Exhibit 99.1
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 73% of the Company's revenues for the six
month period ended September 30, 1998 are no longer material. For the six
month period ended September 30, 1998, total revenues increased from
approximately $23,500,000 to approximately $27,351,000. 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
The timing and amount of the Company's actual capital requirements may be
materially affected by many factors, including 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. Additional 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 future 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 have a material adverse effect on the Company.
High Leverage; Possible Inability to Service Indebtedness
As a result of obtaining both the Fleet/Goldman Sachs credit facility and
the Cisco vendor financing facility, the Company is 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 its debt 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 Data 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
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
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 $11.5
million as of November 10, 1998) owed to the Company. The Company is
vigorously pursuing this suit. 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 also adversely affect the Company.
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 November 9, 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 Goldman Sachs/Fleet Loan and Security
Agreement provides that without the Lenders' prior written consent, the
Company may not make any distribution or declare any dividends in cash or
property other than stock during the three-year term of the Loan and
Security Agreement. 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.