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 15 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. Accordingly, stockholders have
limited historical financial and operating information under the Company's
current business strategy upon which to base an evaluation of the Company's
performance. As a result of the Company terminating its agency
relationship with Bell Atlantic, agency revenues are no longer material.
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.
The Company has had 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. The Company is purchasing
most of its network components from Cisco Systems, Inc. ("Cisco"), the
failure of such equipment to operate as anticipated or the inability of
Cisco to timely supply such equipment 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.
High Leverage; Possible Inability to Service Indebtedness
The Company is highly leveraged and expects to seek to fund its business
plan with additional debt financing, including equipment leasing, which
will further increase the Company's leverage. 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 lease payments and 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.
Additional Capital Requirements; Uncertainty of Additional Financing
Over the next 12 months, the Company intends to (i) further expand its
existing markets, (ii) deploy the ICN in its existing markets, and (iii)
enhance the CTC Information System. Also, over the next three years, the
Company intends to further expand within its existing markets and into six
additional states in the New York-Washington, D.C. corridor and continue
the deployment of its ICN.
The Company believes that the net proceeds of the anticipated TD Facility
and the Spectrum Commitment, together with cash on hand and the anticipated
availability under the Senior Facilities will be sufficient to fund the
Company's capital expenditures, operating losses and working capital
requirements for its existing markets for approximately the next 12 months
even in the event the Company is unsuccessful or delayed in collecting the
Bell Atlantic Receivable. The Company expects to seek additional long-term
financing to refinance the anticipated TD Facility and further fund its
business plan within the next 3-6 months, capital markets permitting. After
the Company has raised sufficient long-term financing to further fund its
business plan, the Company expects to repay and terminate the TD Facility.
The availability of additional borrowings under the Credit Facility is
based on prior receivable collections and subject to complying with the
various covenants of such facility. There can be no assurance that
additional amounts will be available to the Company when needed or at all.
The Company will require substantial additional funding to continue its
penetration of, and deployment of its ICN in, its existing markets and to
implement the Company's planned geographic expansion of its sales presence
and ICN infrastructure into the New York-Washington D.C. corridor. The
Company's actual capital requirements may be materially affected by various
factors, including the timing and actual cost of implementing the Company's
ICN, the timing and costs of expansion into new markets, the extent of
competition and pricing of telecommunications services in its markets,
acceptance of the Company's services, technological change and potential
acquisitions.
Partly as a result of (i) Bell Atlantic rescinding its policy permitting
assignment of existing contracts to CLECs like the Company (including the
negative affect on the borrowing base under the Credit Facility which has
resulted from delays in deriving revenue from previous agency customers -
See Note 2b, "State Regulatory Proceedings"), (ii) the continuing delay in
collecting the Bell Atlantic Receivable and (iii) greater than anticipated
capital expenditures, if the facility with Toronto Dominion (Texas), Inc.
is not consummated and the Bell Atlantic Receivable is not collected, the
Company will need to obtain additional financing, beyond the proceeds of
the Spectrum Commitment, in the first or second fiscal quarter of fiscal
year 2000. If the Company does not enter into the Credit Facility
Amendment, the Company may not remain in compliance with certain
operational covenants under the Credit Facility, depending upon, among
other things, the Company's success in deriving revenue from its former
agency customers.
Sources of funding may include public offerings or private placements of
equity or debt securities, vendor financing, equipment lease financing and
bank loans. There can be no assurance that additional 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 and within the
limitations contained in the Senior Facilities and agreements governing
other debt issued by the Company from time to time. Failure to obtain
financing when needed would result in the delay or abandonment of the
Company's development and expansion plans which would in turn have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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 current 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 affect 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 local, 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 any growth of 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 Lawsuit Against Bell Atlantic
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 January 15, 1999) 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.
Also, Bell Atlantic has recently rescinded its policy in the New England
states of permitting resellers, including the Company, to assume the
service contracts of retail customers under contract to Bell Atlantic. The
failure of the Company's efforts to cause Bell Atlantic to cease and desist
from refusing to permit the assignment of existing contracts and to
continue its longstanding practice of allowing resellers to assume these
customer agreements, without penalty, on a resold basis could have a
material adverse effects on the Company's operating results.
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 adversely 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
Currently, many computer systems and software products are coded to
accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply
with such "Year 2000" requirements. In connection with the deployment of
the Company's new ICN, it has designed new database architecture for its
computer systems that comply with the Year 2000 requirements. Installation
of the computer system and related software is expected to be completed in
June 1999 and testing of the system, including Year 2000 compliance, is
expected to take place commencing in May 1999.
There can be no assurance that the Company's new computer system will
function adequately or that all Year 2000 problems will be identified and
corrected in a timely manner. 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's business, operating results and financial
condition.
Control By Principal Shareholders; Voting Agreement
As of December 31, 1998, the officers and directors and parties
affiliated with or related to such officers and directors controlled
approximately 51.4% of the Company's outstanding voting power. Robert J.
Fabbricatore, the Chairman and Chief Executive Officer of the Company,
beneficially owns approximately 26.5% 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.