeven cash
flow position through the significant overhead cost reductions and the cash flow
being generated from the new prepaid calling and prepaid cellular card business.
We will attempt to raise additional capital through equity or debt placements to
expand its businesses in the future. There can be no assurance that additional
financing would be available to us or, if available, that it could be obtained
on acceptable terms.
Management Changes
During the quarter ended June 30, 2003, Doug Morris and Garry Bolinder
were elected to serve as Directors of the Company to fill vacant Directors'
positions. In addition, during the quarter ended June 30, 2003, Z. A. Hakim, Ray
Klentzman and Dr. Charles Wisdom resigned their positions as Directors of the
Company. Subsequent to the end of the quarter, Gilbert Gertner and James Rash
also resigned their positions as Directors of the Company. In addition, Z.A.
Hakim resigned as an officer of the Company. The Company and Mr. Hakim mutually
agreed to terminate Mr. Hakim's employment agreement dated February 16, 2001.
Other Matters
During the six months ended June 30, 2003, one of our major
shareholders returned to us for cancellation 5,000,000 of his shares of our
common stock. This shareholder also agreed to give up to an additional 3,000,000
of his shares of our common stock to another significant shareholder as
reimbursement of shares given to certain other shareholders who had purchased
shares of the Company's common stock in previous periods. As of June 30, 2003,
approximately 2,413,000 shares had been distributed. The transaction was treated
as a preferential dividend.
We 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 June 30, 2003, we
had disputed approximately $1,338,000 of charges with various carriers. The
consolidated financial statements do not reflect any adjustments to reduce
liabilities for the impact of the unresolved claims. However, there can be no
assurance that we can successfully dispute the balances identified as in error.
On March 10, 2003, SBC sent a letter notifying us that we had fifteen
calendar days to pay all past due balances owed to SBC. SBC stated in the letter
that they reserved the right to disconnect Ciera Network Systems, Inc.'s service
on all of its Missouri, Texas, Kansas, and Oklahoma UNE and resale accounts. The
Company contracted with a third party vendor to continue servicing customers in
Texas. Ciera Network Systems, Inc.'s service for customers in Missouri, Kansas,
and Oklahoma has been disconnected by SBC. The Company estimates monthly
revenues lost with this disconnection of services at $250,000.
On March 19, 2003, the Missouri Department of Revenue sent a Revocation
Order to Ciera Network Systems, Inc. The Order, which revokes Ciera's Missouri
retail sales license, was issued because of Ciera's delinquency in reporting and
paying Missouri retail sales tax. The operation of a business without a valid
Missouri retail sales tax license is a Class A misdemeanor and continued
operation will subject the Company to a penalty not to exceed $10,000. The
Company is evaluating choices of action to resolve outstanding issues with
Missouri taxing authorities.
During the six months ended June 30, 2003, the Company paid consulting
fees and expenses to a board member totaling $74,905.
Going Concern
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern. We have incurred losses since inception and
have a working capital deficit as of June 30, 2003. Additionally, we have had
recurring 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, we cannot assure you that we can raise the
money necessary to fund future operations.
15
Our History of Operating Losses and Deficiencies in Cash Flows
We have incurred operating losses and deficiencies in operating cash
flows in each year since our inception and expect our losses to continue through
December 31, 2003. Our operating losses were $15,831,916, $17,881,001 and
$1,816,901 for the years ended December 31, 2002, 2001 and 2000, respectively.
We had an operating loss of $3,648,423 for the six months ended 2003 and a
working capital deficit of $36,370,407 at June 30, 2003.
Results of Operations
Three Months Ended June 30, 2003 Compared To June 30, 2002
NET SALES. Revenues primarily consist of billings for long-distance
telephone services, local telephone services, private line circuits, prepaid and
postpaid calling cards, debit cards, and prepaid cellular cards. Revenues for
the three months ended June 30, 2003 and 2002, were $4,039,109 and $7,309,824,
respectively. Revenues declined for the three months ended June 30, 2003,
compared to the same period 2002, because of the disconnection of services by
certain carriers during the fourth quarter 2002 and first quarter 2003 and
because of a decline in customer base. Usage-based revenues are approximately
64% of total revenue and monthly recurring revenues are approximately 36% of
total revenue for the three months ended June 30, 2003. Revenues for the three
months ended June 30, 2003, included $477,088 from the Tele-Direct asset
acquisition.
COST OF SERVICES. Cost of services includes direct costs for telephone
services. Cost of services for telephone services include the cost of services
provided by other carriers, network costs, and miscellaneous costs incurred to
provide service. Cost of services for the three months ended June 30, 2003 were
$2,854,754 compared to $5,246,683 for the three months ended June 30, 2002. Cost
of services for the three months ended June 30, 2003, includes approximately
$2,763,700 of direct carrier costs. Cost of services declined for the three
months ended June 30, 2003, because of the reduction in associated revenues and
improved cost management that includes disputing incorrect carrier charges and
directing voice traffic to the least cost provider. Gross margin for the three
months ended June 30, 2003 and 2002 was approximately 29% and 28%, respectively.
Gross margin improved because of improved cost management, billing processes,
and margin derived from Tele-Direct asset acquisition.
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 salaries of the personnel to support our
operations. SG&A expenses for quarters ended June 30, 2003 and 2002, were
$2,155,994 and $5,276,909, respectively. The reduction in SG&A expense for the
three months ended June 30, 2003, compared to the three months ended June 30,
2002, was primarily because of the reduction in number of employees, the closing
of facilities in Missouri and California as previously reported and the
reduction of integration costs incurred during the first quarter 2002. SG&A for
the three months ended June 30, 2003, includes: approximately $1,136,000 of
payroll and employee benefit related expenses; approximately $164,000 in
facilities expense; and approximately $353,000 in professional fees and
expenses. SG&A for the three months ended June 30, 2002 includes: approximately
$2,785,000 of payroll related expenses; approximately $488,000 of facilities
expenses; and approximately $755,000 in professional fees.
DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization
expense for the quarters ended June 30, 2003 and 2002, were $709,928 and
$957,013, respectively. The decrease in depreciation expense is because of the
one-time noncash write off of approximately $2,312,000 for the abandonment of
leasehold improvements related to the closing of facilities in California
recorded during the third quarter 2002.
OTHER INCOME (EXPENSE). For the three months ended June 30, 2003 and
2002, other expense was $424,313 and $371,807, respectively. For the three
months ended June 30, 2003, other expense consists of approximately $424,000 of
interest expense compared with approximately $334,000 for the three months ended
June 30, 2002.
16
Six Months Ended June 30, 2003 Compared To June 30, 2002
NET SALES. Revenues primarily consist of billings for long-distance
telephone services, local telephone services, private line circuits, prepaid and
postpaid calling cards, debit cards, and prepaid cellular cards. Revenues for
the six months ended June 30, 2003 and 2002, were $9,262,130 and $14,370,941,
respectively. Revenues declined for the six months ended June 30, 2003, compared
to the same period 2002, because of the disconnection of services by certain
carriers during the fourth quarter 2002 and first quarter 2003 and because of a
decline in customer base. Usage-based revenues are approximately 63% of total
revenue and monthly recurring revenues are approximately 37% of total revenue
for the six months ended June 30, 2003. Revenues for the six months ended June
30, 2003, included $477,088 from the Tele-Direct asset acquisition.
COST OF SERVICES. Cost of services includes direct costs for telephone
services. Cost of services for telephone services include the cost of services
provided by other carriers, network costs, and miscellaneous costs incurred to
provide service. Cost of services for the six months ended June 30, 2003 were
$6,690,467 compared to $11,137,936 for the six months ended June 30, 2002. Cost
of services for the six months ended June 30, 2003, includes approximately
$6,494,204 of direct carrier costs. Cost of services declined for the six months
ended June 30, 2003, because of the reduction in associated revenues and
improved cost management that includes disputing incorrect carrier charges and
directing voice traffic to the least cost provider. Gross margin for the six
months ended June 30, 2003 and 2002 was approximately 28% and 23%, respectively.
Gross margin improved because of improved cost management, billing processes,
and margin derived from Tele-Direct asset acquisition.
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 salaries of the personnel to support our
operations. SG&A expenses for six months ended June 30, 2003 and 2002, were
$4,726,172 and $10,473,263, respectively. The reduction in SG&A expense for the
six months ended June 30, 2003, compared to the six months ended June 30, 2002,
was primarily because of the reduction in number of employees, the closing of
facilities in Missouri and California as previously reported and the reduction
of integration costs incurred during the first quarter 2002. SG&A for the six
months ended June 30, 2003, includes: approximately $2,421,000 of payroll and
employee benefit related expenses; approximately $337,000 in facilities expense;
and approximately $807,000 in professional fees and expenses compared to the six
months ended June 30, 2002: approximately $5,349,000 of payroll related
expenses; approximately $781,000 of facilities expenses; and approximately
$1,560,000 in professional fees.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the six months ended June 30, 2003 and 2002, were $1,493,914 and
$1,972,824, respectively. The decrease in depreciation expense is because of the
one-time noncash write off of approximately $2,312,000 for the abandonment of
leasehold improvements related to the closing of facilities in California
recorded during the third quarter 2002.
OTHER INCOME (EXPENSE). For the six months ended June 30, 2003 and
2002, other expense was $518,850 and $729,971, respectively. For the six months
ended June 30, 2003, other expense consists of approximately $702,000 of
interest expense offset with a gain on the sale of our interest in GlobalTel of
approximately $183,000. For the six months ended June 30, 2002, other expense
includes approximately $678,000 of interest expense.
Liquidity and Capital Resources
During the six months ended June 30, 2003, we generated positive cash
flow from operations of approximately $504,000. The amount of cash generated is
a result of the net loss incurred during the period offset by the timing of cash
receipts from our customers and the extension of monies owed to our vendors and
excise taxes payable. We have historically operated with negative cash flows and
have funded those losses and deficits through the issuance of debt, the
completion of private equity placements, and delaying payments to vendors.
During the six months ended June 30, 2003, the Company acquired
approximately $24,000 in equipment that was not financed through capital lease
or financing arrangements. Additional cash outflows included payments of
approximately $326,000 towards our capital lease obligations and notes payable
and $140,000 cash paid in the Tele-Direct asset purchase. In addition, we had
cash outflows of approximately $211,000 that reduced our line of credit with
Textron Financial Corporation. Textron Financial Corporation in March 2002, also
exercised common stock warrants reducing our line of credit an additional
$500,000.
17
Altogether, our net operating, investing and financing activities
during the year used approximately $27,000 in cash. Our working capital deficit
at June 30, 2003 was approximately $36,370,000. This represents an increase of
approximately $3,072,000 from the working capital deficit of $33,298,000 at
December 31, 2002.
Our current liabilities include a total of approximately $11,676,000
owed to various carriers, most of which is significantly past credit terms. We
have disputed approximately $1,338,000 of charges with various carriers. The
consolidated financial statements do not reflect any adjustments to reduce
liabilities for the impact of unresolved claims. In addition, our current
liabilities include approximately $4,494,000 of amounts owed to various other
trade vendors, some of which are also past credit terms. We currently do not
have sufficient cash to bring our vendors back to current terms.
Until we produce positive cash flow 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 pay federal and state taxes, 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 suppliers, to pay
federal and state taxes, to service debt requirements and purchase equipment. We
do not consistently pay all of our suppliers on time, some of which are critical
to our operations. These 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 losses from operations during 2002 and for the
six months ended June 30, 2003, we will most likely need to achieve positive
cash flow 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
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.
Liquidity Assessment
Subsequent to June 30, 2003, the Company's assets were reduced by the
amount of approximately $4,026,000, representing the transfer of all of Ciera's
assets to Textron in lieu of a foreclosure, and our liabilities were reduced by
approximately $15,800,000 , representing the amount we owed Textron under the
Loan Agreement.
We estimate our capital expenditures to be approximately $200,000 for
2003. 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. We have negative working capital of
approximately $36,400,000.
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.
It is the plan of management, in order to continue operations, to seek
additional revenue generating activities, significantly reduce SG&A expenses,
and to seek additional capital and borrowing infusion. There can be no assurance
that management will be successful with this plan.
Inflation
Inflation continues to apply modest, upward pressure on the cost of
services provided by CCC GlobalCom.
18
Forward Outlook and Risks
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
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.
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, 2002, 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.
We Have a History of Operating Losses, and We May Not 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, 2001, the Company had a net loss of $18,790,367. For the year ended December
31, 2002, CCC GlobalCom had a net loss of $19,710,961. For the six months ended
June 30, 2003, the Company had a net loss of $4,156,273. As we consolidate our
operations, we expect our negative cash flow, operating losses and net losses to
be reduced for the foreseeable future. We cannot assure 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.
Limited Assets and Working Capital Deficit. As of June 30, 2003, we
had, on a consolidated basis, total assets of approximately $5,691,000 and a
working capital deficit of approximately $36,370,000. Subsequent to June 30,
2003, the Company's assets were reduced by the amount of approximately
$4,026,000, representing the transfer of all of Ciera's assets to Textron in
lieu of a foreclosure, and our liabilities were reduced by approximately
$15,800,000 representing the amount we owed Textron under the Loan Agreement.
There can be no assurance that we will realize positive cash flow from
operations in the foreseeable future. With limited assets and working capital
deficit, we may continue to experience difficulty in paying our vendors,
lenders, and taxing authorities. The Company is considering its options,
including seeking protection under the U.S. Bankruptcy Code.
19
Additional Capital Required. 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 the private sales of
securities, debt and by delaying payments to vendors. 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.
Limited Operating History. We have provided 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 three years. We have limited assets,
limited revenues and limited customers. Our customer base and revenues are
declining on a monthly basis and 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, we
have limited operating and financial data on which we can predict our future
performance and base our investment decisions. We cannot assure that we can
successfully operate as a facilities-based Integrated Communications Provider.
The Telecommunications Market in Which We Operate is Highly
Competitive, and We May Not Be Able to Compete Effectively Against Companies
That Have Significantly Greater Resources Than We Do, Which Could Cause Us to
Lose Customers and Impede Our Ability to Attract New Customers. 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, reenter 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.
20
Continuing Weakness in the Economy and the Telecommunications Industry
May Impact the Company. The continuation of the downturn in the United States'
economy and, in particular, the telecommunications industry, may have a
significant impact on the Company. Several of the Company's competitors and
customers have filed for protection under the bankruptcy laws and the Company
may be unable to collect receivables due to bankruptcies and business
difficulties among its customers. Competitors who successfully complete
restructuring or bankruptcy reorganization processes or who introduce new
product offerings may put the Company at a competitive disadvantage.
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 long-standing 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 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.
A Default in the Textron Financial Corporation Loan and Security
Agreement could result in the lender seizing the Company's Assets. The Company
is in technical default on the Textron Financial Corporation Loan and Security
Agreement because of its failure to achieve certain financial covenants required
by the Loan and Security Agreement. On July 2, 2003, we received a notice of an
Event to Default under the Loan Agreement from Textron. Textron demanded that
Ciera immediately pay or cause to be paid to Textron the sum of $1,214,222,
which was the amount of the outstanding over advance per the Loan Agreement as
of July 2, 2003. Neither Ciera nor CCC GlobalCom has the financial ability to
pay or cause to be paid to Textron the amount demanded.
On August 5, 2003, Textron Financial Corporation sent notice in
accordance with provisions of Section 9-610 et seq. of the Uniform Commercial
Code as in effect in the State of Texas to certain vendors and taxing
authorities of its intent to conduct a public foreclosure sale of its Collateral
under the Loan Agreement on August 18, 2003. Upon completion of this foreclosure
sale, Ciera would have no operating assets. Ciera has vendor liabilities, tax
liabilities and other liabilities of approximately $22,800,000 at June 30, 2003,
exclusive of the $16,098,962 amount owed to Textron. Ciera does not have
existing liquidity sufficient to satisfy all amounts owed. The Company is
considering its options, including seeking protection under the U.S. Bankruptcy
Code.
In lieu of going through the foreclosure proceeding, we voluntarily
surrendered all of the collateral securing Ciera's and CCC GlobalCom's
obligations under the Loan Agreement. In consideration for our voluntarily
agreeing to surrender the assets of Ciera to Textron in lieu of the foreclosure,
Textron agreed to adjust all claims, disputes and causes for action that had
arisen or could have arisen as to the Loan Documents and events prior to the
execution of this Mutual Limited Release. According, subsequent to June 30,
2003, our assets were reduced by the amount of approximately $4,026,000,
representing the transfer of all of Ciera's assets to Textron in lieu of a
foreclosure, and our liabilities were reduced by approximately $15,800,000
representing the amount we owed Textron under the Loan Agreement.
If Our Back Office and Customer Service Systems Are Unable to Meet Our
Needs, We May Not Be Able to Bill Our Customers Efficiently or Provide an
Adequate Level of Customer Service. 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
21
part, on choosing products and services offered by third-party vendors and
integrating these products and services into our operations. We cannot assure
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;
o our failure to maintain and upgrade systems as necessary; and
o our failure to attract and retain qualified systems support
personnel.
Development and Expansion Risk and Possible Inability to Manage Growth.
Our success will depend, among other things, on substantial increases in
customer base, 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.
We Will Need to Rely on Incumbent Local Exchange Carriers (ILECs) to
Successfully Implement Our Services. Their Failure to Cooperate With Us Could
Adversely Affect the Services We Offer and Cause Us to Lose Customers. We are,
and will continue to be, dependent on the ILECs 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 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 telecommunications
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
ILECs, typically cover a two- to three-year period, requiring us to renegotiate
them frequently. We cannot assure 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
22
state-regulated rate structures. We cannot assure 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. Because of the pending foreclosure by Textron Financial Corporation
on the Company's long distance and local service customer base, the Company is
considering its options, including seeking protection under the U.S. Bankruptcy
Code for Ciera Network Systems. Ciera is party to the interconnection
agreements.
If Third Parties Do Not Provide the Telecommunications Products and the
Installation and Field Services That Are Critical to Our Business We Could Lose
Customers. 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.
Declining Prices for Telecommunications Services Could Reduce Our
Revenue and Profitability. The telecommunications business is extremely
competitive. Long-distance prices have decreased substantially in recent years
and have shown signs that the pricing pressure may be easing. 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.
Our Failure to Integrate Successfully Other Businesses We Acquire May
Raise Our Costs and Reduce Our 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.
The Telecommunications Industry Is Undergoing Rapid Technological
Changes, and New Technologies May Be Superior to the Technologies We Use. Our
Failure to Keep up with Such Changes Could Adversely Affect Our Business. 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
23
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. Because of the
pending foreclosure by Textron Financial Corporation on our long-distance and
local service customer base our network has become idle and the Company will
determine whether maintaining its own network is reasonable.
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 U.S. Generally Accepted Accounting Principles 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 collectabilty 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.
Goodwill and Intangibles. We had significant intangible assets related
to goodwill and other acquired intangibles. The determination of related
estimated useful lives and whether or not these assets are impaired involves
significant judgment by management. We 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 intangibles associated with our acquired businesses are impaired. Any
resulting impairment loss could have a significant impact on our financial
condition and results of operations.
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Impairment of Long-Lived Assets. The Company reviews its long-lived
assets for impairment when circumstances indicate that the book value of an
asset may not be fully recovered by the undiscounted net cash flow generated
over the remaining life of the related asset or group of assets. If the cash
flows generated by the asset are not sufficient to recover the remaining book
value of the asset, the Company is required to write down the value of the
asset. In evaluating whether the asset will generate sufficient cash flow to
recover its book value, the Company estimates the amount of cash flow that will
be generated by the asset and the remaining life of the asset. In making our
estimate, the Company considers the performance trends related to the asset, the
likelihood that the trends will continue or change, both at the asset level as
well as at the national economic level, and the length of time that we expect to
retain the asset.
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 nonexchange traded contracts
accounted for at fair value; or
o Relationships and transactions with persons or entities that
derive benefits from any nonindependent relationship other than
the related party transactions discussed below.
New Accounting Pronouncements
We continually monitor and revise our accounting policies as
developments occur. The following recently issued accounting pronouncements may
impact the future presentation of our financial condition and results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS 149 provides for
certain changes in the accounting treatment of derivative contracts. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003,
except for certain provisions that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
which should continue to be applied in accordance with their respective
effective dates. The guidance should be applied prospectively. Management
anticipates that the adoption of SFAS No. 149 will not have a material impact on
the Company's consolidated financial statements. In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. This new statement changes the accounting for
certain financial instruments that, under previous guidance, issuers could
account for as equity. It requires that those instruments be classified as
liabilities in balance sheets. Most of the guidance in SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the Company's third quarter of fiscal
2003. Management anticipates that the adoption of SFAS No. 150 will not have a
material impact on the Company's consolidated financial statements.
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
principal 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
25
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.
As of June 30, 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive officer and principal 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 principal 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
MCI WorldCom vs. Ciera Network Systems, Inc., Case No. 03-CV-55-P(C),
in the Federal District Court for the Northern District of Oklahoma, filed
January 15, 2003. MCI has sued Ciera claiming Ciera owes MCI $2,560,000 for
long-distance services which were resold by Ciera. The case was recently filed.
Ciera has denied that it owes MCI the amounts alleged due to over billing
practices and MCI's failure to provide rates and consolidation of three
contracts as promised, which would lower the overall cost of the service.
Management intends to contest the lawsuit vigorously. At this time, it is too
early to ascertain whether Ciera will be successful in the defense of this case.
ITEM 2. Changes in Securities and Use of Proceeds. None.
ITEM 3. Defaults by the Company on its Senior Securities. The Company is in
technical default on the Textron Financial Corporation Loan and Security
Agreement because of its failure to achieve certain financial covenants required
by the Loan and Security Agreement. On July 2, 2003, we received a notice of an
Event to Default under the Loan Agreement from Textron. Textron demanded that
Ciera immediately pay or cause to be paid to Textron the sum of $1,214,222,
which was the amount of the outstanding over advance per the Loan Agreement as
of July 2, 2003. Neither Ciera nor CCC GlobalCom has the financial ability to
pay or cause to be paid to Textron the amount demanded.
On August 5, 2003, Textron Financial Corporation sent notice in
accordance with provisions of Section 9-610 et seq. of the Uniform Commercial
Code as in effect in the State of Texas to certain vendors and taxing
authorities of its intent to conduct a public foreclosure sale of its Collateral
under the Loan Agreement on August 18, 2003. Upon completion of this foreclosure
sale, Ciera would have no operating assets. Ciera has vendor liabilities, tax
liabilities and other liabilities of approximately $22,800,000 at June 30, 2003,
exclusive of the $16,098,962 amount owed to Textron. Ciera does not have
existing liquidity sufficient to satisfy all amounts owed. The Company is
considering its options, including seeking protection under the U.S. Bankruptcy
Code.
In lieu of going through the foreclosure proceeding, we voluntarily
surrendered all of the collateral securing Ciera's and CCC GlobalCom's
obligations under the Loan Agreement. In consideration for our voluntarily
agreeing to surrender the assets of Ciera to Textron in lieu of the foreclosure,
Textron agreed to adjust all claims, disputes and causes for action that had
arisen or could have arisen as to the Loan Documents and events prior to the
execution of this Mutual Limited Release. According, subsequent to June 30,
2003, our assets were reduced by the amount of approximately $4,026,000,
representing the transfer of all of Ciera's assets to Textron in lieu of a
foreclosure, and our liabilities were reduced by approximately $15,800,000
representing the amount we owed Textron under the Loan Agreement.
ITEM 4. Submission of Matters to Vote of Security Holders. None.
26
ITEM 5. Other Information. None.
ITEM 6(a). Exhibits. Exhibit 10.12 Hakim Settlement Agreement
Exhibit 10.13 Textron Financial Corporation Mutual
Limited Release
Exhibit 31.1 and 32.1 Certification of Chief Executive
Officer
Exhibit 31.2 and 32.2 Certification of Principal
Financial Officer
ITEM 6(b). Reports on Form 8-K. On April 1, 2003, the Company filed an 8-K
announcing the resignation of Clifford J. Bottoms as the Chief Financial Officer
and as a Director of the Company. The Company also announced the resignations of
Gary Owens and Michael Walsh as Directors of the Company.
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 22, 2003 By /s/ Paul E. Licata
--------------------------
Paul E. Licata
Chief Executive Officer and President
/Principal Executive Officer
Date August 22, 2003 By /s/ Mario H. Hernandez
----------------------------------
Mario H. Hernandez
Controller
/Principal Financial Officer
27