EXHIBIT 99.1
RISK FACTORS
LIMITED HISTORY AS AN ICP; RISKS RELATING TO IMPLEMENTATION OF NEW STRATEGY
Although the Company has sold integrated telecommunications services
for over 14 years, it sold local telephone services as an agent for Bell
Atlantic Corp. ("Bell Atlantic") until December 1997 and only began offering
such services as an integrated communications provider ("ICP") under its own
brand name after that time. As a result of the Company terminating its agency
relationship with Bell Atlantic, agency revenues, which accounted for
approximately 71% of the Company's revenues for the nine month period ended
December 31, 1997 are no longer generated by the Company. For the fourth quarter
ended March 31, 1998, agency revenues decreased from $8.4 million to $194,000
and total revenues decreased from $11.5 million to $6.2 million. There can be no
assurance that the Company's prior experience in the sale of telecommunications
services as a sales agent will result in the Company generating sufficient cash
flow to service its debt obligations or to compete successfully under its new
strategy.
The Company plans to deploy its own Integrated Communications Network
("ICN"). The Company has no experience in deploying, operating and maintaining a
telecommunications network. The Company's ability to successfully deploy its ICN
will require the negotiation of interconnection agreements with incumbent local
exchange carriers ("ILECs"), which can take considerable time, effort and
expense and which are subject to federal, state and local regulation. There can
be no assurance that the Company will be able to successfully negotiate such
agreements or to effectively deploy, operate or maintain its facilities or
increase or maintain its cash flow from operations by deploying a network.
Further, there can be no assurance that the packet-switched design of the
network will provide the expected functionality in serving its target market or
that customers will be willing to migrate the provision of their services onto
the Company's network. The Company has engaged a network services integrator to
design, engineer and manage the buildout of the ICN in the Company's existing
markets. Any failure or inability by the network integrator to perform these
functions could cause delays or additional costs in providing services to
customers and building out the Company's ICN in specific markets. Any such
failure could materially and adversely affect the Company's business and results
of operations.
If the Company fails to effectively transition to an ICP platform,
fails to obtain or retain a significant number of customers or is unable to
effectively deploy, operate or maintain its network, such failure could have an
adverse effect on the Company's business, results of operations and financial
condition. In addition, the implementation of its new strategy and the
deployment of its network has increased and will continue to increase the
Company's expenses significantly. Accordingly, the Company expects to incur
significant negative cash flow during the next several years as it implements
its business strategy, penetrates its existing markets as an ICP, enters new
markets, deploys its ICN and expands its service offerings. There can be no
assurance that the Company will achieve and sustain profitability or positive
net cash flow.
CAPITAL REQUIREMENTS AND UNCERTAINTY OF FINANCING
The Company has obtained a commitment for an interim credit facility
(the "Interim Facility") from its current lender. The Interim Facility, which
would mature on June 30, 1999, would provide secured revolving loans of up to
$20 million to refinance the Credit Facility, to fund capital expenditures and
operating losses and for general corporate purposes. The commitment, which is
subject to certain conditions, extends to September 30, 1998. To satisfy one of
those conditions, the Company has received a commitment from Spectrum to
purchase $5 million of Preferred Stock which extends until June 30, 1999. The
Company believes that the Interim Facility and the Interim Spectrum Financing,
if required, together with cash on hand would be sufficient to refinance the
Company's existing credit facility and fund the Company's existing operations
for at least the next 12 months. However, CTC would be required to delay its
proposed geographic expansion and deployment of facilities or to obtain
additional financing within the next 6 months.
The implementation of the Company's business plan to further penetrate
its existing markets as an ICP, deploy the ICN in its existing markets, expand
its sales presence into six additional states in the Boston-Washington D.C.
corridor and enhance the CTC Information System and the repayment of the Credit
Facility will require the Company to raise significant capital. The Company has
been seeking and is actively engaged in the negotiation of commitments with
alternative sources of long term financing to fund its business plans. Although
the Company is highly optimistic that it will be successful in obtaining such
financing based upon its negotiations, there can be no assurance that the
Company will be able to consummate financing in the amount, on the terms and on
the schedule required to implement the Company's business plan, if at all.
The timing and amount of the Company's actual capital requirements may
be materially affected by many factors, including the timing and availability of
financing, the timing and actual cost of expansion into new markets and
deployment of the ICN, the extent of competition and pricing of
telecommunications services in its markets, acceptance of the Company's
services, technological change and potential acquisitions. Sources of funding
the Company's capital requirements may include public offerings or private
placements of equity or debt securities, vendor financing and bank loans. There
can be no assurance that financing will be available to the Company or, if
available, that it can be obtained on a timely basis and on terms acceptable to
the Company. Failure to obtain financing when required could result in the delay
or abandonment of the Company's business plans which could intern have a
material adverse effect on the Company.
HIGH LEVERAGE; POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
If the any of the proposed financings are consummated, the Company
will be highly leveraged. The degree to which the Company is leveraged could
have important consequences to the Company's future prospects, including the
following: (i) limiting the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes; (ii) limiting the flexibility of the Company in
planning for, or reacting to, changes in its business; (iii) leveraging the
Company more highly than some of its competitors, which may place it at a
competitive disadvantage; (iv) increasing its vulnerability in the event of a
downturn in its business or the economy generally; and (v) requiring that a
substantial portion of the Company's cash flow from operations be dedicated to
the payment of principal and interest on the Notes and not be available for
other purposes.
The Company's ability to make scheduled payments of principal of, or
to pay the interest on, or to refinance, its indebtedness, or to fund planned
capital expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations or that anticipated revenue growth and operating improvements will be
realized or will be sufficient to enable the Company to service its
indebtedness, or to fund its other liquidity needs. There can be no assurance
that the Company will be able to refinance all or a portion of its indebtedness
on commercially reasonable terms or at all. If the Company does not generate
sufficient cash flow to meet its debt service and working capital requirements,
the Company may need to examine alternative strategies that may include actions
such as reducing or delaying capital expenditures, restructuring or refinancing
its indebtedness, the sale of assets or seeking additional equity and/or debt
financing. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all.
DEPENDENCE ON IN-HOUSE BILLING AND INFORMATION SYSTEM
The accurate and prompt billing of the Company's customers is
essential to the Company's operations and future profitability. The Company's
expected growth and deployment of its ICN could give rise to additional demands
on the CTC Information System, and there can be no assurance that it will
perform as expected. The failure of the Company to adequately identify all of
its information and processing needs (including Year 2000 compliance), the
failure of the CTC Information System or the failure of the Company to upgrade
the CTC Information System as necessary could have a material adverse effect on
the Company and its results of operations.
DEPENDENCE ON SUPPLIER PROVIDED TIMELY AND ACCURATE CALL DATE RECORDS; BILLING
AND INVOICE DISPUTES
In its reseller business, the Company is dependent upon the timely
receipt and accuracy of call data records provided to it by its suppliers. There
can be no assurance that accurate information will consistently be provided by
suppliers or that such information will be provided on a timely basis. Failure
by suppliers to provide timely and accurate detail would increase the length of
the Company's billing and collection cycles and adversely effect its operating
results. The Company pays its suppliers according to the Company's calculation
of the charges applicable to the Company
based on supplier invoices and computer tape records of all such calls provided
by suppliers which may not always reflect current rates and volumes.
Accordingly, a supplier may consider the Company to be in arrears in its
payments until the amount in dispute is resolved. There can be no assurance
that disputes with suppliers will not arise or that such disputes will be
resolved in a manner favorable to the Company. In addition, the Company is
required to maintain sophisticated billing and reporting systems to service the
large volume of services placed over its networks. As resale volumes increase,
there can be no assurance that the Company's billing and management systems will
be sufficient to provide the Company with accurate and efficient billing and
order processing capabilities.
DEPENDENCE ON NETWORK INFRASTRUCTURE AND PRODUCTS AND SERVICES OF OTHERS
The Company does not currently own any part of a local exchange or
long distance network and depends entirely on facilities-based carriers for the
transmission of customer traffic. After the deployment of the ICN, it will still
rely, at least initially, on others for circuit switching of local voice calls
and on fiber optic backbone transmission facilities. There can be no assurance
that such switching or transmission facilities will be available to the Company
on a timely basis or on terms acceptable to the Company. The Company's success
in marketing its services requires that the Company provide superior
reliability, capacity and service. Although the Company can exercise direct
control of the customer care and support it provides, most of the services that
it currently offers are provided by others. Such services are subject to
physical damage, power loss, capacity limitations, software defects, breaches of
security (by computer virus, break-ins or otherwise) and other factors, certain
of which have caused, and will continue to cause, interruptions in service or
reduced capacity for the Company's customers. Such problems, although not the
result of failures by the Company, can result in dissatisfaction among its
customers.
In addition, the Company's ability to provide complete
telecommunications services to its customers will be dependent to a large extent
upon the availability of telecommunications services from others on terms and
conditions that are acceptable to the Company and its customers. There can be no
assurance that government regulations will continue to mandate the availability
of some or all of such services or that the quality or terms on which such
services are available will be acceptable to the Company or its customers.
CUSTOMER ATTRITION
The Company's operating results may be significantly affected by its
reseller customer attrition rates. There can be no assurance that customers will
continue to purchase long distance or other services through the Company in the
future or that the Company will not be subject to increased customer attrition
rates. The Company believes that the high level of customer attrition in the
industry is primarily a result of national advertising campaigns, telemarketing
programs and customer incentives provided by major competitors. There can be no
assurance that customer attrition rates will not increase in the future, which
could have a material adverse effect on the Company's operating results.
ABILITY TO MANAGE GROWTH; RAPID EXPANSION OF OPERATIONS
The Company is pursuing a new business plan that, if successfully
implemented, will result in rapid growth and expansion of its operations, which
will place significant additional demands upon the Company's current management.
If this growth is achieved, the Company's success will depend, in part, on its
ability to manage this growth and enhance its information, management,
operational and financial systems. There can be no assurance that the Company
will be able to manage expanding its operations. The Company's failure to manage
growth effectively could have a material adverse
effect on the Company's business, operating results and financial condition.
POTENTIAL IMPACT OF THE BELL ATLANTIC LITIGATION AND THE TRO
In December 1997, the Company filed suit against Bell Atlantic for
breaches of its agency contract, including the failure of Bell Atlantic's retail
division to pay $14 million in agency commissions (approximately $11.3 million
as of July 10, 1998) owed to the Company. The Company intends to pursue this
suit vigorously. Although the Company believes the collection of the agency
commissions sought in the suit is probable, there can be no assurance that the
Company will be successful in collecting these commissions. If the Company fails
to collect any of the amounts sought or if their collection becomes less than
probable, the Company would be required to write off the amounts reflected in
its financial statements that it is unable to collect or for which collection
becomes less than probable. Delay in the collection or write-off of the agency
commissions sought may adversely affect the Company.
In the Company's litigation against Bell Atlantic, Bell Atlantic
obtained a temporary restraining order (the "TRO") prohibiting the Company until
December 30, 1998 from marketing certain local telecommunications services to
any Bell Atlantic customer for whom the Company was responsible for account
management, or to whom the Company sold Bell Atlantic services, during 1997.
Although the Company is seeking to have the TRO modified or dissolved, there is
no assurance that it will be successful and the Company's sale of local service
to such customer sites could be prohibited until December 30, 1998. The
inability of the Company to sell local telephony services to such customers
until such date may continue to adversely affect the Company's business. In
addition, the Company must use Bell Atlantic infrastructure for nearly all of
the local telephony services that it currently provides and, although Bell
Atlantic is prohibited by federal law from discriminating against the Company,
there can be no assurance that the litigation with Bell Atlantic will not
negatively affect the Company's relationships with Bell Atlantic's wholesale
division.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a
significant extent upon the abilities and continued efforts of its management,
particularly members of its senior management team. The loss of the services of
any of such individuals could have a material adverse effect on the Company's
results of operations. The success of the Company will also depend, in part,
upon the Company's ability to identify, hire and retain additional key
management as well as highly skilled and qualified sales, service and technical
personnel. Competition for qualified personnel in the telecommunications
industry is intense, and there can be no assurance that the Company will be able
to attract and retain additional employees and retain its current key employees.
The inability to hire and retain such personnel could have a material adverse
effect on the Company's business.
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company expects
that it will face substantial and growing competition from a variety of data
transport, data networking and telephony service providers due to regulatory
changes, including the continued implementation of the Telecommunications Act of
1996 (the "Telecommunications Act"), and the increase in the size, resources and
number of such participants as well as a continuing trend toward business
combinations and alliances in the industry. The Company faces competition for
the provision of integrated telecommunications services as well as competition
in each of the individual market segments that comprise the Company's integrated
approach. In each of these market segments, the Company faces competition from
larger, better capitalized incumbent providers, which have long standing
relationships with their customers and greater name recognition than the
Company.
REGULATION
The Company's local and long distance telephony service, and to a
lesser extent its data services, are subject to federal, state, and, to some
extent, local regulation.
The Federal Communications Commission (the "FCC") exercises
jurisdiction over all telecommunications common
carriers, including the Company, to the extent that they provide interstate or
international communications. Each state regulatory commission retains
jurisdiction over the same carriers with respect to the provision of intrastate
communications. Local governments sometimes impose franchise or licensing
requirements on telecommunications carriers and regulate construction activities
involving public right-of-way. Changes to the regulations imposed by any of
these regulators could affect the Company.
While the Company believes that the current trend toward relaxed
regulatory oversight and competition will benefit the Company, the Company
cannot predict the manner in which all aspects of the Telecommunications Act
will be implemented by the FCC and by state regulators or the impact that such
regulation will have on its business. The Company is subject to FCC and state
proceedings, rulemakings, and regulations, and judicial appeal of such
proceedings, rulemaking and regulations, which address, among other things,
access charges, fees for universal service contributions, ILEC resale
obligations, wholesale rates, and prices and terms of interconnection and
unbundling. The outcome of these rulemakings, judicial appeals, and subsequent
FCC or state actions may make it more difficult or expensive for the Company or
its competitors to do business. Such developments could have a material effect
on the Company. The Company also cannot predict whether other regulatory
decisions and changes will enhance or lessen the competitiveness of the Company
relative to other providers of the products and services offered by the Company.
In addition, the Company cannot predict what other costs or requirements might
be imposed on the Company by state or local governmental authorities and whether
or not any additional costs or requirements will have a material adverse effect
on the Company.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
As it expands, the Company may pursue strategic acquisitions.
Acquisitions commonly involve certain risks, including, among others:
difficulties in assimilating the acquired operations and personnel; potential
disruption of the Company's ongoing business and diversion of resources and
management time; possible inability of management to maintain uniform standards,
controls, procedures and policies; entering markets or businesses in which the
Company has little or no direct prior experience; and potential impairment of
relationships with employees or customers as a result of changes in management.
There can be no assurance that any acquisition will be made, that the Company
will be able to obtain any additional financing needed to finance such
acquisitions and, if any acquisitions are so made, that the acquired business
will be successfully integrated into the Company's operations or that the
acquired business will perform as expected. The Company has no definitive
agreement with respect to any acquisition, although from time to time it has
discussions with other companies and assesses opportunities on an ongoing basis.
YEAR 2000 COMPLIANCE
The Company has assessed its systems and expects all of them to be
year 2000 compliant by the end of 1998. However, there can be no assurance that
all systems will function adequately until the occurrence of year 2000. In
addition, if the systems of other companies on whose services the Company
depends or with whom the Company's systems interface are not year 2000
compliant, there could be a material adverse effect on the Company.
CONTROL BY PRINCIPAL SHAREHOLDERS; VOTING AGREEMENT
As of July 10, 1998, the officers and directors and parties affiliated
with or related to such officers and directors controlled approximately 48.5% of
the outstanding voting power of the Common Stock. Robert J. Fabbricatore, the
Chairman and Chief Executive Officer of the Company, beneficially owns
approximately 27.5% of the outstanding shares of Common Stock. Consequently, the
officers and directors will have the ability to exert significant influence over
the election of all the members of the Company's Board, and the outcome of all
corporate actions requiring stockholder approval. In addition, Mr. Fabbricatore
has agreed to vote the shares beneficially owned by him in favor of the election
to the Company's Board of Directors of up to two persons designated by the
holders of a majority of the Series A Convertible Preferred Stock.
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by rapid technological
change, frequent new service introductions and evolving industry standards. The
Company believes that its long-term success will increasingly depend on its
ability to offer integrated telecommunications services that exploit advanced
technologies and anticipate or adapt to evolving industry standards. There can
be no assurance that (i) the Company will be able to offer new services required
by its customers, (ii) the Company's services will not be economically or
technically outmoded by current or future competitive technologies, (iii) the
Company will have sufficient resources to develop or acquire new technologies or
introduce new services capable of competing with future technologies or service
offerings (iv) all or part of the ICN or the CTC Information System will not be
rendered obsolete, (v) the cost of the ICN will decline as rapidly as that of
competitive alternatives, or (vi) lower retail rates for telecommunications
services will not result from technological change. In addition, increases in
technological capabilities or efficiencies could create an incentive for more
entities to become facilities-based ICPs. Although the effect of technological
change on the future business of the Company cannot be predicted, it could have
a material adverse effect on the Company's business, results of operations and
financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market historically has experienced volatility which has affected
the market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. In addition, factors
such as announcements of developments related to the Company's business, or that
of its competitors, its industry group or its customers, fluctuations in the
Company's results of operations, a shortfall in results of operations compared
to analysts' expectations and changes in analysts' recommendations or
projections, sales of substantial amounts of securities of the Company into the
marketplace, regulatory developments affecting the telecommunications industry
or data services or general conditions in the telecommunications industry or the
worldwide economy, could cause the market price of the Common Stock to fluctuate
substantially.
ABSENCE OF DIVIDENDS
The Company has not paid and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Company intends to retain its
earnings, if any, for use in the Company's growth and ongoing operations. In
addition, the terms of the Series A Convertible Preferred Stock restrict, and
the terms of future debt financings are expected to restrict, the ability of the
Company to pay dividends on the Common Stock.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS AND ISSUANCES OF PREFERRED STOCK
Certain provisions of the Company's Articles of Organization and Bylaws and
the Massachusetts Business Corporation Law may have the effect of delaying,
deterring or preventing a change in control of the Company or preventing the
removal of incumbent directors. The existence of these provisions may have a
negative impact on the price of the Common Stock and may discourage third party
bidders from making a bid for the Company or may reduce any premiums paid to
stockholders for their Common Stock. In addition, the Company's Board of
Directors has the authority without action by the Company's stockholders to
issue shares of the Company's Preferred Stock and to fix the rights, privileges
and preferences of such stock, which may have the effect of delaying, deterring
or preventing a change in control. Certain provisions of the Company's
outstanding Series A Convertible Preferred Stock which provide for payment of
the liquidation preference in cash upon the consummation of certain transactions
may have the effect of discouraging third parties from entering into such
transactions.