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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, 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, 4th 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 March 1, 2004, 25,774,490 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, 2003
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, 2003 and December 31, 2002 3
Consolidated Statement of Operations - for the three
and nine months ended September 30, 2003 and September 30, 2002 4
Consolidated Statement of Cash Flows - for the
nine months ended September 30, 2003 and September 30, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Controls and Procedures 26
PART II - OTHER INFORMATION
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Page
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Item 1. Legal Proceedings 27
Item 2. Changes in the Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to Vote of Security Holders 27
Item 5. Other Information 27
Item 6(a). Exhibits 28
Item 6(b). Reports on Form 8-K 28
Signatures 28
Certifications 29
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
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September 30, December 31,
Assets 2003 2002
------ -----------------------------------
Current assets:
Cash and cash equivalents $ 67,799 $ 212,730
Restricted cash - 155,532
Accounts receivable, net 143,989 -
Inventory 14,465 -
Prepaid expense and other current assets 72,253 13,948
Net assets from discontinued operations 554,008 6,909,925
-----------------------------------
Total current assets 852,514 7,292,135
Property and equipment, net 12,809 3,036
Intangible assets, net 479,031 -
-----------------------------------
Total assets $ 1,344,354 $ 7,295,171
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Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 260,520 $ 93,992
Accrued expenses 64,270 158,473
Accrued compensation and other 19,844 -
Deferred revenue 114,521 -
Short-term notes payable 346,481 -
Net liabilities from discontinued operations 22,799,533 37,339,539
-----------------------------------
Total current liabilities 23,605,169 37,592,004
-----------------------------------
Commitments and contingencies - -
Stockholders' deficit:
Common stock, $.001 par value, authorized 100,000,000 shares;
issued and outstanding 25,774,490 and 37,213,918 respectively 25,775 37,214
Additional paid-in capital 10,786,763 10,684,656
Accumulated deficit (33,073,353) (41,018,703)
-----------------------------------
Total stockholders' deficit (22,260,815) (30,296,833)
-----------------------------------
Total liabilities and stockholders deficit $ 1,344,354 $ 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 Nine Months Ended September 30, 2003 and 2002
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Three Months Ended Nine Months Ended
September 30, September 30,
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2003 2002 2003 2002
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Net sales $ 1,683,324 $ - $ 2,160,412 $ -
Expenses:
Cost of services (1,502,308) - (1,844,873) -
Selling, general and administrative
expenses (394,511) (396,505) (719,456) (1,398,047)
Depreciation and amortization expense (71,853) - (95,804) -
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Loss from operations (285,348) (396,505) (499,721) (1,398,047)
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Other income (expense):
Interest income 245 - 287 6,226
Interest expense (3,214) (484) (3,214) (624)
Other, net - (5,263) - (28,000)
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(2,969) (5,747) (2,927) (22,398)
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Loss from continuing operations
before provision for income taxes (288,317) (402,252) (502,648) (1,420,445)
Income taxes - - - -
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Net loss from continuing operations (288,317) (402,252) (502,648) (1,420,445)
Loss from discontinued operations,
net of income taxes (1,073,521) (5,417,229) (4,915,891) (14,352,694)
Gain on disposition of discontinued
operations, net of income taxes 13,414,558 - 13,414,558 -
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Net income (loss) 12,052,720 (5,819,481) 7,996,019 (15,773,139)
Preferential dividend - - (50,669) -
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Net income (loss) applicable to
common stockholders $ 12,052,720 $ (5,819,481) $ 7,945,350 $(15,773,139)
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Net loss per share from continuing operations $ (0.01) $ (0.01) $ (0.02) $ (0.04)
Net income (loss) per share from
discontinued operations $ 0.47 $ (0.15) $ 0.28 $ (0.40)
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Net income (loss) per share -
basic and diluted $ 0.46 $ (0.16) $ 0.26 $ (0.44)
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Weighted average shares -
basic and diluted 26,461,000 36,671,000 30,804,000 35,863,000
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See accompanying notes to consolidated financial statements. 4
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Nine Months Ended September 30,
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2003 2002
------------------------------------
Cash flows from operating activities:
Net income (loss) $ 7,996,019 $ (15,773,139)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,632,070 2,866,216
Bad debt expense 446,903 1,260,767
Stock issued for services 39,999 420,000
Interest and fees added to line of credit - 993,072
Loss on sale/abandonment of fixed assets 137,498 2,312,266
Amortization of warrant costs 103,600 -
Gain from disposal of subsidiary (183,052) -
Gain from disposal of debt (13,309,006) -
(Increase) decrease in:
Restricted cash 107,543 (154,307)
Accounts receivable 1,255,083 (22,204)
Prepaid expenses 46,649 460,651
Other assets 214,089 (122,662)
Increase (decrease) in:
Cash overdraft 45,916 -
Accounts payable 1,549,122 8,257,170
Accrued compensation and other (356,428) (49,532)
Excise taxes payable 884,810 1,893,172
Accrued expenses (790,220) 206,810
Deferred revenue 67,851 139,688
------------------------------------
Net cash (used in) provided by operating activities (111,554) 2,687,968
------------------------------------
Cash flows from investing activities:
Proceeds from sale of subsidiary 170,000 -
Purchase of property and equipment (32,086) (130,936)
Net cash paid in acquisition (140,000) -
------------------------------------
Net cash used in investing activities (2,086) (130,936)
------------------------------------
Cash flows from financing activities:
Payments on long-term debt (196,969) (212,440)
Net increase (decrease) on line of credit 165,678 (2,129,954)
------------------------------------
Net cash used in financing activities (31,291) (2,342,394)
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Net change in cash (144,931) 214,638
Cash and cash equivalents at beginning of period 212,730 742,761
------------------------------------
Cash and cash equivalents at end of period $ 67,799 $ 957,399
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 245,096 $ 61,674
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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 Nine Months Ended September 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. 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, (Ciera) and
Equalnet, Inc. and Equalnet, LLC. (Equalnet). All
significant intercompany balances and transactions have
been eliminated in consolidation.
Operations of Ciera have been included in discontinued
operations as this entity is in Chapter 7 bankruptcy.
The ongoing operations of the Company are from its
subsidiary Equalnet, Inc. where operating business is
that of selling telephone cards.
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 September 30, 2003
and the results of operations for the periods ended
September 30, 2003 and 2002. Operating results for the
three and nine months ended September 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. Reclassifications Certain balances in the September 30, 2002 and December
31, 2002 consolidated financial statements have been
reclassed to conform to the current year presentation.
5. 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 Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
-------------------------------- ------------------------------
Net income (loss), as reported $ 12,053,000 $ (5,819,000) $ 7,945,000 $ (15,773,000)
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)
-------------------------------- -------------------------------
Pro forma net income (loss) $ 12,053,000 $ (5,819,000) $ 7,659,000 $ (16,059,000)
-------------------------------- -------------------------------
Earnings per share-
Basic and diluted - as reported $ 0.46 $ (0.16) $ 0.26 $ (0.44)
-------------------------------- -------------------------------
Basic and diluted - pro forma $ 0.46 $ (0.16) $ 0.25 $ (0.45)
-------------------------------- -------------------------------
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7
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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6. 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 192,000 and 860,000 shares of common stock
at a range of $1.00 to $3.75 per share were outstanding
at September 30, 2003 and 2002 respectively, however,
they were not included in the calculation of diluted EPS
because their effect was anti-dilutive.
7. 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.
8. Return of During the nine months ended September 30, 2003, a major
Shares and shareholder of the Company returned 11,939,428 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 September 30, 2003,
approximately 1,815,000 shares had been distributed. The
transaction was treated as a preferential dividend.
9. Discontinued In July 2003, one of the creditors of Ciera forclosed on
Operations all of the assets of the Company, causing the local and
long-distance service operations to cease. At that time,
management determined to discontinue the operations of
Ciera. Ciera is in Chapter 7 bankruptcy.
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8
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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9. Discontinued As of September 30, 2003 and December 31, 2002 assets
Operations from discontinued operations of Ciera consist of the
Continued following:
September 30, December 31,
---------------------------------------
2003 2002
---------------------------------------
Restricted cash $ 132,852 $ 233,606
Accounts receivable, net - 3,008,240
Prepaid expenses 28,675 120,577
Property & equipment, net 392,481 2,290,789
Intangible assets, net - 1,042,624
Other assets - 214,089
---------------------------------------
Assets from discontinued
operations $ 554,008 $ 6,909,925
---------------------------------------
As of September 30, 2003 and December 31, 2002
liabilities from discontinued operations consist of the
following:
September 30, December 31,
---------------------------------------
2003 2002
---------------------------------------
Cash overdraft $ 45,916 $ -
Accounts payable 15,719,152 14,336,558
Accrued compensation 19,412 395,684
Excise taxes payable 3,342,506 2,457,696
Other accrued expenses 1,706,383 1,969,385
Line of credit - 2,762,609
Deferred income - 183,843
Notes payable 1,966,164 15,233,764
---------------------------------------
Liabilities from discontinued
operations $ 22,799,533 $ 37,339,539
---------------------------------------
The prepetition assets and liabilities total $554,008
and $22,799,533, respectively at September 30, 2003.
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9
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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9. Discontinued Condensed discontinued operations for the three months
Operations and nine months ended September 30, 2003 and 2002 are as
Continued follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------------------------- --------------------------------
Revenue $ 35,195 $ 6,836,281 $ 8,820,237 $ 21,207,222
Costs and expenses 1,108,716 12,253,510 13,736,128 35,559,916
--------------------------------- --------------------------------
Net loss before income taxes (1,073,521) (5,417,229) (4,915,891) (14,352,694)
Income taxes - - - -
--------------------------------- --------------------------------
Loss from discontinued operations $ (1,073,521) $ (5,417,229) $ (4,915,891) $ (14,352,694)
--------------------------------- --------------------------------
The gain on disposition of discontinued operations of
$13,414,558 resulted primarily from reduction of debt
and disposal of assets upon execution of a Mutual
Limited Release with the Company's main secured creditor
and the voluntary surrender of the assets securing the
debt.
10. Supplemental During the nine months ended September 30, 2003, the
Disclosure of Company:
Cash Flow
Information o Had 11,939,428 shares of the Company's common
stock returned by a major shareholder causing an
increase in additional paid-in-capital and a
decrease in common stock of $11,939.
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.
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10
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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10. Supplemental o The Company sold it's interest in GlobalTel in
Disclosure of exchange for cash of $170,000 and a note
Cash Flow receivable of $20,000 included on the Company's
Information balance sheet under the caption other assets.
Continued
o Acquired certain assets of Tele-Direct as
follows:
Customer base $ 574,835
Furniture and equipment 10,700
Inventory 14,465
Note payable (200,000)
Advance from line of credit (260,000)
-----------------
Net cash paid in acquisition $ 140,000
-----------------
During the nine months ended September 30, 2002, the
Company:
o Satisfied payables with common stock for
$442,496.
o Issued common stock to an employee for
compensation totaling $371,200.
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.
o Satisfied a carrier payable with the transfer of
customer base for $100,000
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11
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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11. Bankruptcy of On August 28, 2003 Ciera filed for protection under
Subsidiary Chapter 7 of the U.S. Bankruptcy Code. Upon liquidation
of the remaining assets, the Chapter 7 Trustee will
negotiate all claims with creditors.
The following represents the total assets and
liabilities in the Chapter 7 case as of September 30,
2003:
Assets:
Restricted cash $ 132,852
Prepaid expenses 28,675
------------------
Total assets $ 161,527
------------------
Liabilities:
Cash overdraft $ 45,916
Accounts payable 15,722,779
Inter-company payable 2,715,827
Accrued compensation and other 19,412
Accrued excise taxes 3,342,506
Other accrued expenses 1,706,383
Notes payable 1,966,164
------------------
Total liabilities $ 25,518,987
------------------
12. 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.
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12
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
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12. Revenue Revenues for prepaid cellular cards are recognized at
Recognition the time of the sale of the card since the Company is
Continued 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 entered into, a price is fixed and determinable
and collection is reasonably assured.
13. 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 has
discontinued its local and long-distance services and
Ciera, the subsidiary that provided those services is in
bankruptcy. Subsequent to the end of the quarter,
management discontinued all remaining operations of the
Company and the remaining operating subsidiary filed for
bankruptcy.
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.
14. Subsequent During December 2003 management determined to
Events discontinue the operations of the subsidiary Equalnet,
Inc. On January 4, 2004 Equalnet filed for Chapter 11
Bankruptcy. On February 18, 2004 Textron foreclosed on
all of the assets of Equalnet. On February 25, 2004 the
bankruptcy was dismissed with the secured creditor
taking all of the assets of Equalnet.
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13
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Recent In November 2002, the EITF reached a consensus on Issue
Accounting No. 00-21, Revenue Arrangements with Multiple
Pronounce- Deliverables. EITF Issue No. 00-21 provides guidance on
ments how to account for certain arrangements that involve the
delivery or performance of multiple products, services
and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements
entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF Issue No. 00-21 did not have
a material impact on consolidated operating results or
financial condition of the Company.
In December 2003, the FASB issued Interpretation No. 46
("FIN 46R") (revised December 2003), Consolidation of
Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate
whether it has a controlling interest in an entity
though means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46 (FIN 46), which was issued in
January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to
an entity, an enterprise must first determine that the
entity is not a variable interest entity (VIE). As of
the effective date of FIN 46R, an enterprise must
evaluate its involvement with all entities or legal
structures created before February 1, 2003, to determine
whether consolidation requirements of FIN 46R apply to
those entities. There is no grandfathering of existing
entities. Public companies must apply either FIN 46 or
FIN 46R immediately to entities created after January
31, 2003 and no later than the end of the first
reporting period that ends after March 15, 2004. The
adoption of FIN 46 had no effect on the Company's
consolidated financial position, results of operations
or cash flows.
In April 2003, FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivatives
and Hedging Activities. SFAS 149 is generally effective
for derivative instruments, including derivative
instruments embedded in certain contracts, entered into
or modified after June 30, 2003. The adoption of SFAS
149 did not have a material impact on the operating
results or financial condition of the Company.
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14
CCC GLOBALCOM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Recent In May 2003, the FASB issued SFAS 150, Accounting for
Accounting Certain Financial Instruments with Characteristics of
Pronounce- Both Liabilities and Equity. SFAS 150 clarifies the
ments accounting for certain financial instruments with
Continued characteristics of both liabilities and equity and
requires that those instruments be classified as
liabilities in statements of financial position.
Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003.
On November 7, 2003, FASB Staff Position 150-3 was
issued, which indefinitely deferred the effective date
of SFAS 150 for certain mandatory redeemable
non-controlling interests. As the Company does not have
any of these financial instruments, the adoption of SFAS
150 did not have any impact on the Company's
consolidated financial statements.
In December 2003, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition. SAB 104 revises or rescinds
portions of the interpretive guidance included in Topic
13 of the codification of staff accounting bulletins in
order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104
did not have a material effect on the Company's
consolidated results of operations or financial
condition.
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15
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 were primarily a
switch-based company, which means we used a strategic deployment of network
switches to provide communication services to our long-distance customers. We
also purchased local telephone communication services from Incumbent Local
Exchange Carriers (ILECs) on a wholesale basis. In most cases, these other
providers from which we purchased services, were transparent to our customers.
The use of our own switches reduced our overall service costs. Our core business
has been communication services and communications products, which includes
long-distance voice and data, local service, long-distance debit cards, and
prepaid cellular cards.
During the past nine months, the Company has ceased operating as a
provider of long-distance voice and data and local service. Financial
constraints caused by negative cash flows, decreasing revenues and an inability
to pay vendors, creditors and taxes has required the Company to file for Chapter
7 Bankruptcy protection for its Ciera Network Systems, Inc. (Ciera) operating
subsidiary (see more detailed information under the section headed "Textron Loan
Matters/Ciera Network Systems, Inc.". At the end of the third quarter 2003, the
Company continued to operate it's EqualNet, Inc. operating subsidiary
concentrating on the selling of long-distance debit cards and prepaid cellular
calling cards; however, in January 2004, Equalnet also filed for Chapter 11
Bankruptcy. Due to these bankruptcies, as of the date of this filing the Company
does not have any continuing operations.
The Company has decided to discontinue operations of Ciera Network
Systems, Inc. subsidiary because of continuing losses and Textron Financial
Corporation's foreclosure of Ciera's assets. Management has no intention of
reentering the long-distance voice and data and local service markets.
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 continue
to experience this difficulty currently. 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/Ciera Network Systems, Inc.
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.
16
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 or (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. The Company has remained 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 the Amended and Restated Loan Agreement (the "Loan
Agreement").
On July 2, 2003, we received a notice of an Event of 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 had the financial ability to pay or cause to be paid to
Textron the amount demanded. To facilitate the impending foreclosure action to
be taken by Textron Financial Corporation and with the approval of Textron
Financial Corporation, on July 3, 2003, Ciera Network Systems, Inc. signed a
management services agreement with New Access Communications giving New Access
Communications complete control of the existing Ciera customer base. New Access
Communications was to provide all telecommunications services to the customers
and also commenced billing and collecting from the customers. Ciera layed off
the majority of its workforce upon signing the management services agreement
with New Access Communications.
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 had 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.
In lieu of going through the foreclosure proceeding, the Company
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. Upon execution of the Mutual
Limited Release with Textron Financial, the Company's assets were reduced by the
amount of approximately $2,611,000, representing the transfer of all of Ciera's
assets to Textron in lieu of a foreclosure, and our liabilities were reduced by
approximately $15,920,000 representing the amount we owed Textron under the Loan
Agreement and unearned revenue. The Company has recorded a net gain of
approximately $13,309,000 for the forgiveness of the Textron Financial debt and
the foreclosure of certain Ciera Network Systems, Inc.'s assets. Financial
results and remaining assets and liabilities related to Ciera Network Systems,
Inc. are presented as Discontinued Operations in the Company financial results
for the period ended September 30, 2003. Prior year results have been restated
for Discontinued Operations for comparative purposes.
On August 28, 2003, subsequent to executing the Mutual Limited Release
with Textron Financial Corporation, Ciera Network Systems, Inc. filed for
Chapter 7 bankruptcy protection in the U.S. Bankruptcy Court of the Southern
District of Texas (Houston). All employees of Ciera Network Systems, Inc. were
terminated and Ciera is no longer an operating entity. The Company remains under
Chapter 7 bankruptcy protection.
The Company, through it's EqualNet, Inc. subsidiary, has remained
liable for $260,000 payable to Textron related to the acquisition of certain
assets of Tele-Direct Inc., which is further described below.
17
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 we
have moved to significantly smaller facilities with significantly lower rent
expense at 1250 Wood Branch Park Drive, Houston, Texas. However, these
restructuring steps do not ensure that we will continue as a going concern.
Business Plan
At September 30, 2003, we determined that our best chance of success as
a telecommunications company was to engage in the business of selling
long-distance 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 loan proceeds from Textron Financial Corporation of $260,000.
The Company was to also pay to Telefyne a percentage of a certain customer's
collected revenues for a specific period of time. Subsequent to the acquisition
date, the Company and Telefyne, Inc. negotiated a fixed amount of $200,000 in
place of a percentage of a certain customer's collected revenues.
As a result of the Tele-Direct acquisition, we entered the debit card
and prepaid cellular card business with a distribution channel of over 2,500
convenience stores throughout the U.S. Purchases of telecommunications services
were 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 terminated Ciera's operations pursuant to the transfer
of Ciera's assets to Textron, we focused our efforts on the business that we
entered as the result of our purchase of certain assets of Tele-Direct.
We were in an extremely difficult financial position. We were in a
turn-around and workout mode. We continued to reduce operating expenses while
attempting to generate revenues from the debit card and prepaid cellular card
business. We attempted to get to a breakeven cash flow position through the
significant overhead cost reductions and the cash flow generated from the new
prepaid calling and prepaid cellular card business. We attempted to raise
additional capital through equity or debt placements to expand its business.
Subsequent to September 30, 2003, the Company's operating subsidiary,
EqualNet, Inc., discontinued operations because of EqualNet's inability to
service its vendor and creditor debt. EqualNet filed for chapter 11 bankruptcy
protection in the U.S. Bankruptcy Court, Southern District (Houston) on January
4, 2004. The bankruptcy court has since dismissed the bankruptcy petition and
Textron Financial Corporation has foreclosed on EqualNet's assets. Management
has no intention of reentering the long-distance debit card and prepaid cellular
card market.
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. 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. During the third quarter, Gilbert Gertner and
James Rash also resigned their positions as Directors of the Company.
Other Matters
During the nine months ended September 30, 2003, one of our major
shareholders returned to us for cancellation 11,939,428 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 September 30,
2003, approximately 2,413,000 shares had been distributed. The distribution of
shares was treated as a preferential dividend.
18
During the nine months ended September 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 September 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.
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 $502,648 before accounting for discontinued
operations for the nine months ended 2003 and a working capital deficit of
$507,130 excluding assets and liabilities of discontinued operations at
September 30, 2003. The working capital deficit inclusive of discontinued
operations assets and liabilities is $22,752,655 at September 30, 2003.
Results of Operations
Three Months Ended September 30, 2003 Compared To September 30, 2002
NET SALES. Revenues primarily consist of billings for long-distance
debit cards and prepaid cellular cards from the Tele-Direct business acquired on
May 30, 2003. Revenues for the three months ended September 30, 2003 and 2002
were $1,683,324 and $0, respectively. Because of Ciera Network Systems, Inc.'s
chapter 7 bankruptcy filing on August 28, 2003, the Company's Net Sales from
Ciera's operations are reported as Discontinued Operations. COST OF SERVICES.
Cost of services includes direct costs for long-distance debit cards and prepaid
cellular cards from the Tele-Direct business acquired on May 30, 2003. Cost of
services for long-distance debit cards and prepaid cellular cards include the
cost of common carrier, prepaid cellular cards, shipping, and miscellaneous
costs incurred to provide service. Cost of services for the three months ended
September 30, 2003 and 2002 were $1,502,308 and $0, respectively. As previously
disclosed cost of sales for Ciera's operations for the three months ended
September 30, 2003 and 2002, respectively, are reported as Discontinued
Operations. Gross margin for the three months ended September 30, 2003 was
approximately 11%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative (SG&A) expenses consist of costs to provide sales, 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 September 30, 2003 and 2002, were
$394,511 and $396,505, respectively. SG&A expenses related to the Ciera Network
Systems, Inc. business are reported as part of Discontinued Operations.
DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization
expense for the quarter ended June 30, 2003, was $71,853. The amount reflects
the amortization of the intangible associated with the acquisition of the
Tele-Direct business.
OTHER INCOME (EXPENSE). For the three months ended September 30, 2003,
other income/(expense) was ($2,969). For the three months ended September 30,
2003, other income/(expense) consists of approximately ($3,214) of interest
expense offset by $245 of interest income.
LOSS FROM DISCONTINUED OPERATIONS: Loss from Discontinued Operations
for the three months ended September 30, 2003 and 2002, were $1,073,521 and $5,
417,229, respectively. The reduction in loss for the three months ended
September 30, 2003 compared to the prior year is the result of Ciera Network
Systems ceasing business operations on June 30, 2003. The loss for the third
quarter 2003, is primarily attributable to operating expenses incurred during
the wind-down of the Ciera Network Business after the transfer of the customer
base to New Access Communications on July 3, 2003.
19
GAIN ON DISPOSITION OF DISCONTINUED OPERATIONS: Gain on Disposition of
Discontinued Operations for the three months ended September 30, 2003 was
$13,414,558. The net gain consists of a net gain on the forgiveness of the
Textron Financial debt and the foreclosure of certain Ciera Network Systems,
Inc.'s assets of $13,309,006, gain on the sale of our interest in GlobalTel of
$183,052, and a loss on the disposal of fixed assets of $77,500.
Nine Months Ended September 30, 2003 Compared To September 30, 2002
NET SALES. Revenues primarily consist of billings for long-distance
debit cards and prepaid cellular cards from the Tele-Direct business acquired on
May 30, 2003. Revenues for the nine months ended September 30, 2003 and 2002,
were $2,160,412 and $0, respectively. Because of Ciera Network Systems, Inc.'s
chapter 7 bankruptcy filing on August 28, 2003, the Company's Net Sales from
Ciera's operations are reported as Discontinued Operations.
COST OF SERVICES. Cost of services includes direct costs for
long-distance debit cards and prepaid cellular cards from the Tele-Direct
business acquired on May 30, 2003.. Cost of services for long-distance debit
cards and prepaid cellular cards include the cost of common carrier, prepaid
cellular cards, shipping, and miscellaneous costs incurred to provide service.
Cost of services for the nine months ended September 30, 2003 and 2002, were
$1,844,873 and $0, respectively. As previously disclosed, cost of sales for the
three months ended September 30, 2003, are reported as Discontinued Operations.
Gross margin for the nine months ended September 30, 2003, was approximately
15%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative (SG&A) expenses consist of costs to provide sales, 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 the nine months ended September 30, 2003 and 2002
were $719,456 and $1,398,047, respectively. SG&A expenses related to the Ciera
Network Systems, Inc. business are reported as part of Discontinued Operations.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the nine months ended September 30, 2003, was $95,804. The amount
reflects the amortization of the intangible associated with the acquisition of
the Tele-Direct business.
OTHER INCOME (EXPENSE). For the nine months ended September 30, 2003,
other income/(expense) was ($2,927). For the nine months ended September 30,
2003, other income/(expense) consists of approximately ($3,214) of interest
expense offset by $287 of interest income.
LOSS FROM DISCONTINUED OPERATIONS: Loss from Discontinued Operations
for the nine months ended September 30, 2003 and 2002, were $4,915,891 and
$14,352,694, respectively. The reduction in loss for the nine months ended
September 30, 2003 compared to the prior year is the result of Ciera Network
Systems ceasing business operations on June 30, 2003.
GAIN ON DISPOSITION OF DISCONTINUED OPERATIONS: Gain on Disposition of
Discontinued Operations for the nine months ended September 30, 2003 was
$13,414,558. The net gain consists of a net gain on the forgiveness of the
Textron Financial debt and the foreclosure of certain Ciera Network Systems,
Inc.'s assets of $13,309,006, gain on the sale of our interest in GlobalTel of
$183,052, and a loss on the disposal of fixed assets of $77,500.
Liquidity and Capital Resources
During the nine months ended September 30, 2003, we had negative cash
flow from operations of approximately $112,000. The amount of cash used is a
result of losses from continuing and discontinued operations 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.
20
During the nine months ended September 30, 2003, the Company acquired
approximately $32,000 in equipment that was not financed through capital lease
or financing arrangements. Additional cash outflows included payments of
approximately $197,000 towards our capital lease obligations and notes payable
and $140,000 cash paid in the Tele-Direct asset purchase.
Altogether, our net operating, investing and financing activities
during the year used approximately $145,000 in cash. Our working capital deficit
at September 30, 2003 was $507,130 excluding assets and liabilities of
discontinued operations at September 30, 2003. The working capital deficit
inclusive of discontinued operations assets and liabilities is $22,752,655 at
September 30, 2003.
Our current liabilities include a total of approximately $260,000 owed
to various vendors. Our current liabilities include $22,799,533 of net
liabilities from discontinued operations. Ciera filed for chapter 7 bankruptcy
protection on August 28, 2003. 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
nine months ended September 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
The Company's assets have been reduced by the amount of approximately
$2,611,000, representing the transfer of all of Ciera's assets to Textron in
lieu of a foreclosure, and our liabilities were reduced by approximately
$15,920,000, representing the amount we owed Textron under the Loan Agreement.
We estimate our capital expenditures to be approximately $40,000 for
2003. We will also be required to fund our operating losses and working capital.
We have negative working capital of approximately $22,753,000. We have negative
working capital of $507,130, exclusive of discontinued operations.
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.
21
Inflation
Inflation continues to apply modest, upward pressure on the cost of
services provided to CCC GlobalCom.
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. 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 nine months ended September
30, 2003, the Company had a net loss from continuing operations of $502,648. 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 September 30, 2003,
we had, on a consolidated basis, total assets of approximately $1,344,000 and on
a continuing operations basis, total assets of approximately $790,000 and a
working capital deficit on a consolidated basis of approximately $22,753,000 and
a working capital deficit on a continuing operations basis of approximately
$507,000. The Company's consolidated assets and liabilities have been reduced
approximately $2,611,000 and $15,920,000, respectively, for the transfer of
Ciera's assets to Textron Financial Corporation in lieu of a foreclosure and the
forgiveness of debt to 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.
22
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 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.
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 had limited assets, limited
revenues and limited customers. After the settlement with Textron Financial for
Ciera's assets, including Ciera's customer base, the Company as of September 30,
2003 was engaged only in the business of selling long-distance debit cards and
prepaid cellular cards through Equalnet, Inc. However, in January 2004, Equalnet
also filed for Chapter 11 Bankruptcy. Due to these bankruptcies, as of the date
of this filing the Company does not have any continuing operations There can be
no assurance that we will ever operate profitably. In order to generate
revenues, we must acquire other companies/businesses. 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, we have limited operating and financial data on which we can
predict our future performance and base our investment decisions;.
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.
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 or other 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 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.
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.
23
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.
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
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 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.
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.
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 November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for certain arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material impact on operating results or the financial
condition of the Company.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity though means other than voting rights and accordingly
24
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after March
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133,
Accounting for Derivatives and Hedging Activities. SFAS 149 is generally
effective for derivative instruments, including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on the operating results or financial
condition of the Company.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. On November 7, 2003, FASB Staff Position 150-3 was issued, which
indefinitely deferred the effective date of SFAS 150 for certain mandatory
redeemable non-controlling interests. As the Company does not have any of these
financial instruments, the adoption of SFAS 150 did not have any impact on the
Company's consolidated financial statements.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretive guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on the Company's results of operations or financial condition.
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
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 September 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.
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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. 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. To
facilitate the impending foreclosure action to be taken by Textron Financial
Corporation and with the approval of Textron Financial Corporation, on July 3,
2003, Ciera Network Systems, Inc. signed a management services agreement with
New Access Communications giving New Access Communications complete control of
the existing Ciera customer base. New Access Communications was to provide all
telecommunications services to the customers and also commenced billing and
collecting from the customers. Ciera layed off the majority of its workforce
upon signing the management services agreement with New Access Communications.
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 had vendor liabilities, tax
liabilities and other liabilities of approximately $22,800,000 at September 30,
2003, exclusive of amounts owed to Textron at that time. Ciera does not have
existing liquidity sufficient to satisfy all amounts owed.
In lieu of going through the foreclosure proceeding, the Company
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. Upon execution of the Mutual
Limited Release with Textron Financial, the Company's assets were reduced by the
amount of approximately $2,611,000, representing the transfer of all of Ciera's
assets to Textron in lieu of a foreclosure, and our liabilities were reduced by
approximately $15,920,000 representing the amount we owed Textron under the Loan
Agreement and unearned revenue. The Company has recorded a net gain of
$13,309,006 for the forgiveness of the Textron Financial debt and the
foreclosure of certain Ciera Network Systems, Inc.'s assets. Financial results
and remaining assets and liabilities related to Ciera Network Systems, Inc. are
presented as Discontinued Operations in the Company financial results for the
period ended September 30, 2003. Prior year results have been restated for
Discontinued Operations for comparative purposes.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
26
ITEM 6(A). EXHIBITS.
Exhibit 31.1 Certification of Chief Executive Officer
and Principal Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer
and 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 April 14, 2004 By /s/ Paul E. Licata
--------------------------
Paul E. Licata
Chief Executive Officer, President and
Chief Financial Officer
/Principal Executive Officer
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