UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-76630
COMPETITIVE COMPANIES, INC.
(Name of small business issuer in its charter)
Nevada
65-1146821
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3751 Merced Drive, Suite A
Riverside, CA
92503
(Address of principal executive offices)
(Zip Code)
Issuer’s telephone number: (951) 687-6100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the last 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer’s revenues for its most recent fiscal year ended December 31, 2006. $1,013,817.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and ask price, as of March 30, 2007, was $7,829,558 based on a share value of $0.15.
The number of shares of Common Stock, $0.001 par value, outstanding on March 30, 2007 was 52,197,050 shares.
Transitional Small Business Disclosure Format (check one): Yes[ ] No [X]
COMPETITIVE COMPANIES, INC.
FOR THE FISCAL YEAR ENDED
December 31, 2006
Index to Report
on Form 10-KSB
FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:
•
Our current deficiency in working capital;
•
Increased competitive pressures from existing competitors and new entrants;
•
Our ability to market our services to new subscribers;
•
Adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
•
Consumer acceptance of price plans and bundled offering of our services;
•
Loss of customers or sales weakness;
•
Technological innovations;
•
Inability to achieve future sales levels or other operating results;
•
Key management or other unanticipated personnel changes; and
•
The unavailability of funds for capital expenditures.
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Factors That May Affect Our Results of Operation” in this document.
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In this form 10-KSB references to “CCI”, “the Company”, “we,” “us,” and “our” refer to COMPTETIVE COMPANIES, INC. and its wholly owned subsidiaries COMPETITIVE COMMUNICATIONS, INC. and CCI RESIDENTIAL SERVICES, INC.
AVAILABLE INFORMATION
We file annual, quarterly and special reports and other information with the SEC that can be inspected and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405. Information regarding the public reference facilities may be obtained from the SEC by telephoning 1-800-SEC-0330. The Company’s filings are also available through the SEC’s Electronic Data Gathering Analysis and Retrieval System which is publicly available through the SEC’s website (www.sec.gov). Copies of such materials may also be obtained by mail from the public reference section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405 at prescribed rates.
PART I
ITEM 1.
DESCRIPTION OF BUSINESS
(a) General Business Development
Competitive Companies, Inc. (“CCI”) was formed in October 2001 to restructure a company formerly known as “Western Telephone and Television”, which had been in business since 1985 providing telephone systems and services to apartment complexes. CCI became the parent company of Competitive Communications, Inc., which provides local and long distance telephone service to retail users, and CCI Residential Services, Inc., which provides local, and long distance telephone service, Internet service and cable television service to apartment complexes in California, Alabama and Mississippi. The Company’s main office is located in Riverside, California.
On May 5, 2005, CCI merged with CA Networks, Inc. (“CAN”), which provided retail local and long distance telephone service and DSL Internet service in Kentucky. The company operates as “The Telephone Company” in Kentucky and has been providing retail service since November 2004. According to the terms of the Merger Agreement and Plan of Reorganization we agreed to issue to the shareholders of CAN 39,885,659 shares of common stock of CCI in exchange for 39,885,659 shares of common stock of CAN.
On June 30, 2006, we entered into an Asset Purchase Agreement with Voice, Video, and Data Services, Inc. (“VVDS”), a Wyoming corporation, wherein we agreed to sell the assets of The Telephone Company to VVDS. We sold to VVDS all the assets of The Telephone Company, which included but were not limited to: all existing inventory; contracts to sell telephone services in Kentucky; its rights under licenses and agreements; its vendor agreements; its office lease and physical property located in Kentucky; its copyrights, trademarks and tradenames; all regulatory rights and filings, all advertising and promotional material, and any names and addresses of The Telephone Company’s customers. Additionally, VVDS agreed to assume any and all outstanding liabilities of The Telephone Company.
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As consideration for the sale, VVDS agreed to deliver 1,400,000 shares of our unregistered common stock, currently held by Mr. Russ Preston, who is the President of VVDS as well as one of our former directors. We agreed to cancel the shares upon closing of the agreement. Furthermore, Mr. Preston agreed to deliver to us an additional 1,400,000 shares of our unregistered common stock, currently held in his name, to act as collateral for the payment of all outstanding liabilities assumed under the agreement. It was agreed these additional shares may be cancelled if VVDS does not pay off all outstanding liabilities on or before December 31, 2006.
As of the beginning of the third quarter, CCI no longer has operations within Kentucky and has focused on continuing its operations of providing telecommunications services to California, Alabama, and Mississippi. The telecommunications products and services provided by the company and its subsidiaries include local telephone services, domestic and international long distance services, and enhanced voice, data and Internet services, primarily to residents of apartment complexes, retail businesses and residential users. We operate in both a regulated and non-regulated environment. Our subsidiary, Competitive Communications, is regulated whereas our subsidiary, CCI Residential, is unregulated.
Recent developments in our industry, such as court decisions concerning access fees, increase use of cell phones by apartment dwellers and the like, have caused us to reevaluate our business plan. We have decided to focus on improving our VoIP services (Voice over Internet Protocol), which we conducted initial tests of at the end of the first quarter of 2006. On May 1, 2006, we launched the VoIP to existing customers at a complex in San Ramon, California. However, we had to abandon this service in the beginning of August 2006 because our supplier experienced too many difficulties with the equipment and implementation of the VoIP system requirements such as 911 services, conferencing, etc. Due to the carrier difficulties and the lack of funds to address these problems, we had to push back our intention to convert all other existing customers to VoIP. Additional funds will be needed to upgrade and alleviate the difficulties experienced by our supplier. We anticipate though as CCI bundles its services, DSL and cable television margins will increase due to fixed cost expenses associated with those services.
During the third quarter, we also announced our intention to lease the first 20,000 Intellant antennas from Waylinks, Inc, which is expected to be available for deployment in early 2007. Waylinks patented antennas are wire replacement antennas that have the capacity to transmit bandwidth at a very high speed, which will help reduce costs of the “The Last Mile”. The Last Mile or final delivery of services has in the past always been one of the most costly parts of the telecom industry. Hopefully, the Waylinks antenna will allow us to deliver VoIP phone service, high definition television service and high-speed internet service at a reduced cost to consumers in apartment complexes and those who reside in the surrounding areas using the existing apartment complexes as a point of presence (POP).
For the years ended December 31, 2006 and 2005, we incurred net losses of $179,723 and $1,966,556, respectively. Our accumulated deficit at the end of December 31, 2006 was $2,332,535. These conditions raise substantial doubt about our ability to continue as a going concern over the next twelve months. See Note 2 to the accompanying financial statements for a discussion of management’s plans for the next twelve months.
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To financing continuing operations, in February 2007, CCI issued 1,450,000 shares of its $.001 par value common stock at a price of $0.10 per share in a private placement offering to accredited investors for aggregate gross cash proceeds of $145,000.
(b) Our Business
CCI is a Nevada corporation that is now trading publicly and is essentially a holding company for its operating subsidiaries, Competitive Communications, Inc. (“Competitive Communications”) is an approved and regulated local and long distance telephone companies in California, Alabama, and Mississippi, and CCI Residential Services Inc. (“CCI Residential”), which is a non-regulated telephone company providing local and long distance telephone service, high-speed Internet and cable television service to large apartment complexes in California, Alabama, and Mississippi.
CCI has developed its own operating service system known as Hartline System that provides the back office needs for provisioning, customer service and billing for its customers. Since the provisioning of retail customers is so different than the provisioning of apartment complex customers, there is no other known system in the market that combines the requirements of the two different market needs.
CCI provides telecommunications services primarily to residents of apartment complexes, retail businesses and residential users, in primary and secondary metropolitan areas of California, Alabama, and Mississippi. The telecommunications products and services provided by the company and its subsidiaries include local telephone services, domestic and international long distance services, and enhanced voice, data and Internet services.
Principal Products and Services
Under the Telecommunications Act of 1996, CCI’s regulated subsidiary, Competitive Communications, receives significantly discounted prices from the existing or traditional local phone companies and long distance carriers, thereby reducing their costs. As regulated telecommunications providers, the companies are required to negotiate agreements for resale services from the local exchange carriers, to file telephone rate tariffs with state public utilities commissions, and are subject to the state public utilities commission rules regarding telecommunications carriers. The companies are currently approved as operating telephone companies in California, Alabama, and Mississippi and operate as approved public utilities by each state’s Public Service Commissions. Competitive Communications has completed wholesale interconnect agreements with SBC, now known as “AT&T”, Verizon, BellSouth, CenturyTel and QWEST. These agreements allow us to purchase wholesale local and long distance telephone service and nationwide Internet service at discounted prices and resell those services at retail rates to businesses and residential users.
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The subsidiary, CCI Residential, operates under shared tenant services provisions within each state and is a non-regulated company. As such, it is not required to file tariffs with state public utilities commissions and does not have to comply with commission rules regarding local exchange carriers, thus legally avoiding the more onerous rate filing requirements of the regulated subsidiaries and other regulated carriers. CCI Residential can sign individual agreements with property owners allowing for payments to the property owner a portion of the revenue the subsidiary receives from apartment complex residents on the owner’s property. As a shared tenant service provider, CCI Residential is required by each state’s public utilities commission to provide regulated carriers with equal access to the apartment complexes it services. CCI Residential accounts for approximately 99 percent of CCI’s consolidated revenue through an oral agreement whereby CCI sells services from Competitive Communications, the regulated subsidiary, through the unregulated subsidiary, CCI Residential.
The remaining percentage of CCI’s revenue is a result of direct sales to other residential and business customers. It is anticipated that the direct sales percentage of Competitive Communications will increase considerably in the future as residential and business customer bases are increased and as CCI expands its services to consumers surrounding the apartment complexes selling VoIP (Voice –over-Internet-Protocol), high-speed Internet and video services. This move will significantly reduce CCI’s costs for services that are now purchased from the incumbent local telephone companies.
Competitive Communications, Inc.
This subsidiary offers the following services in most of their markets: local and long distance telephone services, toll-free or 800 service, and dedicated Internet and DSL services to business and non-apartment complex residential customers.
To offer these services, Competitive Communications must secure certification from a state regulator and typically must file rates or price lists for the services that it will offer. The certification process varies from state to state; however, the fundamental requirements are largely the same. State regulators require new entrants to demonstrate that they have secured adequate financial resources to establish and maintain good customer service. New entrants must show that they possess the knowledge and ability required to establish and operate a telecommunications network. CCI currently has all necessary agreements in place in California, and Mississippi.
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Services are sold as bundled or unbundled, depending on the customer’s preference. Presently, services are sold directly to business and residential customers. Competitive Communications also sells services to CCI Residential, which then sells these services to apartment residents under shared tenant services provisions. Most of Competitive Communications’ direct sales to business and residential customers result from direct solicitation, Yellow Pages advertising, referrals from other customers, and conversion of customers who leave apartment complexes serviced by CCI Residential. In the future, CCI plans to add commissioned sales agents to target small- to medium-sized businesses and residential customers. Initially, these agents will be added in California. It is anticipated that the small- to medium-sized businesses will provide better gross margins than the residential market since business customers normally make more long distance calls, create less bad debt than residential customers, and are more apt to subscribe to high-speed Internet services. Presently, approximately 99 percent of Competitive Communications’ sales are due to CCI Residential, and the remaining percentage is from direct sales of telephone and Internet services to retail residential and business customers.
CCI Residential Services
CCI Residential provides the following products and services: local and long distance services, high-speed Internet, cable television, and toll-free or 800 service in California, Alabama, and Mississippi.
To offer these services to apartment complex customers, CCI Residential must sign a contract with the apartment owner. These multi-year contracts normally range from five to 20 years. They provide for the apartment owner to share in a percentage of the revenue received from servicing the complex. The percentage received may vary from 0 percent to 11 percent, based on the total revenue received, the types of services provided, the term of the contract and other negotiated factors. If the complex is under construction, CCI Residential must plan for, have approved, and install underground cabling. If the complex is already built, it must survey the cabling needs and negotiate the use of the cable with the owner. It must secure state approval to conduct business in the state and establish service from Competitive Communications, if available, or if Competitive Communications is not yet certified, from the traditional local phone companies. With the ability to provide bundled services in an extremely cost effective manner, CCI Residential plans to market to the MDU (multiple-dwelling units) market in a vigorous manner.
Services sold by CCI Residential can be bundled or unbundled depending on the customer’s preference. Competitive Communications sells unbundled telephone, cable television, and Internet services to CCI Residential at or marginally above Competitive Communications’ cost. CCI Residential then sells these services to apartment complex customers at competitive market prices. By having all outside service agreements under Competitive Communications, it will be possible in the future to negotiate better terms and discounts based on the combined volume of the customer bases of Competitive Communications and CCI Residential.
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When tenants move into an apartment complex serviced by CCI Residential, the leasing agent informs them that the complex has a private telephone service provider and a private cable television provider (in those locations where CCI provides the cable television service). Tenants must contact CCI Residential in order to activate their telephone and cable television service. Those tenants who prefer to receive service from the local telephone company instead may do so. However, their telephone line must be cross-connected from CCI Residential to the local telephone company. This may take the telephone company from a few days to two weeks to accomplish and will cost the tenant for the work. The telephone service for those tenants who select CCI Residential for their service, in most cases, will be activated while they are still on the line placing their orders. On average, more than 39% of tenants decide to use CCI Residential telephone service. Those who do not use the CCI Residential can select a local carrier, use their cell phones only, or choose not to have any telephone service. Over 62 of tenants use CCI Residential provided cable television service at those complexes where CCI Residential offers the service. Those who do not use CCI Residential either use satellite television dishes for service or do not have television service at all. Approximately 34 of tenants use DSL Internet service provided by CCI Residential. Presently, approximately 49 percent of the CCI Residential revenue is from telephone-related service, approximately 33 percent is from cable television service, and approximately 18 percent is from Internet service to tenants of apartment complexes serviced by the company. It is anticipated that the percentage of revenues from Internet services will increase in the future as the company expands its Internet service offering to additional complexes serviced and as market penetration increases.
As CCI Residential purchases its services from Competitive Communications, CCI Residential does not need or have the same service agreements required of Competitive Communications.
Long Distance Services
The company offers a full range of domestic and international long distance services. These services include “1+” outbound calling and inbound toll free service.
Competitive Communications, Inc. has negotiated an agreement with QWEST Communications for volume discounts for long distance resale. Prior to signing with QWEST, the company had long distance service providers that were more expensive than QWEST and provided very poor service. Periodically the company reviews proposals from other long distance providers to ensure that it is receiving the best possible rates. Should better rates with comparable service be found, a request revision of the QWEST agreement would be requested or the more cost effective provider would be selected and transition made to the new provider.
The agreement with QWEST allows CCI to offer long distance telephone service in all 50 states.
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Internet Services
Since May 2002 CCI has been installing and offering high-speed Internet service to selected apartment complex customers. It offers high-speed Internet access services via digital subscriber line, (DSL). After accepting bids from five other carriers, based on price and service quality, QWEST was selected as the carrier to provide the Internet service telephone lines at selected apartment complexes.
Competitive Companies began testing wireless Internet service in the summer of 2006. VoIP service will be added to the wireless service and will allow the company to offer complete local and long distance telephone service along with the Internet service. This complete service is projected to compete with the incumbent local telephone companies in more rural areas (those cities and towns with populations of less than 30,000) as a lower-cost alternative for telecommunications services.
While many companies in the telecommunications industry are looking to provide these services, the cost of equipment at the user’s home or business is often prohibitive, taking up to five years to recoup the cost of the equipment alone. CCI has an agreement with an independent company that develops equipment to send and receive voice, video, and data signaling. CCI anticipates renting the equipment at a cost of $10 per month per subscriber, making it financially feasible to aggressively pursue these rural markets with wireless services.
While there are a number of municipalities that want to set up wireless services for their cities, the large telephone and cable TV companies are attempting to block the ability of municipalities to offer the services as they compete directly with private enterprise. Legal action is taking place in several areas to prohibit this competition. CCI has developed a program that works with municipalities to provide wireless services to their population and generates a residual income for the city. CCI is currently negotiating with several other cities. The company expects this program to spread throughout the southeastern and mid-western states very quickly.
Voice-over-Internet Protocol
VoIP uses the traditional technology of sending data packets over the Internet to transmit voice, through the compression of voice into data packets which are transmitted over data networks. Instead of establishing a specific connection between two devices and sending a message in “one piece”, VoIP separates the message into smaller fragments called packets. These packets are transmitted separately over a decentralized network and upon reaching its final destination, are reassembled into the original message.
With continued competitive pressure from the use of cellular telephones and bundled services from the major carriers, CCI’s challenge is to improve the VoIP project timeline. CCI tested the VoIP services in 2006 at its office in Riverside, California, and at various apartment complexes in California. Several different carriers and gateway devices were tested and CCI has decided on the carrier and equipment they planned to use in the future.
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CCI began its launch of the VoIP to existing customers on May 1, 2006, at a complex in San Ramon, California. However, CCI had to abandon this service in the beginning of August 2006 because our supplier experienced too many difficulties with the equipment and implementation of the VoIP system requirements such as 911 services, conferencing, etc. Due to the carrier difficulties and the lack of funds to address these problems, we had to push back our intention to convert all other existing customers to VoIP. Additional funds will be needed to upgrade and alleviate the difficulties experienced by our supplier. We anticipate though as CCI bundles its services, DSL and cable television margins will increase due to fixed cost expenses associated with those services.
Competition and Market Overview
The telecommunications industry is highly competitive. CCI believes that the principal competitive factors affecting its business will be pricing levels and clear pricing policies, customer service, and the variety of services offered. Its ability to compete effectively will depend upon its continued ability to maintain high-quality, market-driven services at prices generally equal to or below those charged by competitors. To maintain its competitive posture, CCI believes that it must be in a position to reduce its prices in order to meet reductions in rates, if any, by others. Any such reductions could reduce revenues. Many of CCI’s current and potential competitors have financial, personnel, and other resources, including brand name recognition as well as other competitive advantages.
CCI competes principally with traditional local phone companies serving an area, such as SBC (AT&T), BellSouth, and Verizon. While these types of providers have name recognition, CCI has the ability to offer lower pricing and bundled packages of services with one bill and one point of contact.
As a recent entrant in the integrated telecommunications services industry, CCI has not achieved and does not expect to achieve a significant market share for any of its resale services. Recent regulatory initiatives allow newer local phone companies such as our subsidiary, Competitive Communications, to connect with traditional local phone company facilities. Although this provides increased business opportunities for CCI, such connection opportunities have been -- and likely will continue to be -- accompanied by increased pricing flexibility for and relaxation of regulatory oversight of the traditional local phone companies.
Traditional local phone companies have long-standing relationships with regulatory authorities at the federal and state levels. While recent FCC administrative decisions and initiatives provide increased business opportunities to telecommunications providers such as CCI, they also provide the traditional local phone companies with increased pricing flexibility for their private line, special access and switched access services. However, Wireless Internet and VoIP services are currently non-regulated and cost much less than the standard hardwire services offered by the local phone companies. Therefore, CCI will be able to move the majority of its business from the regulated arena and compete very competitively with the traditional companies.
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Voice-over-Internet Protocol
VoIP services first emerged in the mid 1990s but were not typically used for transmitting voice signals due to the potential for data packets to be delayed or lost, preventing a real-time transmission and possibly resulting in poor sound quality. Due to these factors, VoIP did not receive a positive response early on and most consumers were not attracted to the idea of VoIP. However, as bandwidth increased and improvements in the packet technology occurred, the quality and reliability of VoIP was enhanced.
With new improvements, VoIP now allows a much higher volume of telecommunications traffic to flow at much higher speeds than do traditional circuits, while at a significantly lower cost. VoIP networks are less capital intensive to construct and much less expensive to maintain. VoIP networks are based on Internet protocol and therefore can interface with web-based services, such as virtual portals, interactive voice response, and unified messaging packages. A VoIP network utilizes intellectual property to transmit a call from its origination point to CCI’s servers. The ability to minimize the use of established telecommunication lines reduces the cost of transmitting telephone calls for CCI and ultimately the customer.
Today, VoIP is increasingly used by residential and business users and offered through a wide array of service providers. Vonage is the most advertised and largest of these VoIP providers. However, with companies like Vonage, you must have your Internet service provided by another company in order to purchase VoIP from Vonage. Some other providers are long distance phone companies, cable companies, and Internet service providers. These types of providers differ in the type of networks used and the characteristics and features offered for VoIP communications services.
Intellectual Property
CCI’s Hartline system enters, schedules, provisions, and tracks a customer’s order from the point of sale to the installation and testing of service. It also interfaces with trouble management, inventory, billing, collection and customer service systems.
For the apartment complex customers, the processes are automated. It is intended that most of the processes involved in switching the non-apartment complex customers to CCI networks will also be automated. The goal is to accelerate the time between customer order and service installation, reduce overhead costs, and provide exceptional customer service. To achieve this goal, CCI is continuing to develop and enhance its Hartline system to support the growth of its operations into the non-apartment complex markets.
Governmental Approval and Regulation
CCI’s current telecommunications services business is subject to state and local regulation. Traditionally, telephone services have been subject to extensive state regulation, while Internet services have been subject to much less regulation. VoIP has elements that resemble traditional telephone companies as well as those that resemble the Internet. Therefore, VoIP did not fit into either existing framework of regulation and until recently operated in an environment that was largely free of regulation.
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However, the Federal Communications Commission (“FCC”), U.S. Congress, and various state regulatory bodies have begun to assert regulatory authority over VoIP providers and on a continuous basis are evaluating how VoIP will be regulated in the future. Some of the existing regulations for VoIP are applicable to the entire industry, while other rulings are limited to specific companies and/or categories of service. At this point in time, the application of rules to CCI and its competitors is speculative.
State Regulation
State regulatory agencies have jurisdiction when facilities and services are used to provide intrastate services. A portion of CCI’s current traffic may be classified as intrastate and therefore subject to state regulation. CCI expects to offer more intrastate services as its business and product lines expand and state regulations are modified to allow increased local services competition. For other than shared tenant services, in order to provide intrastate services, CCI generally must obtain a certificate of public convenience and necessity from the state regulatory agency and comply with state requirements for telecommunications utilities, including state rate requirements.
State agencies require that CCI file periodic reports, pay various fees and assessments, and comply with rules governing quality of service, consumer protection, and similar issues. Although the specific requirements vary from state to state, they tend to be more detailed than the FCC’s regulation because of the strong public interest in the quality of basic local exchange service. CCI will comply with all applicable state regulations, and as a general matter does not expect that these requirements of industry-wide applicability will harm the business. However, new regulatory burdens in a particular state may affect the profitability of services in that state.
Local Regulation
CCI’s networks are subject to numerous local regulations such as building codes and licensing. Such regulations vary on a city-by-city and county-by-county basis. If CCI decides in the future to install its own fiber optic transmission facilities, it will need to obtain rights-of-way to publicly owned land. Since CCI is an approved public utility, such rights-of-way may be available to the company on economically reasonable or advantageous terms.
VoIP Regulations
On February 12, 2004, the FCC initiated a rulemaking proceeding concerning the provision of voice and other services and applications utilizing Internet Protocol technology. As part of this proceeding, the FCC is considering whether VoIP services should be classified as information services or telecommunications services. If the FCC determines VoIP services to be telecommunications services, then VoIP service will be subject to rules and regulations that apply to traditional telephone services and that are already applicable to CCI due to its other services. The FCC has not reached a decision but has drawn distinctions among different types of VoIP providers and has concluded some providers to be telecommunications services and others to be information services.
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On June 3, 2005, the FCC released an order and notice of proposed rulemaking concerning VoIP emergency services. The order set forth two primary requirements for providers of VoIP services that provide service by sending or receiving calls to or from users on the public switched telephone network. First, the order requires notification to customers of the difference between the emergency services available through this VoIP service and those available through traditional telephone providers. Second, the order requires enhanced emergency dialing capabilities or the dedication of wireline E-911 network to transmit customers’ 911 calls, callback number and customer provided location information to the emergency authority serving the customers’ specified location.
Personnel
As of December 31, 2006, we had 8 full-time staff of which 2 are management, 1 is technical and 5 are administrative. Pending capital funding and growth, we may experience a significant change in the number of full time employees over the next 12 months. We intend to use the services of independent consultants and contractors to perform various professional services. We believe that this use of third-party service providers may enhance our ability to contain general and administrative expenses. Currently, there exist no organized labor agreements or union agreements between us and our employees. We believe that our relations with our employees are good.
ITEM 2.
DESCRIPTION OF PROPERTY
Our corporate headquarters are in Riverside, California, where we lease approximately 2,500 square feet of office and warehouse space for approximately $2,400 per month. The lease expires December 14, 2011. In addition to our headquarters, we generally are provided minimal space at no charge, from 100 to 200 square feet, for our telecommunications equipment at each of the apartment complexes where we have systems installed. Our offices are in good condition and are sufficient to conduct our operations.
We do not intend to renovate, improve, or develop properties. We are not subject to competitive conditions for property and currently have no property to insure. We have no policy with respect to investments in real estate or interests in real estate and no policy with respect to investments in real estate mortgages. Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate activities.
ITEM 3.
LEGAL PROCEEDINGS
We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us which may materially affect us.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the fiscal year ended December 31, 2006.
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PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Our common stock has been quoted on the NASD Over the Counter Bulletin Board under the trading symbol “CCOP” from March 8, 2006 until present. The high and low closing prices of our common stock for the periods indicated are set forth below. These closing prices do not reflect retail mark-up, markdown or commissions.
2005
High
Low
First Quarter
$ n/a
$ n/a
Second Quarter
$ n/a
$ n/a
Third Quarter
$ n/a
$ n/a
Fourth Quarter
$ n/a
$ n/a
2006
High
Low
First Quarter
$1.05
$0.25
Second Quarter
$0.95
$0.10
Third Quarter
$0.28
$0.05
Fourth Quarter
$0.45
$0.05
(b) Holders of Common Stock
As of March 30, 2007, there were approximately 497 holders of record of CCI’s 52,197,050 outstanding shares of common stock.
Preferred stock
We are authorized to issue 10,000,000 shares of preferred stock.
Class A convertible preferred stock
In December 1999, we issued 4,000,000 shares of Class A convertible preferred stock to various founding stockholders and management. These 4,000,000 shares were convertible into 20,000,000 shares of common stock. Upon the merger with CAN, we repurchased all 4,000,000 shares of Class A preferred stock for a total of $40,000 from the founding stockholders and management and subsequently cancelled these shares. No preferred shares were converted into shares of our common stock.
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Class B convertible preferred stock
We have reserved for issuance 1,495,436 shares of Class B convertible preferred stock entitling persons owning the Class B shares to convert the Class B shares into shares of our common stock based upon the opening bid and ask price of our common stock when we commenced trading on the over the counter bulletin board (“OTCBB”). The conversion formula was based upon the following formula:
1 - the fraction (average of opening bid and ask price on the OTCBB/$3.00)
Divided by
the fraction: [average of opening bid and ask price on the OTCBB/$3.00]
For example, assume average opening bid/ask of $1.25. [ 1 – (1.25/3) = 0.58. 0.58 divided by (1.25/3) = 1.38 additional shares of common stock issued upon conversion.
If the average opening bid/ask price is more than $3.00 per share, no shares of common stock shall be issued and the rights of the preferred stockholders will terminate. Further, under no circumstances will the shares convert into more than 2,990,872 shares of common stock.
On March 8, 2006, our common stock began trading on the OTCBB. The average bid/ask opening price was $1.25 per share. Therefore, we have reserved for issuance approximately 2,063,702 shares (subject to increase based upon the rounding of fractional shares) of our common stock for conversion of the Class B convertible preferred shares. There are no plans to convert the Class B preferred shares at this time.. Any fractional shares shall be rounded up to the next whole share.
Class C convertible preferred stock
We have reserved for issuance 1,000,000 shares of Class C convertible preferred stock entitling persons owning the Class C shares to convert the Class C shares into shares of our common stock based upon the average closing bid price of our common stock for the first five business day period following our approval of trading on the OTCBB. The conversion formula was based upon the following:
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If the average of the closing bid price for the common stock for first five business day period immediately following the closing of the reorganization agreement during which the common stock is qualified for quotation on the OTCBB is less than $3.00 per share, the number of shares of common stock to be issued upon conversion of the Class C preferred stock shall be the product obtained by multiplying the following conversion ratio by the 1,000,000 shares of Class C preferred stock held by Huntington Partners. The conversion ratio shall be one minus the adjusted price divided by the adjusted price. The adjusted price shall be determined by dividing the closing bid price for the common stock for first five business day period immediately following the closing of the reorganization agreement during which the common stock is qualified for quotation on the over the counter bulletin board by $3.00. For purposes of determining the closing bid price for the common stock for first five business day period immediately following the closing of the reorganization agreement during which the common stock is qualified for quotation on the over the counter bulletin board, purchases of our common stock by us or our affiliates or persons controlled by us or our affiliates shall be disregarded. In addition, if trades have not been executed on at least three of those five days, the adjustment period shall be extended until our common stock shall have been traded on at least three days, and the average closing bid price for those three trading days shall be the price used in the formula.
For example, assume the average of first 5 days closing bid of $1.25, and no other adjustments under the formula. The conversion would occur as follows:
•
1 – (1.25/3) = 0.58
•
0.58 divided by 1.25/3 = 1.38
•
1.38 x 1,000,000 = 1,380,000.
Accordingly, 1,380,000 shares of common stock would be issued to Huntington Partners upon conversion of the Class C preferred stock.
If the average opening bid/ask price is more than $3.00 per share, no shares of common stock shall be issued and the rights of the preferred stockholders will terminate. Further, under no circumstances will the shares convert into more than 2,000,000 shares of common stock.
On March 8, 2006, our common stock began trading on the OTCBB. The five day average closing bid price was approximately $1.25 per share. Therefore, we have reserved for issuance 1,380,000 shares of our common stock for conversion of the Class C convertible preferred shares. There are no plans to convert Class C preferred shares at this time.
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c) Dividends
We have never declared or paid dividends on our Common Stock. We intend to follow a policy of retaining earnings, if any, to finance the growth of the business and do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on the Common Stock will be at the sole discretion of the Board of Directors and will depend on our profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.
(d) Securities Authorized for Issuance under Equity Compensation Plans
CCI’s Employee Stock Incentive Plan, adopted on December 2, 2005, an aggregate of 10,000,000 shares of common stock are reserved for issuance. This plan is intended to encourage directors, officers, employees and consultants to acquire ownership of CCI’s common stock. The opportunity is intended to foster in participants a strong incentive to put forth maximum effort for the Company’s continued success and growth, to aid in retaining individuals who put forth such effort, and to assist in attracting the best available individuals to CCI in the future. During the year ended December 31, 2005, we cancelled 3,435,000 options which were previously outstanding as of December 31, 2004 and adopted our 2005 Stock Option Plan. The stock option plan was adopted by our board of directors and has not been approved by our stockholders. As of December 31, 2006, 10,000,000 shares remain available for issuance under this stock option plan.
Recent Sales of Unregistered Securities
During the fourth quarter of 2006, we issued and sold a total of 490,000 shares of common stock to 8 individual investors for a total purchase price of $49,000, all of which was paid in cash. We believe that the issuance and sale of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued directly by us and did not involve a public offering or general solicitation. The recipients of the shares were afforded an opportunity for effective access to files and records of our company that contained the relevant information needed to make their investment decision, including our financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to issuing the shares, had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the shares.
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On November 28, 2005, we issued a total of 375,000 shares of common stock (total value of $37,500) to an individual as compensation for consulting services. All shares were valued at $0.10 per share. We believe that the issuance of all the shares described above was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued directly by us and did not involve a public offering or general solicitation. The recipient of the shares was afforded an opportunity for effective access to files and records of our company that contained the relevant information needed to make their investment decision, including our financial statements and 34 Act reports. We reasonably believed that the recipient, immediately prior to issuing the shares, had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The recipient had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the shares.
During the first quarter of 2007 we issued an aggregate of 1,450,000 shares of our common stock to a group of 12 accredited investors, at $0.10 per share,
for total gross proceeds of $145,000, pursuant to the exemption provided by Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder. The shares were offered solely to accredited investors, no form of general advertising was used, all investors took the shares as an investment and not with the intent to distribute and all shares were issued with a restrictive legend thereon. There were no commissions paid on the issuance and sale of the shares.
ITEM 6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULT OF OPERATIONS.
CURRENT OPERATIONS
CCI, Competitive Communications and CCI Residential Services (collectively referred to as the “Company”) provide telephone, cable television, long distance/inter - exchange, and dial up and high-speed Internet connections and e-mail services, mainly to customers who live in multi-tenant residential buildings. The Company’s operations are located in Riverside, California and substantially all of its customers are California residents with a smaller percentage residing in Alabama and Mississippi.
On May 5, 2005, the Company merged with CA Networks, Inc. (“CAN”), which was a development stage enterprise in the process of developing a business model in the same industry as CCI. CAN was formed under the laws of the state of Wyoming on January 14, 2004. The combined companies maintained the name of CCI.
On June 30, 2006, we entered into an Asset Purchase Agreement with Voice, Video, and Data Services, Inc. (“VVDS”), a Wyoming corporation, wherein we agreed to sell the assets of The Telephone Company to VVDS. Additionally, VVDS agreed to assume any and all outstanding liabilities of The Telephone Company.
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We provide telecommunications services primarily to residents of apartment complexes, and other users, including business and residential, in primary and secondary metropolitan areas in California, Alabama, and Mississippi. We offer a set of telecommunications products and services including local telephone services, domestic and international long distance services and enhanced voice, data and internet services. We generally price our services at a discount of 5% to 10% below the prices charged by traditional local phone companies. As of the date of this filing, we are operational in 8 apartment complexes in California, Mississippi, and Alabama and use 6 of our own telephone switches.
OVERVIEW AND OUTLOOK
Recent developments in our industry, such as court decisions concerning access fees, increase use of cell phones by apartment dwellers and the like, have caused us to reevaluate our business plan. We have decided to focus on improving our VoIP (Voice over Internet Protocol) services by moving up our testing and implementation to the end of the second quarter of 2007. We began the launch of the VoIP to existing customers in the on May 1, 2006 at a complex in San Ramon, California. However, CCI had to abandon this service in the beginning of August 2006 because our supplier experienced too many difficulties with the equipment and implementation of the VoIP system requirements such as 911 services, conferencing, etc. Due to the carrier difficulties and the lack of funds to address these problems, we had to push back our intention to convert all other existing customers to VoIP. Additional funds will be needed to upgrade and alleviate the difficulties experienced by our supplier. We anticipate though as CCI bundles its services, DSL and cable television margins will increase due to fixed cost expenses associated with those services.
Results of Operations for the Years Ended December 31, 2006 and 2005.
The following table is a summary of our operations for the year ended December 31, 2006 as compared to the year ended December 31, 2005.
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For the Years Ended December 31,
Increase / (Decrease)
2006
2005
$
%
Revenues
$ 1,013,817
$ 773,230
$ 240,587
31%
Cost of sales
803,464
686,194
117,270
17%
Gross profit
210,353
87,036
123,317
142%
Expenses
General and administrative
268,150
396,147
(127,997)
(32%)
Salaries and wages
351,598
245,619
105,979
43%
Consulting fees
37,500
376,402
(338,902)
(90%)
Depreciation
31,579
40,740
(9,161)
(22%)
Intangible asset impairment
-
778,000
778,000
(100%)
Bad debt
14,712
34,824
(20,112)
(58%)
Impairment of operating assets
-
44,376
(44,376)
(100%)
Total operating expenses
703,539
1,916,108
(1,212,569)
(63%)
Net operating income (loss)
(493,186)
(1,829,072)
1,335,886
(73%)
Total other income (expenses)
313,463
(137,484)
450,947
(328%)
Net (loss)
$ (179,723)
$ (1,966,556)
$ 1,786,833
(91%)
Revenues:
Revenues for the years ended December 31, 2006 were $1,013,817 compared to $773,230 in the year ended December 31, 2005. This resulted in an increase in revenues of $240,587 or 31%, from the same period one year ago. The increase was due to enhanced service offerings and a price increase to our customers.
Cost of sales:
Cost of sales for the year ended December 31, 2006 was $803,464, a decrease of $117,270, or 17%, from $686,194 for the year ended December 31, 2005. The decrease was due to eliminating underutilized circuits.
Gross profit:
Gross profit for the year ended December 31, 2006 was $210,353, an increase of $123,317 or 142% as compared to $87,036 for the year ended December 31, 2005. Gross profit as a percentage of revenue for the years ended December 31, 2006 and 2005 were 21% and 11%, respectively.
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General and Administrative expenses:
General and administrative expenses were $268,150 for the year ended December 31, 2006 versus $396,147 for the year ended December 31, 2005, which resulted in a decrease of $127,997 or 32%. The decrease was due to restructuring departments, and eliminating underutilized circuit expenses.
Salaries and wages:
Salaries and wages were $351,598 for the year ended December 31, 2006 versus $245,619 for the year ended December 31, 2005, which resulted in an increase of $105,979 or 43%. The increase was due to restructuring employee compensation.
Consulting fees:
Consulting fees were $37,500 for the year ended December 31, 2006 versus $376,402 for the year ended December 31, 2005, which resulted in a decrease of $338,902 or 90%. The decrease was due to better utilization of employee talent.
Depreciation:
Depreciation was $31,579 for the year ended December 31, 2006 versus $40,740 for the year ended December 31, 2005, which resulted in a decrease of $9,161 or 22%. The decrease was due to no new assets were acquired and the decrease was normal depreciation.
Intangible asset impairment:
Intangible asset impairment was $0 for the year ended December 31, 2006 versus $778,000 for the year ended December 31, 2005, which resulted in a decrease of $778,000 or 100%. The decrease was due to impairment of goodwill which resulted from the merger of CAN.
Bad debt:
Bad debt was $14,712 for the year ended December 31, 2006 versus $34,824 for the year ended December 31, 2005, which resulted in a decrease of $20,112 or 58%. The decrease was due to eliminating the Kentucky division.
Impairment of operating assets:
Impairment of operating assets was $0 for the year ended December 31, 2006 versus $44,376 for the year ended December 31, 2005, which resulted in a decrease of $44,376 or 100%. The decrease was due to the impairment of operating assets which resulted from the merger of CAN.
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Net operating loss:
Net operating loss for the year ended December 31, 2006 was $493,186 as compared to a net operating loss of $1,829,072 for the year ended December 31, 2005. This decrease of $1,335,886 from 2005 was primarily related to the non-recurring expense of $778,000 as intangible asset impairment and $44,376 as impairment of operating assets.
Total other income (expense):
During the year ended December 31, 2006 the total other income was $313,463 versus a total other expense was $137,484 for the year ended December 31, 2005, which resulted in an increase of $450,947 or 328%. The increase was due to the debt forgiveness of the notes payable during 2006.
Net loss:
The net loss for the year ended December 31, 2006 was $179,723 versus a net loss of $1,966,556 for the year ended December 31, 2005, a change in net loss of $1,961,575.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets, accumulated deficit, stockholders’ equity and working capital at December 31, 2006.
Total Assets |
$ 231,114 |
Accumulated (Deficit) |
$ (2,332,535) |
Stockholders’ (Deficit) |
$ (36,551) |
Working Capital (Deficit) |
$ (149,187) |
We have incurred losses since inception and may incur future losses. Our current financial condition raises substantial doubt about our ability to continue as a going concern.
Going Concern
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate our continuance as a going concern. Our ability to continue as a going concern is dependent on our ability to raise funds to finance ongoing operations and repay debt; however we may not be able to raise sufficient funds to do so. Our independent auditors have raised substantial doubt about our ability to continue as a going concern over the next twelve months. Our poor financial condition has led us to revise our business plan.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
Application of Critical Accounting Policies and Pronouncements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Stock-based compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. CCI adopted SFAS No. 123 (R) during 2005. Stock issued for services totaled $125,350 and $911,877 for the years ended December 31, 2006 and 2005, respectively.
Recent Issued Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”) which supersedes APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 changes the requirements for accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS No. 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe SFAS No. 154 will have an immediate significant impact on its financial position or results of operations.
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FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATION
RISKS RELATING WITH OUR BUSINESS AND MARKETPLACE
We have incurred losses since inception and may incur future losses. Our poor financial condition raises substantial doubt about our ability to continue as a going concern.
Our net operating losses for the year ended December 31, 2006 totaled $179,723. We have never operated at a profit. As of December 31, 2006, we had a stockholders’ deficit of $36,551 and only had $4,337 in cash available to finance our operations and a working capital deficit of $149,187.
Our ability to continue as a going concern is dependent on our ability to raise funds to finance ongoing operations and repay debt; however we may not be able to raise sufficient funds to do so. Our independent auditors have indicated that there is substantial doubt about our ability to continue as a going concern over the next twelve months. Because of these factors, an investor cannot determine if and when we will become profitable and therefore runs the risk of losing their investment.
We have incurred substantial losses and expect to continue to incur losses for the foreseeable future.
For the last two fiscal years ended December 31, 2006 and 2005, we sustained net losses of $179,723 and $1,966,556, respectively. Capital requirements have been and will continue to be significant, and our cash requirements have exceeded cash flow from operations since inception. We are in need of additional capital to continue our operations and have been dependent on the proceeds of private placements of securities to satisfy working capital requirements. We will continue to be dependent upon the proceeds of future offerings or public offerings to fund development of products, short-term working capital requirements, marketing activities and to continue implementing the current business strategy. There can be no assurance that we will be able to raise the necessary capital to continue operations.
If we are unable to obtain additional funding, our business operations will be harmed and if we do obtain additional financing our then existing stockholders may suffer substantial dilution.
We will require additional funds to expand our operations. We anticipate that we will require up to approximately $750,000 to fund our continued operations for the next twelve months, depending on revenue from operations. Additional capital will be required to effectively support the operations and to otherwise implement our overall business strategy. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Any additional equity financing may involve substantial dilution to our then existing stockholders.
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Without realization of additional capital, it would be unlikely for us to continue as a going concern.
As a result of our deficiency in working capital at December 31, 2006 and other factors, our auditors have included an explanatory paragraph in their audit report regarding substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments as a result of this uncertainty. The going concern qualification may adversely impact our ability to raise the capital necessary for the continuation of operations.
We may not be able to provide our products and services if we do not connect or continue to connect with the traditional carriers, our primary competitors.
As a competitive carrier, we must coordinate with traditional carriers so that we can provide local service to customers on a timely and competitive basis. The Telecommunications Act created incentives for regional Bell operating companies to cooperate with competitive carriers and permit access to their facilities by denying such companies the ability to provide in-region long distance services until they have satisfied statutory conditions designed to open their local markets to competition. The regional Bell operating companies in our markets are not yet permitted by the FCC to offer long distance services. These companies may not be accommodating once they are permitted to offer long distance service. Currently Verizon is permitted to offer both local and long distance service in some our mutual service areas, but we have not yet noticed any impact on our markets.
Many competitive carriers, including us, have experienced difficulties in working with traditional carriers with respect to initiating, connecting, and implementing the systems used by these competitive carriers to order and receive network elements and wholesale services and locating equipment in the offices of the traditional carriers.
If we cannot obtain the cooperation of a regional Bell operating company in a region, whether or not we have been authorized to offer long distance service, our ability to offer local services in such region on a timely and cost-effective basis will be harmed.
Competition from companies with already established marketing links and brand recognition to our potential customers may adversely affect our ability to introduce and market our products.
The telecommunications industry is highly competitive. Many of our current and potential competitors have financial, personnel and other resources, including brand name recognition, substantially greater than ours, as well as other competitive advantages over us. Certain competitors may be able to secure product from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, and adopt more aggressive pricing than we will. There can be no assurance we will be able to compete successfully against these competitors, which ultimately may have a materially adverse effect on our business, results of operations, financial condition and potential products in the future.
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Because our principal competitors are also our suppliers, our revenues may be reduced.
In each of the markets we target, we will compete principally with the traditional local phone companies serving that area, such as SBC, BellSouth or Southwestern Bell. We must purchase the telecommunications services we offer from these or similar carriers. Our suppliers could charge less than we do which could reduce our revenues.
RISKS FACTORS RELATING TO OUR COMMON STOCK
Our common stock could be deemed a low-priced “Penny” stock which could make it cumbersome for brokers and dealers to trade in our common stock, making the market for our common stock less liquid and negatively affecting the price of our stock.
In the event we are accepted for trading in the over-the-counter market, trading of our common stock may be subject to certain provisions of the Securities Exchange Act of 1934, commonly referred to as the “Penny Stock Rules” as defined in Rule 3a51-1. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our stock is deemed to be a penny stock, trading will be subject to additional sales practice requirements on broker-dealers. These require a broker-dealer to:
•
Deliver to the customer, and obtain a written receipt for, a disclosure document;
•
Disclose certain price information about the stock;
•
Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
•
Send monthly statements to customers with market and price information about the penny stock; and
•
In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.
Consequently, penny stock rules may restrict the ability or willingness of broker-dealers to trade and/or maintain a market in our common stock. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares.
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If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. More specifically, NASD has enacted Rule 6530, which determines eligibility of issuers quoted on the OTC Bulletin Board by requiring an issuer to be current in its filings with the Commission. Pursuant to Rule 6530(e), if we file our reports late with the Commission three times in a two-year period or our securities are removed from the OTC Bulletin Board for failure to timely file twice in a two-year period then we will be ineligible for quotation on the OTC Bulletin Board. The annual report for 2005 was considered late and our securities have been removed from the OTC Bulletin Board as we were unable to meet the filing grace period as defined under Rule 12b-25. Therefore, we must not have two more late filings or have our securities removed from the OTC Bulletin Board one more time within the next two years or we will be in jeopardy of being dequoted from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Stocks traded on the bulletin board are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts; our stockholders may have greater difficulty in selling their shares when they want and for the price they want.
Investors may have greater difficulty in getting orders filled because it is anticipated that if our stock trades on a public market, it initially will trade on the over-the-counter bulletin board rather than on Nasdaq. Investors’ orders may be filled at a price much different than expected when an order is placed. Trading activity in general is not conducted as efficiently and effectively on the OTC:BB as with Nasdaq-listed securities.
Investors must contact a broker dealer to trade bulletin board securities. Investors do not have direct access to the bulletin board service. For bulletin board securities, there only has to be one market maker.
Bulletin board transactions are conducted almost entirely manually. Because there are no automated systems for negotiating trades on the bulletin board, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. Therefore, when investors place market orders - an order to buy or sell a specific number of shares at the current market price - it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and execution of the order.
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Furthermore, because bulletin board stocks are usually not followed by analysts, there may be lower trading volume than for Nasdaq-listed securities.
NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the National Association of Securities Dealers (NASD) has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
ITEM 7.
FINANCIAL STATEMENTS
See Index to Financial Statements and Financial Statement Schedules appearing on page F-1 through F-16 of this Form 10-KSB.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Kingery & Crouse, P.A. to Beckstead and Watts, LLP
On February 18, 2006, Kingery & Crouse, P.A., our independent auditor, resigned and our Board of Directors accepted the resignation on February 20, 2006 concurrent with the appointment of Beckstead & Watts, LLP as our new independent auditor. During the most recent two fiscal years and during the portion of 2006 preceding the Board’s decision, neither the Company, nor anyone engaged on its behalf, consulted with Beckstead & Watts, LLP regarding: (i) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
The reports of Kingery & Crouse, P.A. on our consolidated financial statements for the fiscal years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except for modifications to include explanatory paragraphs expressing substantial doubt regarding our ability to continue as a going concern.
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The change in accountants did not result from any dissatisfaction with the quality of professional services rendered by Kingery & Crouse, P.A., as the independent accountants of the Company. We filed notice of this change on Form 8-K dated February 22, 2006.
Beckstead and Watts, LLP to Malone & Bailey, PC
On March 13, 2006, the Registrant terminated the engagement of Beckstead and Watts, LLP, as the Registrant’s independent accountants. Beckstead and Watts, LLP did not perform an audit of the Registrant’s financial statements or any significant audit related functions from the time they were engaged (February 20, 2006) through the date of the termination of their engagement (March 13, 2006).
The dismissal of Beckstead and Watts, LLP was recommended by the Registrant’s Executive Management and approved by the Registrant’s Board of Directors. There were no disagreements between the Registrant and Beckstead and Watts, LLP on any matter of accounting principles or practices, or financial statement disclosure, or audit scope or procedure.
We appointed Malone & Bailey, PC, as our independent accountants for the year ended December 31, 2005 on March 6, 2006. This change in accountants was recommended by our Executive Management and approved by our Board of Directors. During the most recent two fiscal years and during the portion of 2006 preceding the Board’s decision, neither the Company, nor anyone engaged on its behalf, consulted with Malone & Bailey, PC regarding: (i) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant’s financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K). We filed a notice of this change on Form 8-K on March 16, 2006.
Malone & Bailey, PC to Lawrence Scharfman & Co., CPA, P.C.
On July 17, 2006, we terminated the engagement of Malone & Bailey, PC, as our independent accountants.
Malone & Bailey, PC did not complete an audit of our financial statements from the time they were engaged (March 6, 2006) through the date of the termination of their engagement (July 17, 2006). We experienced some difficulties in timely responding to audit requests from Malone & Bailey, PC, which resulted in the mutual determination for us and Malone & Bailey, PC to terminate our relationship.
The dismissal of Malone & Bailey, PC was recommended by our Executive Management and approved by our Board of Directors.
There were no disagreements between us and Malone & Bailey, PC on any matter of accounting principles or practices, or financial statement disclosure, or audit scope or procedure.
31
We appointed Lawrence Scharfman & Co., CPA, P.C., as our independent accountants for the year ended December 31, 2005 on July 17, 2006. This is a change in accountants recommended by our Executive Management and approved by our Board of Directors. During the most recent two fiscal years and during the portion of 2006 preceding the Board’s decision, neither the Company, nor anyone engaged on its behalf, has consulted with Lawrence Scharfman & Co., CPA, P.C. regarding: (i) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant’s financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K). We filed a notice of this change on Form 8-K on July 20, 2006.
ITEM 8A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. We conducted an evaluation, with the participation of Henri Hornby, our current Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2006, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal accounting officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Mr. Hornby evaluated our disclosure controls and procedures and concluded that as of December 31, 2006, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
32
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies, which result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following two material weaknesses which have caused management to conclude that, as of December 31, 2006, our disclosure controls and procedures were not effective at the reasonable assurance level:
1.
We were unable to meet our requirements to timely file our Form 10-KSB for the year ended December 31, 2005. Management evaluated the impact of our inability to timely file periodic reports with the Securities and Exchange Commission on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted in the inability to timely make this filing represented a material weakness.
2.
We did not maintain a sufficient complement of finance and accounting personnel with adequate depth and skill in the application of generally accepted accounting principles as demonstrated by significant adjustments to our financial statements identified by our independent registered accounting firm in the preparation of our annual report for fiscal 2005. In addition, we did not maintain a sufficient complement of finance and accounting personnel to handle the matters necessary to timely file this Form 10-KSB for the year ended December 31, 2005. Management evaluated the impact of our lack of sufficient finance and accounting personnel on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted in our lack of sufficient personnel represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
To remediate the material weaknesses in our disclosure controls and procedures identified above, in addition to working with our independent auditors, we have engaged Accuity Financial Services, a consulting firm that provides expertise in accounting matters and performs accounting services on an outsourced basis, to supplement our internal accounting and bookkeeping capabilities. We have also implemented a new accounting software system and have changed internal accounting personnel.
Changes in Internal Control over Financial Reporting
Except as noted above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
ITEM 8B.
OTHER INFORMATION
None.
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The members of the Board of Directors of the Company will serve until the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the Board of Directors. Officers are elected by the Board and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board. Information as to the directors and executive officers of the Company is as follows:
NAME | AGE | POSITION |
Henri Hornby (1) | 50 | Current Chief Executive Officer, Secretary, Treasurer, Principal Accounting Officer, Director |
Jerald Woods | 56 | Vice-President, Director |
Janice Gordon (2) | 52 | President |
David Hewitt | 60 | Director |
(1)
Upon Mr. Edison’s resignation, the Board of Directors appointed Mr. Henri Hornby to serve as the Interim Chief Executive Officer.
(2)
On September 8, 2005, Russell Preston resigned from his position of President and Ms. Janice Gordon and Mr. William Jeff Manis were appointed as Co-Presidents of the Company.
Duties, Responsibilities and Experience
Henri Hornby was the Secretary, Treasurer, C.F.O, Chairman and Director of CA Networks, Inc. from its inception. Subsequent to the merger of CCI and CA Networks, Inc, Mr. Hornby remained a part of CCI as the Secretary, Treasurer, and Director. Upon Mr. Edison’s resignation on March 28, 2006, Mr. Hornby agreed to serve as our Interim Chief Executive Officer. From 1995 to 2004, he served as Chairman and president of Adven, Inc., a publicly-trade company on the Over-the-Counter Bulletin Board which was engaged in the environmental clean-up business. In early 2004, Adven commenced an acquisition of properties in the mining sector and changes its name to West Africa Gold.
34
Jerald Woods was the Vice President and Director of CA Networks, Inc. and subsequent to the merger of CCI and CA Networks, Inc. he has remained in these positions. Prior to the merger, Mr. Woods served as a telecommunications consultant for Competitive Companies. From 1994 to 2000 he was an Officer and Director of APMSAFE.COM (American Privacy Management, Inc.), a private company engaged in the computer encryption business. From 1988 to 1994, he was Chairman and Director for American Digital Communications, Inc. From 1984 to 1989, he hosted and produced “Breakthroughs in Technology,” an investment program specializing in high technology companies. He currently is President of JLW Communications Services. He also serves as a Director for Pico Medical located in Bethesda, Maryland.
Janice Gordon was appointed Co-President of CCI upon Russell Preston’s resignation on September 8, 2005. Ms. Gordon was to serve as Co-President with Mr. Manis. However, upon Mr. Manis’ resignation in January of 2006, Ms. Gordon became the only President of CCI. Prior to being appointed Co-President, Ms. Gordon joined CCI in April 2005 as President of Competitive Communications, Inc, our wholly-owned subsidiary. While at Competitive Communications, she was responsible for all operational functions and for providing service to the residential Multiple Dwelling Units. From 2003 through 2005, she served as a Director of International Marketing for Unified Worldwide Transport, LLC, a company engaged in the telecommunications industry in Santa Monica, CA. From 2002 through 2003, she served as Carrier Sales Manager for Verestar, Inc., a company engaged in the telecommunications industry in Santa Monica, CA where she oversaw sales for the company’s wholesale carrier division. From 2000 through 2001, Ms. Gordon served as Vice President of Sales and Distribution for Transmission Networks, Inc., a company engaged in the telecommunications industry. Ms. Gordon received her bachelor’s degree in Business Administration from the University of Southern California in 1977.
David Hewitt has been a Director since December 2001. Prior to joining the Company through the merger with Huntington Partners, Inc., he was the Co-Founder and President of Huntington Partners, Inc. Mr. Hewitt co-founded this company in 1994. From 1989 to 1992, he was Co-Founder and Managing Director of Trilateral Company, a real estate firm. He has an MBA with Distinction from Amos Tuck School of Business Administration at Dartmouth College and a BA from University of Rochester.
Limitation of Liability of Directors
Pursuant to the Nevada General Corporation Law, our Articles of Incorporation exclude personal liability for our Directors for monetary damages based upon any violation of their fiduciary duties as Directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which a Director receives an improper personal benefit. This exclusion of liability does not limit any right which a Director may have to be indemnified and does not affect any Director’s liability under federal or applicable state securities laws. We have agreed to indemnify our directors against expenses, judgments, and amounts paid in settlement in connection with any claim against a Director if he acted in good faith and in a manner he believed to be in our best interests.
35
Election of Directors and Officers
Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
No Executive Officer or Director of the Corporation has been the subject of any Order, Judgment, or Decree of any Court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring suspending or otherwise limiting him from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.
No Executive Officer or Director of the Corporation has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is currently pending.
No Executive Officer or Director of the Corporation is the subject of any pending legal proceedings.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. During the preparation of this Form 10-KSB, we learned that the reports required by Section 16(a) were not filed in connection with the securities issuances to our officers and directors during fiscal 2006. Therefore, none of our officers and directors are current in their respective 16(a) reports.
Audit Committee
We do not have an Audit Committee, our board of directors during 2006 performed some of the same functions of an Audit Committee, such as: recommending a firm of independent certified public accountants to audit the annual financial statements; reviewing the independent auditors’ independence, the financial statements and their audit report; and reviewing management’s administration of the system of internal accounting controls. The Company does not currently have a written audit committee charter or similar document.
36
Code of Ethics
A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:
•
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
•
Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the Commission and in other public communications made by an issuer;
•
Compliance with applicable governmental laws, rules and regulations;
•
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
•
Accountability for adherence to the code.
On December 18, 2005, we adopted a written code of ethics that governs all of our officers, and more specifically our principal executive officer, principal financial officer and principal accounting officer directors, employees and contractors. The code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote the above mentioned objectives. Anyone can obtain a copy of the Code of Ethics by contacting the Company. The Company will post any amendments to the Code of Ethics, as well as any waivers that are required to be disclosed by the rules of either the Securities and Exchange Commission of the National Association of Dealers.
Nominating Committee
We do not have a Nominating Committee or Nominating Committee Charter. Our board of directors performed some of the functions associated with a Nominating Committee. We have elected not to have a Nominating Committee at this time, however, our Board of Directors intends to continually evaluate the need for a Nominating Committee.
ITEM 10.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total compensation that we have paid or that has accrued on behalf of our chief executive officer and other executive officers with annual compensation exceeding $100,000 during the most recent fiscal years ending December 31, 2006 and 2005.
37
SUMMARY COMPENSATION TABLE
Annual Compensation | Long Term Compensation | |||||||
Name and Principal Position | Year | Salary | Bonus | Other Annual
| Awards | Payouts |
All other compensation | |
Restricted
| Options | LTIP
| ||||||
Russell Preston, | 2005 | $49,473 | -0- | -0- | -0- | -0- | -0- | -0- |
Former Chief Executive Officer and President | ||||||||
Henri Hornby, | 2006 | $13,000 | -0- | -0- | -0- | -0- | -0- | -0- |
Current Chief Executive Officer, Secretary and Treasurer (1) | 2005 | $46,509 | -0- | -0- | -0- | -0- | -0- | -0- |
Janice Gordon, President | 2006 | $60,000 | -0- | -0- | -0- | -0- | -0- | -0- |
Dave Reding,
| 2006 | $5,000 | -0- | -0- | -0- | -0- | -0- | -0- |
Jerry Woods, Vice President & Director | 2006 | $23,700 | -0- | -0- | -0- | -0- | -0- | -0- |
(1) Mr. Hornby assumed the position of Chief Executive Officer on March 31, 2006. The amount shown above as salary for Mr. Hornby represents the amount received while he served in the positions of Secretary and Treasurer prior to being appointed in March 2006 as the CEO.
Options Granted
We currently maintain a stock incentive plan in which common stock may be granted to employees, directors and consultants. During the year ended December 31, 2005, we cancelled 3,435,000 options which were previously outstanding as of December 31, 2004 and adopted our 2005 Stock Option Plan. The stock option plan was adopted by our board of directors and has not been approved by majority consent of our stockholders.
38
Date Granted | Number of Shares | Weighted Average Exercise Price | ||
Balance, December 31, 2004 | 3,435,000 | $0.10 | ||
Options Cancelled | (3,435,000) | $0.10 | ||
Options Granted | - | |||
Options Exercised | - | - | ||
Balance, December 31, 2005 | -0- | -0- | ||
Options Cancelled | - | - | ||
Options Granted | - | - | ||
Options Exercised | - | - | ||
Balance, December 31, 2006 | -0- | -0- | ||
Termination of Employment
There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person associated with the Company which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person’s employment with the Company or its subsidiaries, or any change in control of the Company, or a change in the person’s responsibilities following a change in control of the Company.
Compensation Committee
We currently do not have a compensation committee of the board of directors. Until a formal committee is established, our entire board of directors will review all forms of compensation provided to our executive officers, directors, consultants and employees including stock compensation and loans.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information, to the best of our knowledge, about the beneficial ownership of our common stock on March 30, 2007, held by those persons known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial ownership for the following table is based on 52,197,050 shares of common stock outstanding as of March 30, 2007.
39
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes (unless footnoted) shares of common stock that the stockholder has a right to acquire within 60 days after March 30, 2007 through the exercise of any option, warrant or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of our common stock.
Security Ownership of Management and Directors
Name of Management and Directors (1) | Number
| Percent
|
Henri Hornby, current Chief Executive Officer, Secretary, Treasurer, and Director |
| 20% |
Jerald Woods, Vice President and Director | 7,198,866 | 14% |
Janice Gordan, President | -0- | 0% |
David Hewitt, Director |
1,000,000 |
2% |
All Directors & Officers as a Group |
18,466,532 |
35% |
(1)
As used in this table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have “beneficial ownership” of any security that such person has the right to acquire within 60 days after such date. Address for the persons listed in the table is care of the Company.
(2)
Figures are rounded to the nearest percentage.
(3)
Includes 2,500,000 options to purchase shares of common stock at $0.10 per share and 100,000 shares of common stock held in a limited liability company of which Mr. Reding is a 50% member.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
40
ITEM 13.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Exhibits
Exhibit Number | Description |
2.1 | Plan and agreement of reorganization between Huntington Telecommunications Partners, LP, Competitive Companies Holdings, Inc., and Competitive Companies, Inc. dated December 19, 2001 (Incorporated by reference to Exhibit 2 to Form SB-2 filed on January 11, 2002) |
2.2 | Plan and agreement of reorganization between Huntington Telecommunications Partners, LP, Competitive Companies Holdings, Inc., and Competitive Companies, Inc. dated July 25, 2002 (Incorporated by reference to Exhibit 2.2 to Form SB-2A filed on August 2, 2002) |
2.3 | Plan and agreement of reorganization between Huntington Telecommunications Partners, LP, and Competitive Companies, Inc. dated December 31, 2002 (Incorporated by reference to Exhibit 2.2 to Form SB-2A filed on April 24, 2003) |
2.4 | Plan and agreement of reorganization between Competitive Companies Inc. and CCI Acquisition Corp. dated May 4, 2005 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 9, 2005) |
3(i) | Articles of Competitive Companies, as amended on December 27, 2001 (Incorporated by reference to Exhibit 3(I) to Form SB-2 filed on January 11, 2002) |
3(ii) | By-laws of Competitive Companies (Incorporated by reference to Exhibit 3(II) to Form SB-2 filed on January 11, 2002) |
4 | Rights and preferences of Preferred Stock (Incorporated by reference to Exhibit 4 to Form SB-2 filed on January 11, 2002) |
10.1 | Partnership Agreement between Morris-Crocker Associates and WT&T Telecommunications Partners, LP dated November 20, 1993 (Incorporated by reference to Exhibit 10.1 to Form SB-2 filed on January 11, 2002) |
10.2 | Partnership Agreement between Morris-Revocable Trust and WT&T Telecommunications Partners, LP dated November 20, 1993 (Incorporated by reference to Exhibit 10.2 to Form SB-2 filed on January 11, 2002) |
10.3 | Partnership Agreement between Stephen P. Diamond and Suzanne Diamond and Huntington Telecommunication Partners LP dated November 7, 1994 (Incorporated by reference to the Exhibit 10.3 to Form SB-2 filed on January 11, 2002) |
10.4 | Purchase Agreement between Personal Communications Spectrum V and Western Telephone and Television dated December 31, 1995 (Incorporated by reference to Exhibit 10.5a to Form SB-2 filed on January 11, 2002) |
10.5 | Supply, Services and Management Agreement between Personal Communications Spectrum V and Competitive Communications Inc. dated 1996 (Incorporated by reference to Exhibit 10.5b to Form SB-2 filed on January 11, 2002) |
10.6 | Asset Purchase Agreement between GST Universal Inc. and Competitive Communications, Inc. dated April 28, 1999 (Incorporated by reference to Exhibit 10.6a to Form SB-2 filed on January 11, 2002) |
10.7 | Telephone and Television Lease and Access Agreement between Crow Canyon Developers Ltd. and GRI Telecommunications Inc. (Promontory Point Apartments) dated November 1, 1996 (Incorporated by reference the Exhibit 10.6b to Form SB-2 filed on January 11, 2002) |
10.8 | Telephone and Television Lease and Access Agreement between Crow Canyon Developers Ltd. and GRI Telecommunications Inc. (Promontory View Apartments) dated November 1, 1996 (Incorporated by reference to the Exhibit 10.6c to Form SB-2 filed on January 11, 2002) |
41
10.9 | Employment Agreement between Competitive Communications Inc. and Larry Halstead dated August 31, 1997 (Incorporated by reference to Exhibit 10.7 to Form SB-2 filed on January 11, 2002) |
10.10 | Employment Agreement between Competitive Communications Inc. and David Kline dated April 8, 1996 (Incorporated by reference to Exhibit 10.19 to Form SB-2 filed on January 11, 2002) |
10.11 | Agreement with LCI Quest (Incorporated by reference to Exhibit 10.10 to Form SB-2 filed on January 11, 2002) |
10.12 | Carrier Services Agreement with Inet dated June 25, 1999 (Incorporated by reference to Exhibit 10.11 to Form SB-2 filed on January 11, 2002) |
10.13 | Sample Employee Option Agreement – 1998 Stock Plan (Incorporated by reference to Exhibit 10.12 to Form SB-2 filed on January 11, 2002) |
10.14 | Sample Consultant Option Agreement – 1999 Stock Plan (Incorporated by reference to Exhibit 10.13 to Form SB-2 filed on January 11, 2002) |
10.15 | Lease Agreement between Competitive Communications and Riverside Business Center dated July 21, 1999 (Incorporated by reference to Exhibit 10.15 to Form SB-2 filed on January 11, 2002) |
10.16 | Mississippi License Approval Letter dated November 8, 1999 (Incorporated by reference to Exhibit 10.16 to Form SB-2 filed on January 11, 2002) |
10.17 | California License Approval Letter dated December 16, 1999 (Incorporated by reference to Exhibit 10.17 to Form SB-2 filed on January 11, 2002) |
16.1 | Letter to the Commission from Kingery & Crouse, P.A., dated February 21, 2006 (Incorporated by reference to Exhibit 16 to Form 8-K filed on February 22, 2006) |
16.2 | Letter to the Commission from Beckstead & Watts, LLP, dated March 15, 2006 (Incorporated by reference to Exhibit 16 to Form 8-K filed on March 15, 2006) |
21* | List of Competitive Companies, Inc.’s Subsidiaries |
31* | Certification of Henri Hornby pursuant to Section 302 of the Sarbanes-Oxley Act |
32* | Certification of Henri Hornby pursuant to Section 906 of the Sarbanes-Oxley Act |
_____
*
Filed herewith
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by Lawrence Scharfman & Co., CPA, P.C. for the audit of our 2006 and 2005 annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for 2006 and 2005 were $15,000 and $12,500, respectively.
The aggregate fees billed for professional services rendered by Kingery & Crouse, P.A., for review of the financial statements included in our Form 10-QSB, or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for 2005 were $8,263.
42
(2) AUDIT-RELATED FEES
NONE
(3) TAX FEES
NONE
(4) ALL OTHER FEES
NONE
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
We do not have an audit committee.
(6) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
Not applicable.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
COMPETITIVE COMPANIES, INC.
By: /s/ Henri Hornby
Henri Hornby, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Henri Hornby | CEO, Secretary, Treasurer, | March 30, 2007 |
Henri Hornby | Director, and Principal Accounting Officer | |
/s/ Janice Gordan | President | March 30, 2007 |
Janice Gordon | ||
/s/ David Hewitt | Director | March 30, 2007 |
David Hewitt |
44
COMPETITIVE COMPANIES, INC.
Index to Financial Statements
Lawrence Scharfman & Co., CPA P.C.
Certified Public Accountants
18 E. SUNRISE HIGHWAY, #203 | 9608 HONEY BELL CIRCLE |
FREEPORT, NY 11520 | BOYNTON BEACH, FL 33437 |
TELEPHONE: (516) 771-5900 | TELEPHONE: (561) 733-0296 |
FACSIMILE: (516) 771-2598 | FACSIMILE: (561) 740-0613 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Competitive Companies, Inc. as of December 31, 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Competitive Companies, Inc. as of December 31, 2006 and the results of operations and cash flows for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Competitive Companies, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, Competitive Companies, Inc. suffered recurring losses from operations and has a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Lawrence Scharfman
Lawrence Scharfman, CPA
Boynton Beach Florida
March 29, 2007
- LICENSED IN FLORIDA & NEW YORK -
F-1
Lawrence Scharfman & Co., CPA P.C.
Certified Public Accountants
18 E. SUNRISE HIGHWAY, #203 | 9608 HONEY BELL CIRCLE |
FREEPORT, NY 11520 | BOYNTON BEACH, FL 33437 |
TELEPHONE: (516) 771-5900 | TELEPHONE: (561) 733-0296 |
FACSIMILE: (516) 771-2598 | FACSIMILE: (561) 740-0613 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Competitive Companies, Inc. as of December 31, 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Competitive Companies, Inc. as of December 31, 2005 and the results of operations and cash flows for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Competitive Companies, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, Competitive Companies, Inc. suffered recurring losses from operations and has a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Lawrence Scharfman
Lawrence Scharfman, CPA
Boynton Beach Florida
September 12, 2006
- LICENSED IN FLORIDA & NEW YORK -
F-2
Competitive Companies, Inc.
Consolidated Balance Sheets
December 31, | December 31, | ||||
2006 | 2005 | ||||
Assets | |||||
Current assets: | |||||
Cash | $ | 4,337 | $ | 5,279 | |
Accounts receivable, net of allowance of $27,368 and $75,918 | 111,709 | 110,377 | |||
Prepaid expenses and other current assets | 2,432 | 5,250 | |||
Total current assets | 118,478 | 120,906 | |||
Fixed assets, net | 111,270 | 157,300 | |||
Other assets | |||||
Deposits | 1,366 | 18,721 | |||
Total assets | 231,114 | 296,927 | |||
Liabilities and Stockholders’ Deficit | |||||
Current liabilities | |||||
Accounts payable | $ | 175,945 | $ | 180,846 | |
Accrued expenses | 25,758 | 146,344 | |||
Customer deposits | 37,500 | 28,250 | |||
Note payable | - | 262,637 | |||
Note payable – related party | 28,462 | 34,130 | |||
Current maturities of capital lease obligations | - | 11,447 | |||
Total current liabilities | 267,665 | 663,654 | |||
Stockholders’ Deficit | |||||
Preferred stock, $0.001 par value, 10,000,000 shares authorized: | |||||
Class “A” convertible, no shares issued and | |||||
outstanding at December 31, 2006 and 2005 | - | - | |||
Class “B” convertible, 1,495,436 shares issued and | |||||
outstanding at December 31, 2006 and 2005 | 1,495 | 1,495 | |||
Class “C” convertible, 1,000,000 shares issued and | |||||
outstanding at December 31, 2006 and 2005 | 1,000 | 1,000 | |||
Common stock, $0.001 par value, 100,000,000 shares authorized | |||||
52,197,050 and 54,348,960 shares issued and outstanding | |||||
at December 31, 2006 and 2005, respectively | 52,197 | 54,349 | |||
Subscriptions receivable | - | (5,550) | |||
Additional paid in capital | 2,241,292 | 1,734,791 | |||
Accumulated (deficit) | (2,332,535) | (2,152,812) | |||
(36,551) |
(366,727) | ||||
| |||||
$ | 231,114 | $ | 296,927 | ||
The accompanying notes are an integral part of these financial statements.
F-3
Competitive Companies, Inc.
Consolidated Statements of Operations
For the years ended | |||||
December 31, | |||||
2006 | 2005 | ||||
Revenue | $ | 1,013,817 | $ | 773,230 | |
Cost of sales | 803,464 | 686,194 | |||
Gross profit | 210,353 | 87,036 | |||
Expenses: | |||||
General and administrative | 268,150 | 396,147 | |||
Salaries and wages | 351,598 | 245,619 | |||
Consulting fees | 37,500 | 376,402 | |||
Depreciation | 31,579 | 40,740 | |||
Intangible asset impairment | - | 778,000 | |||
Bad debt | 14,712 | 34,824 | |||
Impairment of operating assets | - | 44,376 | |||
Total operating expenses |
703,539 |
1,916,108 | |||
Net operating (loss) | (493,186) | (1,829,072) | |||
Other income (expense): | |||||
Other income | - | 6,799 | |||
Interest expense | (26,464) | (34,747) | |||
Gain on debt forgiveness | 339,927 | - | |||
Loss on investment | - | (109,536) | |||
Total other income (expense) |
313,463 |
(137,484) | |||
Net (loss) | $ | (179,723) | $ | (1,966,556) | |
Weighted average number of common shares outstanding - | |||||
basic and fully diluted | 51,381,903 | 33,001,875 | |||
Net (loss) per share – basic and fully diluted |
$ |
(0.00) |
$ |
(0.06) | |
The accompanying notes are an integral part of these financial statements.
F-4
Competitive Companies, Inc.
Statements of Changes in Stockholders’ Deficiency
|
|
|
Total | |||||||||
|
Common Stock |
Class A Preferred Stock |
Class B Preferred Stock |
Class C Preferred Stock | Additional | Subscriptions | Accumulated | Stockholders' | |||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Paid-in |
Receivable |
(Deficit) |
Equity | |
|
Balance,
|
39,885,659 |
$ 39,886 |
4,000,000 |
$ 4,000 |
1,495,436 |
$1,495 |
1,000,000 |
$ 1,000 |
$(18,774,448) |
$ - |
$ 19,684,494 |
$ 956,427 |
|
Repurchase of shares |
- |
- |
(4,000,000) |
(4,000) |
- |
- |
- |
- |
(36,000) |
- |
- |
(40,000) |
|
Shares issued in
|
5,912,061 |
5,912 |
- |
- |
- |
- |
- |
- |
19,698,666 |
- |
(19,870,750) |
(166,172) |
|
Shares issued
|
7,238,740 |
7,239 |
- |
- |
- |
- |
- |
- |
716,635 |
(5,550) |
- |
718,324 |
|
Shares issued
|
1,312,500 |
1,313 |
- |
- |
- |
- |
- |
- |
129,937 |
- |
- |
131,250 |
|
Net loss for
|
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
(1,966,556) |
(1,966,556) |
|
Balance,
|
54,348,960 |
54,350 |
- |
- |
1,495,436 |
1,495 |
1,000,000 |
1,000 |
1,734,790 |
(5,550) |
(2,152,812) |
(366,727) |
|
Shares cancelled |
(6,899,910) |
(6,900) |
- |
- |
- |
- |
- |
- |
6,900 |
- |
- |
- |
|
Shares issued
|
3,923,000 |
3,923 |
- |
- |
- |
- |
- |
- |
375,077 |
5,550 |
- |
384,550 |
|
Shares issued
|
825,000 |
825 |
- |
- |
- |
- |
- |
- |
124,524 |
- |
- |
125,349 |
|
Net loss for
|
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
(179,723) |
(179,723) |
|
Balance,
|
52,197,050 |
$ 52,198 |
- |
$ - |
1,495,436 |
$ 1,495 |
1,000,000 |
$ 1,000 |
$ 2,241,291 |
$ - |
$ (2,332,535) |
$ (36,551) |
The accompanying notes are an integral part of these financial statements.
F-5
Competitive Companies, Inc.
Consolidated Statements of Cash Flows
For the years ended | |||||
December 31, | |||||
2006 | 2005 | ||||
Cash flows from operating activities | |||||
Net (loss) | $ | (179,723) | $ | (1,966,556) | |
Adjustments to reconcile net (loss) to | |||||
net cash (used) by operating activities: | |||||
Depreciation | 31,579 | 40,740 | |||
Shares issued for services | 125,350 | 911,877 | |||
Loss on investment | - | 109,536 | |||
Impairment of operating assets | - | 44,376 | |||
Provision for bad debt | 14,712 | 41,021 | |||
Forgiveness of debt | (339,927) | - | |||
Decrease (increase) in assets: | |||||
Accounts receivable | (16,044) | (13,619) | |||
Prepaid expenses and other current assets | 17,355 | (34,141) | |||
Deposits | 2,818 | - | |||
Increase (decrease) in liabilities: | |||||
Accounts payable | (4,901) | 91,933 | |||
Accrued expenses | (46,103) | (50,899) | |||
Customer deposits | 9,250 | 28,250 | |||
Net cash (used) by operating activities |
(385,634) |
(797,484) | |||
Cash flows from investing activities | |||||
Proceeds received from acquisition | - | 157,576 | |||
Purchase of fixed assets | (9,870) | (32,352) | |||
Proceeds from disposal of fixed assets | 24,321 | - | |||
Net cash provided by investing activities |
14,451 |
125,224 | |||
Cash flows from financing activities | |||||
Principal payments on debt and capital leases | (14,308) | (6,465) | |||
Proceeds from the sale of common stock | 384,550 | 718,324 | |||
Payments for repurchase of preferred stock | - | (40,000) | |||
Net cash provided by financing activities |
370,242 |
671,859 | |||
Net (decrease) in cash | (941) | (401) | |||
Cash – beginning | 5,279 | 5,680 | |||
Cash – ending | $ | 4,338 | $ | 5,279 | |
Supplemental disclosures: | |||||
Interest paid | $ | 26,464 | $ | 34,747 | |
Income taxes paid |
$ |
- |
$ |
- | |
Non-cash investing and financing activities: | |||||
Shares issued for services | $ | 125,350 | $ | 911,877 | |
Debt forgiveness |
$ |
339,927 |
$ |
- | |
The accompanying notes are an integral part of these financial statements.
F-6
Competitive Companies, Inc
Notes to Financial Statements
Note 1 – Summary of Accounting Policies
Competitive Companies, Inc. ("Competitive") was originally incorporated under the laws of the state of Nevada in March 1998, and shortly thereafter acquired all of the assets and assumed all of the liabilities of Competitive Communications, Inc. ("CCI"), which was incorporated under the laws of the state of California in February 1996. In January 2000, CCI Residential Services, Inc. ("CCIR") was formed. This entity, which is also a wholly owned subsidiary of Competitive was formed to expand on the residential services currently being provided by CCI, while CCI focused on developing revenue streams from other services.
Competitive, CCI and CCIR (collectively referred to as the "Company") provide telephone, cable television, long distance/inter - exchange, and dial up and high-speed Internet connections and e-mail services, mainly to customers who live in multi-tenant residential buildings. The Company's operations are located in Riverside, California and substantially all of its customers are California residents.
On May 5, 2005 the Company merged with CA Networks, Inc. ("CAN"), which was a development stage enterprise that was in the process of developing a business model in the same industry as Competitive. CAN was formed under the laws of the state of Wyoming on January 14, 2004. The combined companies maintained the name of CCI.
On the date of the transaction (the "Effective Date") the Company issued 40,599,999 shares of its common stock to the shareholders of CAN in exchange for the 40,599,999 outstanding shares of CAN. In effect, each of CAN's shares that were issued and outstanding immediately before the merger was exchanged for one share of the Company's common stock. Although Competitive was the legal acquirer and surviving entity, because the shareholders of CAN received the majority of the voting rights in the combined entity, for accounting purposes the acquisition was treated as a recapitalization of CAN with CAN being reflected as the acquirer of Competitive (a reverse acquisition). Accordingly, the 5,912,061 common shares held by the Company's shareholders were deemed have been issued by CAN in exchange for the Company's net liabilities at the date of the acquisition. Upon such acquisition date, the purchase price consisted of the following:
Estimated value of 5,912,061 shares of common stock of Competitive deemed to have been issued, at estimated value of $0.10 per share | $ 591,206 |
Direct costs of the business combination | 19,717 |
Net liabilities assumed | 167,077 |
Total | $ 778,000 |
F-7
Competitive Companies, Inc
Notes to Financial Statements
Because the net book value of Competitive' assets and liabilities approximated their fair values on the date of acquisition, the purchase price above has been reflected as an impairment expense on the Company's books and records.
In connection with this transaction, we agreed to file a registration statement with the Securities and Exchange Commission to register the shares of restricted common stock issued to CAN's shareholders who own less than 5% of the total outstanding shares of the merged entity, however at the current time, we are considering whether or not this is feasible as we are not currently trading. The merged company (collectively "we", "us", "ours") intends to be a provider of local telephone, long distance service and high speed internet service through Wireless Internet networks in all states it operates in, and will also offer cellular service nationwide.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Actual results could differ significantly from our estimates.
Cash and cash equivalents
CCI maintains a cash balances in interest and non-interest-bearing accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.
Basis of Accounting
Our consolidated financial statements are prepared using the accrual method of accounting.
Principles of Consolidation
The consolidated financial statements include the accounts of CCI, and its wholly-owned subsidiary CCIR. All significant inter-company balances and transactions have been eliminated. CCI and CCIR will be collectively referred herein to as the “Company”.
F-8
Competitive Companies, Inc
Notes to Financial Statements
Revenue Recognition
Our revenue recognition policy is consistent with the criteria set forth in Staff Accounting Bulletin 104 - Revenue Recognition in Financial Statements ("SAB 104") for determining when revenue is realized or realizable and earned. In accordance with the requirements of SAB 104 we recognize revenue when (1) persuasive evidence of an arrangement exists; (2) delivery of our services has occurred; (3) our price to our customer is fixed or determinable; and (4) collectibility of the sales price is reasonably assured. As such, we recognize revenues in the month in which we provide services. Services provided but not billed by the end of the year are reflected as unbilled receivables in the accompanying consolidated balance sheet.
Allowance for Doubtful Accounts
We evaluate the allowance for doubtful accounts on a regular basis through periodic reviews of the collectibility of the receivables in light of historical experience, adverse situations that may affect our customers' ability to repay, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accounts receivable are determined to be past due based on how recently payments have been received and those considered uncollectible are charged against the allowance account in the period they are deemed uncollectible. The allowance for doubtful accounts was $27,368 and $75,918 at December 31, 2006 and 2005, respectively.
Investment
During the quarter ended June 30, 2005, we entered into an acquisition agreement to purchase an unrelated entity. However, because this entity failed to comply with the terms of the acquisition agreement, we were unable to consummate the acquisition, and abandoned our acquisition efforts in September 2005. During the period between the date of the acquisition agreement and our decision to abandon the proposed acquisition, we invested $109,536 in the entity. This amount was determined to be impaired as of the date of our decision to abandon the acquisition and accordingly, we charged operations for $109,536 during the year ended December 31, 2005.
Fixed assets
Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:
Furniture and fixtures | 5 years |
Telecommunication equipment and computers | 5 – 10 years |
Leasehold Improvements | 7 years |
F-9
Competitive Companies, Inc
Notes to Financial Statements
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which have extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.
Impairment of long-lived assets
Long-lived assets held and used by CCI are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations. The Company incurred an impairment loss of $-0- and $44,376 for the years ended December 31, 2006 and 2005, respectively.
Basic and diluted loss per share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For 2006 and 2005, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Goodwill and Other Intangible Assets
Goodwill and indefinite life intangible assets are recorded at fair value and not amortized, but are reviewed for impairment annually or more frequently if impairment indicators arise, as required by SFAS No. 142. As of December 31, 2006 and 2005 we had no goodwill or other intangible assets. The Company incurred impairment losses of $-0- and $778,000 for the years ended December 31, 2006 and 2005, respectively.
Income taxes
CCI applies recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. CCI provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
F-10
Competitive Companies, Inc
Notes to Financial Statements
Stock-based compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. CCI adopted SFAS No. 123 (R) during 2005. Stock issued for services totalled $125,350 and $911,877 for the years ended December 31, 2006 and 2005, respectively.
Advertising
We expense advertising costs as they are incurred. These expenses approximated $51,050 and $6,982 for the years ended December 31, 2006 and 2005, respectively.
Recently Issued Accounting Pronouncement
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”) which supersedes APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 changes the requirements for accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS No. 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe SFAS No. 154 will have an immediate significant impact on its financial position or results of operations.
F-11
Competitive Companies, Inc
Notes to Financial Statements
Note 2 – Going Concern
Our consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. We have incurred continuous losses from operations, have an accumulated deficit of $2,332,535 and a working capital deficit of $149,187 at December 31, 2006, and have reported negative cash flows from operations over the last three years. In addition, we do not currently have the cash resources to meet our operating commitments for the next twelve months, and we expect to have ongoing requirements for capital investment to implement our business plan. Finally, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which we operate.
We anticipate our merger discussed in Note 1 will provide us with better access to debt or equity capital and/or will help to improve our results of operations through our ability to offer additional services to our customers and through the negotiation of better line usage charges and sharing of operating overhead. Since inception, our operations have primarily been funded through private equity financing, and we expect to continue to seek additional funding through private or public equity and debt financing.
Our ability to continue as a going concern is dependent on our ability to generate sufficient cash from operations to meet our cash needs and/or to raise funds to finance ongoing operations and repay debt. However, there can be no assurance that we will be successful in our efforts to raise additional debt or equity capital and/or that our cash generated by our operations will be adequate to meet our needs. These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.
Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Note 3 – Asset sale
On June 30, 2006, the Company entered into an Asset Purchase Agreement with Voice, Video and Data Services, Inc. (“Buyer”), whereby the Company agrees to sell, convey, assign, transfer and deliver to the Buyer all of the assets and liabilities of its Kentucky division, including but not limited to the following: all existing inventory; telephone service contracts within the state of Kentucky; its rights under licensing agreements; vendor agreements; its office lease; all physical property located in Kentucky; and all of the outstanding liabilities attributed to the Kentucky operations in exchange for the cancellation of 1,400,000 shares of the Company’s par value common stock controlled by a principal of the Buyer. As of July 12, 2006, the Company has transferred assets valued at $175,000 and liabilities totaling $173,000 pursuant to the agreement.
F-12
Competitive Companies, Inc
Notes to Financial Statements
Additionally, the Buyer has escrowed with the Company 1,400,000 shares of the Company’s par value common stock as security for payment of the transferred liabilities. If the Buyer does not fully pay all such liabilities as of December 31, 2006 the escrowed shares shall be cancelled.
Note 4 – Property and Equipment
Property and equipment consist of the following:
December 31, | |||||
2006 | 2005 | ||||
Telecommunication equipment and computers | $ | 267,354 | $ | 448,469 | |
Furniture and fixtures | 3,353 | 7,751 | |||
Leasehold improvements | 13,539 | 13,539 | |||
284,246 | 469,759 | ||||
Less accumulated depreciation | (172,976) | (312,459) | |||
$ | 111,270 | $ | 157,300 | ||
Depreciation expense totaled $31,579 and $40,740 for 2006 and 2005, respectively
Note 5 – Income taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), which requires use of the liability method. SFAS No. 109 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For the years ended December 31, 2006 and 2005, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2006, the Company had approximately $2,275,000 of federal and state net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2025.
F-13
Competitive Companies, Inc
Notes to Financial Statements
The components of the Company’s deferred tax asset are as follows:
As of December 31, | As of December 31, | |
2006 | 2005 | |
Deferred tax assets: | ||
Net operating loss carry forwards | $ 795,000 | $ 753,000 |
Total deferred tax assets | 795,000 | 753,000 |
Net deferred tax assets before valuation allowance | 795,000 | 753,000 |
Less: Valuation allowance | (795,000) | (753,000) |
Net deferred tax assets | $ -0- | $ -0- |
Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2006 and 2005.
A reconciliation between the amount of income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:
2006 | 2005 | |
Federal and state statutory rate | 35% | 35% |
Change in valuation allowance on deferred tax assets | (35%) | (35%) |
-0- | -0- |
Note 6 – Long Term Debt
Long-term debt consists of the following:
Unsecured note payable to a stockholder, with interest at 8%, and monthly principal and interest payments of $683 through February 23, 2011. The balance was $28,462 and $34,128 at December 31, 2006 and 2005, respectively.
Scheduled maturities of long-term debt as of December 31, 2006 are as follows:
Years | Amounts |
2006 | 8,196 |
2007 | 8,196 |
2008 | 8,196 |
Thereafter | 3,874 |
F-14
Competitive Companies, Inc
Notes to Financial Statements
Debt forgiveness
Note payable to Frontier Communications Services, Inc., bearing interest at 10% and requiring monthly principal and interest payments of $3,000. Frontier has recently completed bankruptcy and no further obligation was assigned. As such, the debt and accrued interest has been written off in 2006, and the Company has recorded income through debt forgiveness of $57,993 including principal and accrued interest. This note was originally due on March 15, 2003, however due to the aforementioned, the required monthly payments had not been made since December 31, 2002. The note was secured by the telecommunications equipment purchased with the proceeds from the note. The balance of the note payable was $-0- and $55,188 at December 31, 2006 and 2005, respectively.
Note payable to GST, which initially required interest at 10% with monthly interest payments of $1,729 through its maturity date of April 28, 2004. The note was secured by the telecommunications equipment purchased with the proceeds from the note. Effective April 28, 2004, the interest rate was increased to a default rate of 15% per annum. The note has not been paid. The Company has ceased operations and abandoned all claims on the debt. As such, the debt and accrued interest has been written off in 2006, and the Company has recorded income through debt forgiveness of $281,934 including principal and accrued interest. The balance of the note payable was $-0- and $264,322 including accrued interest of $56,872 at December 31, 2006 and 2005, respectively.
Note 7 – Commitments
We lease our operating facility in Riverside California under a non-cancelable 5-year operating lease expiring December 14, 2011. The lease provides for increases in future minimum annual rental payments based on defined annual increases beginning with monthly payments of $2,433 and culminating in a monthly payment of $2,945 in 2011. Lease expense totaled $39,026 and $65,912 during 2006 and 2005, respectively.
Future minimum lease payments required are as follow:
Year | Amount |
2006 | $29,321 |
2007 | 30,858 |
2008 | 32,394 |
2009 | 33,931 |
2010 | 32,394 |
Total | $158,898 |
F-15
Competitive Companies, Inc
Notes to Financial Statements
Note 8 – Stockholders’ equity
Convertible Class A Preferred Stock
In consummation of the merger in Note 1, the Company repurchased 4,000,000 Class “A” preferred stock for $40,000 during 2005. Therefore, there was no outstanding Class “A” preferred stock at December 31, 2006 or 2005, respectively.
Common stock
During 2006 the Company cancelled 6,899,910 shares.
During 2006, CCI issued 4,220,500 shares of its $.001 par value common stock for cash totaling $422,050.
During 2006, CCI issued 77,500 shares of its $.001 par value common stock for subscriptions payable at December 31, 2005.
During February of 2006, CCI issued 100,000 shares of its $.001 par value common stock to Island Capital Management for consulting services valued at a price of $0.15 per share, totaling $15,350, the fair market value of the underlying shares.
During July of 2006, CCI issued 100,000 shares of its $.001 par value common stock to Island Capital Management for consulting services valued at a price of $0.10 per share, totaling $10,000, the fair market value of the underlying shares.
During September of 2006, CCI issued 200,000 shares of its $.001 par value common stock to Opus Pointe for professional services valued at a price of $0.25 per share, totaling $50,000, the fair market value of the underlying shares.
During September of 2006, CCI issued 50,000 shares of its $.001 par value common stock to Stoecklein Law Group for professional services valued at a price of $0.25 per share, totaling $12,500, the fair market value of the underlying shares.
During 2005, CCI issued 6,465,990 shares of its $.001 par value for cash totaling $640,133.
During 2005, CCI issued 1,312,500 shares for director services valued at $131,250, the fair market value of the underlying shares.
F-16
Competitive Companies, Inc
Notes to Financial Statements
On the date of the transaction (the "Effective Date") in Note 1 the Company, issued 40,599,999 shares of its common stock to the shareholders of CAN in exchange for the 40,599,999 outstanding shares of CAN. 5,912,061. Because the net book value of Competitive's assets and liabilities approximated their fair values on the date of acquisition the purchase price, the Company expensed $778,000.
Note 9 – Common stock options
During the year ended December 31, 2005, Company cancelled 3,435,000 options outstanding at December 31, 2004 and adopted 2005 Stock Option Plan (the “Plan”). The Plan authorizes the issuance of stock options and other awards to acquire up to a maximum 10,000,000 shares of the Company’s common stock (less the number of shares issuable upon exercise of options granted by the Company under all other stock incentive plans on the date of any grant under the Plan). The Plan provides for the grant of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended), options that are not incentive stock options, stock appreciation rights and various other stock-based grants.
The following is a summary of activity of outstanding stock options under the 2005 Stock Option Plan:
| Number | Weighted Average Exercise | ||||
| Of Options | Price | ||||
Balance, December 31, 2004 |
| 3,435,000 |
|
| $ | .10 |
Options cancelled | (3,435,000) |
| .10 | |||
Options granted |
| - |
|
|
| - |
Options exercised |
| - |
|
| - | |
Balance, December 31, 2005 |
| -0- |
|
| $ | -0- |
Options cancelled | - |
| - | |||
Options granted |
| - |
|
|
| - |
Options exercised |
| - |
|
| - | |
Balance, December 31, 2006 |
| -0- |
|
| $ | -0- |
Exercisable, December 31, 2006 |
| -0- |
|
| $ | -0- |
F-17
Competitive Companies, Inc
Notes to Financial Statements
Note 10 – Subsequent Events
During 2007, CCI issued 1,450,000 shares of its $.001 par value common stock for cash to accredited investors totaling $145,000 pursuant to its private placement offering.
F-18