SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter ended September 30, 2000
Commission File Number 0-27505.
CTC COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3469590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
220 Bear Hill Rd., Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
(781) 466-8080
(Registrant's telephone number including area code)
Former fiscal year: March 31, 2001
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of Common Stock, as of the latest practicable date:
As of November 14, 2000, 26,577,387 shares of Common Stock were outstanding.
<PAGE>
CTC COMMUNICATIONS GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Part I FINANCIAL STATEMENTS PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Unaudited Balance Sheets
as of September 30 and March 31, 2000 3
Condensed Consolidated Unaudited
Statements of Operations
Three Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Unaudited
Statements of Operations
Six Months Ended September 30, 2000 and 1999 5
Condensed Consolidated Unaudited
Statements of Cash Flows
Six Months Ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Unaudited
Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 15-16
Part II OTHER INFORMATION
Item 1. Legal Proceedings Inapplicable
Item 2. Changes in Securities Inapplicable
Item 3. Default Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a
Vote of Security Holders 17
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
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CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $120,872,166 $20,093,156
Accounts receivable, net 49,197,397 39,965,335
Prepaid expenses and other current assets 3,767,597 3,576,033
------------- -------------
Total current assets 173,837,160 63,634,524
Property and equipment 214,238,602 120,604,893
Less accumulated depreciation and amortization (49,937,442) (29,369,433)
------------- -------------
Total property and equipment, net 164,301,160 91,235,460
Deferred financing costs and other assets 15,930,236 7,363,368
------------- -------------
Total assets $354,068,556 $162,233,352
============= =============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses $43,462,079 $46,328,757
Accrued salaries and related taxes 3,158,146 2,482,800
Current portion of obligations under
capital leases 15,111,626 8,413,414
Current portion of notes payable 1,749,342 1,749,342
------------- -------------
Total current liabilities 63,481,193 58,974,313
Long-term debt:
Obligations under capital leases,
net of current portion 47,877,806 15,031,108
Notes payable, net of current portion 103,584,924 103,928,207
------------- -------------
Total long-term debt 151,462,730 118,959,315
Series B redeemable convertible preferred stock 198,539,851 0
Stockholders' deficit:
Common stock 263,308 257,736
Additional paid in capital 93,051,980 90,652,020
Deferred compensation (53,410) (106,410)
Retained deficit (152,677,096) (106,503,622)
--------------- -------------
Total stockholders' deficit (59,415,218) (15,700,276)
--------------- -------------
Total liabilities and stockholders' deficit $354,068,556 $162,233,352
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
<S> <C> <C>
Telecommunications revenues $58,508,354 $35,109,155
Operating costs and expenses:
Cost of telecommunications revenues,
excluding depreciation 45,421,733 27,398,259
Selling, general and
administrative expenses 20,536,134 12,676,315
Depreciation 11,975,575 3,652,809
--------------- ------------
Total operating costs and expenses 77,933,442 43,727,383
--------------- ------------
Loss from operations (19,425,088) (8,618,228)
Other income (expense), net:
Interest income 2,146,554 473,780
Interest expense (4,246,670) (4,221,052)
Other income 0 71,996
--------------- ------------
Total other expense, net (2,100,116) (3,675,276)
--------------- ------------
Net loss $(21,525,204) $(12,293,504)
=============== ============
Net loss per common share:
Basic and diluted $(0.99) $(0.61)
=============== ============
Weighted average number of common shares:
Basic and diluted 26,267,495 20,634,800
=============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended September 30,
2000 1999
<S> <C> <C>
Telecommunications revenues $110,977,441 $66,156,006
Operating costs and expenses:
Cost of telecommunications revenues,
excluding depreciation 85,523,390 53,487,443
Selling, general and
administrative expenses 38,247,475 26,918,439
Depreciation 20,937,682 5,756,309
--------------- -------------
Total operating costs and expenses 144,708,547 86,162,191
--------------- -------------
Loss from operations (33,731,106) (20,006,185)
Other income (expense), net:
Interest income 3,518,996 474,121
Interest expense (9,153,785) (7,991,767)
Other income 0 111,514
--------------- -------------
Total other expense, net (5,634,789) (7,406,132)
--------------- -------------
Net loss $(39,365,895) $(27,412,317)
=============== =============
Net loss per common share:
Basic and diluted $(1.77) $(1.56)
=============== =============
Weighted average number of common shares:
Basic and diluted 26,118,831 18,061,875
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended September 30,
2000 1999
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(39,365,895) $(27,412,317)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 20,937,682 5,756,309
Stock compensation expense 53,000 2,506,119
Interest related to warrants and certain fees 464,249 2,075,913
Changes in working capital items:
Accounts receivable (9,232,062) (10,662,878)
Prepaid expenses and other current assets (191,564) (1,567,589)
Other assets (5,489,223) (5,400)
Accounts payable and accrued expenses (2,866,679) 8,543,081
Accrued salaries and related taxes 675,346 1,285
--------------- ---------------
Net cash used by operating activities (35,015,146) (20,765,477)
INVESTING ACTIVITY:
Additions to property and equipment (49,044,678) (11,745,132)
--------------- ---------------
Net cash used in investing activities (49,044,678) (11,745,132)
FINANCING ACTIVITIES:
Proceeds from the issuance of Series B Redeemable
Convertible Preferred Stock, net of offering costs 191,732,272 0
Proceeds from the issuance of common stock 2,405,533 62,096,789
Repayment of amount due from stockholders 0 19,045
Proceeds from notes payable 25,000,000 42,098,357
Repayment of notes payable (25,730,618) (26,839,164)
Deferred financing costs (3,517,174) (42,559)
Repayments under capital lease obligations (5,051,179) (2,504,179)
--------------- ---------------
Net cash provided by financing activities 184,838,834 74,828,289
--------------- ---------------
Increase in cash and cash equivalents 100,779,010 42,317,680
Cash and cash equivalents at beginning of year 20,093,156 2,254,258
--------------- ---------------
Cash and cash equivalents at end of period $120,872,166 $44,571,938
============== ===============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Network, related equipment and building acquired
under capital leases $44,596,089 $3,155,402
Network and related equipment acquired under
notes payable $362,615 $7,215,611
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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CTC COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnote disclosures required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three and six months ended September 30,
2000 are not necessarily indicative of the results that may be expected for
the transition period ending December 31, 2000, as noted below. These
statements should be read in conjunction with the financial statements and
related notes included in the our Annual Report on Form 10-K for the fiscal
year ended March 31, 2000.
Change in Fiscal Year
At the Annual Meeting of our Board of Directors held on July 27, 2000, our
fiscal year end was changed from March 31 of each year to December 31 of each
year. The transition period will be reported on Form 10-K for the period
ending December 31, 2000.
NOTE 2: COMMITMENTS AND CONTINGENCIES
We are a party to suits arising in the normal course of business which our
management believes are not material individually or in the aggregate.
NOTE 3: NET LOSS PER SHARE
The following tables set forth the computation of basic and diluted
net loss per share:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
----------------------------
Numerator:
<S> <C> <C>
Net loss $(21,525,204) $(12,293,504)
Accretion to redemption value on
redeemable preferred stock (4,539,531) (362,380)
Numerator for basic net loss
per share and diluted net ----------------------------
loss per share $(26,064,735) $(12,655,884)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 26,267,495 20,634,800
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ----------------------------
loss per share-weighted-average shares 26,267,495 20,634,800
============================
Basic and diluted net loss per share $(0.99) $(0.61)
============================
</TABLE>
7
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<TABLE>
<CAPTION>
Six Months Ended
September 30,
2000 1999
Numerator: ----------------------------
<S> <C> <C>
Net loss $(39,365,895) $(27,412,317)
Accretion to redemption value on
redeemable preferred stock (6,807,579) (689,384)
Numerator for basic net loss
per share and diluted net ----------------------------
loss per share $(46,173,474) $(28,101,701)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 26,118,831 18,061,875
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ----------------------------
loss per share-weighted-average shares 26,118,831 18,061,875
============================
Basic and diluted net loss per share $(1.77) $(1.56)
============================
</TABLE>
NOTE 4: PREFERRED STOCK
In May 2000, the Company completed a $200 million preferred stock financing
with Bain Capital Inc., Thomas H. Lee Partners, L.P. and CSFB Private Equity,
consisting of 8.25% Series B redeemable convertible preferred stock which
converts into common stock at $50 per share. The preferred stockholders may
require redemption of the preferred shares if the common stock of the Company
reaches certain levels. The Company may elect to redeem the preferred shares
on the fifth anniversary of the closing and all outstanding shares of
preferred stock must be redeemed by May 2010. Bain Capital and Thomas H. Lee
each invested $75 million and CSFB Private Equity has invested $50 million.
NOTE 5: RELATED PARTY TRANSACTION
In May 2000, the Company entered into a 15 year lease for approximately
71,250 square feet from a limited liability company in which two of the
Company's executive officers, including the chairman, own a majority of
membership interests, and in which four executive officers of the Company
each own a minority membership interest. The annual base rental under the
lease is $1,778,100, which is subject to annual cost of living adjustments.
The lease obligation has been capitalized in the accompanying condensed
consolidated unaudited financial statements.
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, as amended, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133, as amended") was issued, as amended by SFAS Nos.
137 and 138, which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended, is effective for all fiscal quarters
8
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of fiscal years beginning after June 15, 2000. The Company is presently
analyzing the impact, if any, that the adoption of SFAS No. 133, as amended,
will have on its financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25." The Company is
required to adopt the Interpretation on July 1, 2000. The Interpretation
requires, among other things, that stock options that have been modified to
reduce the exercise price be accounted for as variable. The Company modified
one stock option agreement in April 1999, which resulted in a stock
compensation charge of approximately $2.2 million. No other option grants
have been modified by a reduction of the exercise prices, therefore, the
adoption of the Interpretation is not expected to have an impact on the
Company's consolidated financial statements, unless modifications are made in
the future.
Adoption of Staff Accounting Bulletin 101.
The Company, as described below, will revise its revenue recognition policy
for certain recurring monthly fees to be consistent with applicable
provisions of Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). Previously, monthly recurring fees for
the next month's service were recognized at the time all of the Company's
significant performance obligations had been fulfilled and the related
monthly service fee became nonrefundable based on the terms of the Company's
contract with its customers which require 60 days notice for cancellation.
Since SAB 101 now indicates that nonrefundability of revenues and
fulfillment of all significant performance obligations are not a basis for
revenue recognition, the Company has determined that deferral of the monthly
recurring service fees to the period in which the service is available to the
customer is a preferable method of accounting. The impact of the change in
recognizing recurring service fees will be reported as a cumulative effect of
a change in accounting principle as of April 1, 2000 in accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes. The
cumulative effect of this change will increase the Company's loss by
approximately $1.8 million as of April 1, 2000. This amount represents the
income attributable to the deferral, as of that date, of one month's
recurring service fee revenue totaling approximately $9.3 million. SAB 101
as amended, allows the Company to implement this change as of the last
quarter of the transition period ending December 31, 2000. The previously
reported quarterly financial information for the transition period will be
restated so that annual operating results for the transition period ending
December 31, 2000 will be presented on the new basis.
There will be no impact to the Company's cash flow from operations as a
result of this change. Also, it is believed that the adoption of this change
in accounting for fiscal 2000 or prior periods will not have a material
effect on the Company's previously reported results of operations, financial
position or cash flows for those periods.
9
<PAGE>
Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and Notes set forth elsewhere in this Report.
OVERVIEW
We are a rapidly growing single-source provider of voice, data and Internet
communications services, or integrated communications provider, with 16 years
of marketing, sales and service experience. We target predominantly medium and
larger-sized business customers who seek greater capacity for voice and data
traffic, a single provider for their telecommunications requirements and
improved levels of service. We have a large, experienced sales force
consisting of 253 sales people supported by 182 network coordinators as of
September 30, 2000. Our sales force is located close to our customers in 38
sales branches primarily in the Northeast and Mid-Atlantic states.
We are currently deploying our own state-of-the-art network facilities to
carry telecommunications traffic. Our network uses packet-switching, a
technology which transmits data in discrete packages. It also uses internet
protocol, which is a method that allows computers with different architectures
and operating systems to communicate over the internet, and asynchronous
transfer mode, or ATM, architecture. These network technologies allow the
network to transmit multiple types of media, such as voice, data, Internet and
video. The first phase of our network included 22 Cisco Systems, or Cisco,
advanced data switches and two network operations centers. We have
interconnected our facilities with leased transmission capacity over fiber
optic cable strands from Level 3 Communications and NorthEast Optic Network.
In March 2000, we signed a $115 million agreement to purchase more than 8,300
route miles of dark fiber covering the eastern half of the United States from
Williams Communications to implement our fiber network program. The contract
includes co-location space and ongoing network maintenance services. The
fiber acquired will expand our current network presence along the Boston to
Washington, D.C. corridor into 40 major markets extending from the central
United States throughout the eastern United States. In August 2000, we signed
a $3.3 million agreement to purchase 325 route miles of dark fiber in northern
New England. The contract includes co-location space and ongoing network
maintenance services. Cisco has reviewed and approved our network design and
has designated our network as a Cisco Powered Network(tm). In May 1999, we
began the testing of our integrated communications network, or service marked
as PowerPath(sm) Network, with some of our customers. In September 1999, we
began providing commercial service on our PowerPath(sm) Network and by
September 30, 2000, we were servicing over 1,300 customers on our
PowerPath(sm) Network.
We became an integrated communications provider, or ICP, in January 1998.
Prior to that, we were the largest independent sales agent for NYNEX Corp.
(now Verizon), based on agency revenues. At the end of 1997, before leaving
the Verizon agency program, we were managing relationships for approximately
7,000 customers, representing over 280,000 local access lines and over $200
million in annual local telecommunications spending. As of September 30,
2000, after only 33 months as an integrated communications provider, we were
servicing 407,052 access lines and equivalent circuits,
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or ALEs. ALEs are the total number of voice circuits and equivalent data
circuits we have in service. Voice circuits are the actual number of voice
circuits purchased by our customers, while equivalent data circuits represent
the data transmission capacity purchased by our customers divided by 64
kilobits per second, which is the capacity necessary to carry one voice
circuit.
Our Services
We offer the following services:
Local Telephone Services. We offer connections between customers'
telecommunications equipment and the local telephone network, which we
currently lease from incumbent local exchange carriers. For large customers
or customers with specific requirements, we integrate their private systems
with analog or digital connections. We also provide all associated call
processing features as well as continuously connected private lines for both
voice and data applications.
Long Distance Telephone Services. We offer a full range of domestic and
international long distance services, including "1+" outbound calling,
inbound toll free service, standard and customized calling plans. We also
offer related services such as calling cards, operator assistance and
conference calling.
High Speed Data Services. We offer a wide array of both continuously
connected and switched high speed digital data services. Switched or high
speed digital data services include Integrated Services Digital Network, or
ISDN, frame relay and ATM products.
Internet Services. We offer high speed, continuously connected internet
access and services through various digital connections. We provide the
necessary configuration support and other support services on a 24-hour,
7-day a week basis.
Future Service Offerings. As we continue deploying the network, we may
offer the following additional services: hosting of web-sites, electronic
commerce over the internet, data security and storage services, systems
integration, managed services, consulting and network monitoring services,
customized private networks, virtual private networks and other data, and
voice and sophisticated network products.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000
AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999.
Total revenues for the quarter ended September 30, 2000 ("2000 Quarter") were
$58,508,000, as compared to $35,109,000 for the quarter ended September 30,
1999 ("1999 Quarter"), or an increase of 67%. Total revenues for the six
months ended September 30, 2000 ("2000 Six Months") were $110,977,000, as
compared to $66,156,000 for the six months ended September 30, 1999 ("1999 Six
Months"). The 2000 Quarter revenues also represented an increase of 12% over
the revenues of $52,469,000 for the quarter ended June 30, 2000. Revenues for
local, Internet access and data services increased a combined 13% on a
sequential quarter basis due primarily to the addition of new customer
relationships.
11
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A common basis for measurement of an ICP's progress is the growth in ALEs.
During the 2000 Quarter, we provisioned 45,300 net ALEs, bringing the total
lines in service to 407,052. Net lines provisioned through the 2000 Quarter
represented a 13% sequential increase over net lines provisioned through the
quarter ended June 30, 2000. Data ALEs represent 22% of total ALEs as of
September 30, 2000.
Costs of telecommunications revenues, excluding depreciation, for the 2000
Quarter were $45,422,000, as compared to $27,398,000 for the 1999 Quarter; and
were $85,523,000 for the 2000 Six Months, as compared to $53,487,000 for the
1999 Six Months. As a percentage of telecommunications revenues, cost of
telecommunications revenues was 77% for the 2000 Quarter, as compared to 76%
for the quarter ended June 30,2000. The increase in the percentage of the
cost of the telecommunications revenues primarily reflects lower rates on toll
revenue due to rate decreases and the effect of the Verizon strike on our
network installations.
Selling expense consists of the costs of providing sales and other support
services for customers including salaries, commissions and bonuses to
salesforce personnel. General and administrative expense consists of the
costs of the billing and information systems and personnel required to support
our operations and growth.
For the 2000 Quarter, selling, general and administrative expenses (SG&A)
increased 62% to $20,536,000 from $12,676,000 for the 1999 Quarter; and for
the 2000 Six Months, increased 42% to $38,247,000 from $26,918,000 for the
1999 Six Months. This increase was due to the opening of additional branch
sales offices and the associated increased number of sales, service and
engineering employees hired in connection with the transition to the ICP
platform. As of September 30, 2000, we employed 757 people including 253
account executives and 182 network coordinators in branch locations throughout
the Northeast and Mid-Atlantic states.
Depreciation and amortization expense increased to $11,976,000 in the 2000
Quarter from $3,653,000 for the 1999 Quarter; and for the 2000 Six Months,
increased to $20,938,000 from $5,756,000 for the 1999 Six Months. This
increase was a result of additional expenses associated with the equipment and
software relating to the network deployment and the upgrade of our information
systems. Network equipment and software is being depreciated over 3-5 years,
reflecting the risk of rapid technological change.
Other expense, net decreased by 43% to $2,100,000 and decreased by 24% to
$5,635,000 for the 2000 Quarter and 2000 Six Months, respectively, from the
same periods in 1999. Interest expense increased due to the increase in
borrowings required in connection with the deployment of our network, working
capital requirements and funding our operating losses. This increase is
offset by an increase in interest income from the proceeds of our preferred
stock financing.
As a result of the above factors, the net losses amounted to $21,525,000 for
the 2000 Quarter and $39,366,000 for the 2000 Six Months.
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Liquidity and Capital Resources
Working capital at September 30, 2000 was $110.4 million compared to $4.7
million at March 31, 2000, an increase of $105.7 million. Cash balances at
September 30, 2000 and March 31, 2000 totaled $120,872,000 and $20,093,000,
respectively.
The increase in working capital resulted from the net proceeds realized from a
$200 million preferred stock financing with Bain Capital Inc. ($75 million),
Thomas H. Lee Partners, L.P. ($75 million) and CSFB Private Equity ($50
million). The investment consists of 8.25% Series B redeemable convertible
preferred stock which converts into our common stock at $50 per share. The
preferred stockholders may require redemption of the preferred shares if the
common stock of the Company reaches certain levels. The Company may elect to
redeem the preferred shares on the fifth anniversary of the closing and all
outstanding shares of preferred stock must be redeemed by May 2010. The net
proceeds are being used to fund strategic marketing and technology initiatives
of our accelerated business plan which include the purchase of dark fiber and
optronics, branch sales office and PowerPath(sm) Network expansion and new
PowerPath(sm) Network product and applications development.
In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior
secured credit facility ("TD credit facility") to fund our base plan for
expansion of our branch sales offices and our Integrated Communications
Network. The proceeds were used to retire the $43 million balance of the $75
million Goldman Sachs/Fleet Credit Facility and to repay in full the $25
million Cisco vendor financing facility. The TD credit facility includes a
$50 million senior secured 7-1/2 year revolving credit facility, a $100
million senior secured 7-1/2 year delayed draw term loan and a $75 million
senior secured 8 year term loan. As of September 30, 2000, we entered into an
amendment to the TD credit facility to modify certain provisions of the
agreement and we are in compliance with all of the financial convenants. As
of September 30, 2000, $100 million of the TD credit facility was outstanding.
Since September 30, 1998, we have entered into various lease and vendor
financing agreements which provide for the acquisition of equipment and
software. As of September 30, 2000, the aggregate amount borrowed under these
agreements was approximately $68.2 million.
In July 1999, we completed a public offering (including the exercise of the
underwriters' overallotment option) of 6,037,500 shares of common stock at
$11.50 per share, adjusted for the March 2000 three-for-two stock split with
net proceeds of approximately $62.1 million. The proceeds were used for
general corporate purposes and continued deployment of the PowerPath(sm)
Network and expansion into new markets throughout the Northeast and Mid-
Atlantic states.
We will continue to use the balance of the proceeds realized from the TD
credit facility and Series B redeemable convertible preferred stock financing
for general corporate purposes including, capital expenditures, working
capital and operating losses associated with the continued deployment of our
network, further penetration of our existing region and our expansion into new
markets throughout the Northeast and Mid-Atlantic states. Until utilized, the
net proceeds from the TD credit facility and Series B redeemable convertible
preferred stock financing are being invested in short-term, interest-bearing
instruments and other investment-grade securities.
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We believe that proceeds available from the Series B redeemable convertible
preferred stock financing and the TD credit facility, cash on hand and the
amounts expected to be available under our bank and lease financing
arrangements will be sufficient to fund our planned capital expenditures,
working capital and operating losses for at least the next 12 months. We
cannot assure you that if we require funds in addition to the funds made
available through the TD credit facility and the preferred stock financing,
such financing will be available, or if available, on terms acceptable to us
when needed. If we are unable to obtain such financing when needed, we may
postpone or abandon our development and expansion plans which could have a
material adverse effect on our business, results of operations and financial
condition. The actual timing and amount of our capital requirements may be
materially affected by various factors, including the timing and actual cost
of the network, the timing and cost of our expansion into new markets, the
extent of competition and pricing of telecommunications services by others in
our markets, the demand by customers for our services, technological change
and potential acquisitions.
Year 2000 Compliance
Our information technology systems and non-information systems were year 2000
compliant prior to the end of 1999. We did not incur any year 2000 problems
in our systems that required any corrective actions and did not experience any
interruptions in service as a result of the year 2000 compliance status of any
of our vendors. Our systems and applications are effectively processing
information in order to support ongoing operations in the year 2000 and
beyond.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, as amended, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133, as amended") was issued, as amended by SFAS Nos.
137 and 138, which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is presently
analyzing the impact, if any, that the adoption of SFAS No. 133, as amended,
will have on its financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25." The Company is
required to adopt the Interpretation on July 1, 2000. The Interpretation
requires, among other things, that stock options that have been modified to
reduce the exercise price be accounted for as variable. The Company modified
one stock option agreement in April 1999, which resulted in a stock
compensation charge of approximately $2.2 million. No other option grants
have been modified by a reduction of the exercise prices, therefore, the
adoption of the Interpretation is not expected to have an impact on the
Company's consolidated financial statements, unless modifications are made in
the future.
14
<PAGE>
Adoption of Staff Accounting Bulletin 101.
The Company, as described below, will revise its revenue recognition policy
for certain recurring monthly fees to be consistent with applicable provisions
of Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). Previously, monthly recurring fees for the next
month's service were recognized at the time all of the Company's significant
performance obligations had been fulfilled and the related monthly service fee
became nonrefundable based on the terms of the Company's contract with its
customers which require 60 days notice for cancellation.
Since SAB 101 now indicates that nonrefundability of revenues and
fulfillment of all significant performance obligations are not a basis for
revenue recognition, the Company has determined that deferral of the monthly
recurring service fees to the period in which the service is available to the
customer is a preferable method of accounting. The impact of the change in
recognizing recurring service fees will be reported as a cumulative effect of
a change in accounting principle as of April 1, 2000 in accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes. The
cumulative effect of this change will increase the Company's loss by
approximately $1.8 million as of April 1, 2000. This amount represents the
income attributable to the deferral, as of that date, of one month's
recurring service fee revenue totaling approximately $9.3 million. SAB 101
as amended, allows the Company to implement this change as of the
last quarter of the transition period ending December 31, 2000. The
previously reported quarterly financial information for the transition period
will be restated so that annual operating results for the transition period
ending December 31, 2000 will be presented on the new basis.
There will be no impact to the Company's cash flow from operations as a
result of this change. Also, it is believed that the adoption of this change
in accounting for fiscal 2000 or prior periods will not have a material
effect on the Company's previously reported results of operations, financial
position or cash flows for those periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to financial risk, including changes in interest rates,
relates primarily to outstanding debt obligations. We utilize our senior
secured credit facility to fund a substantial portion of our capital
requirements. This facility bears interest at a variable interest rate, which
is subject to market changes. Our earnings are affected by changes in short-
term interest rates as a result of our borrowings under the TD credit
facility. The TD credit facility interest payments are determined by the
outstanding indebtedness and the LIBOR rate at the beginning of the period in
which interest is computed. As required under the TD credit facility, we
utilize interest rate swap and collar agreements to hedge variable rate
interest risk on 50% of the TD credit facility. All of our derivative
financial instrument transactions are entered into for non-trading purposes.
15
<PAGE>
Notional amount outstanding at September 30, 2000, for the interest rate
collar is $33 million, with an expected maturity date in the year 2003. The
interest rate collar effectively locks $33 million of our TD credit facility
borrowings between 12.25% and 9.67%.
Notional amount outstanding at September 30, 2000, for interest rate
swap is $17 million, with an expected maturity date in the year 2003. The
interest rate swap effectively caps $17 million of our TD credit facility
borrowings at 10.75%.
For purposes of specific risk analysis we use sensitivity analysis to
determine the impacts that market risk exposure may have on the fair value of
our outstanding debt obligations. To perform sensitivity analysis, we assess
the risk of loss in fair values from the impact of hypothetical changes in
interest rates on market sensitive instruments, considering the hedge
agreements noted above. We compare the market values for interest risk based
on the present value of future cash flows as impacted by the changes in the
rates. We selected discount rates for the present value computations based on
market interest rates in effect at September 30, 2000. We compared the market
values resulting from these computations with the market values of these
financial instruments at September 30, 2000. The differences in the comparison
are the hypothetical gains or losses associated with each type of risk. As a
result of our analysis we determined at September 30, 2000, with respect to
our variable rate debt obligations, a 10% increase in interest rates with all
other variables held constant would result in increased interest expense and
cash expenditures for interest of approximately $259,000 in the quarter ended
September 30, 2000. A 10% decrease in interest rates would result in reduced
interest expense and cash expenditures of approximately $259,000 for the same
period.
For purposes of specific risk analysis we use sensitivity analysis to
determine the impacts that market risk exposure may have on the fair value of
our outstanding fixed rate redeemable convertible preferred stock. To perform
sensitivity analysis, we assess the risk of loss in fair values from the
impact of hypothetical changes in dividend rates on market sensitive
instruments. We compare the market values for dividend risk based on the
present value of future cash flows as impacted by the changes in the rates. We
selected discount rates for the present value computations based on market
dividend rates in effect at September 30, 2000. We compared the market values
resulting from these computations with the market values of these financial
instruments at September 30, 2000. The differences in the comparison are the
hypothetical gains or losses associated with each type of risk. As a result of
our analysis we determined at September 30, 2000, with respect to our fixed
rate redeemable convertible preferred stock, a 10% increase in dividend rates
with all other variables held constant would result in increased dividends of
approximately $412,500 in the quarter ended September 30, 2000. A 10% decrease
in dividend rates would result in reduced dividends of approximately $412,500
for the same period.
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Part II
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The 2000 Annual Meeting of Stockholders of the Company was held
on July 27, 2000.
(b) Not applicable.
(c) Each nominee for Class III director received the following votes:
<TABLE>
<CAPTION>
Name Votes For Abstentions
-----------------------------------------------------------------
<S> <C> <C>
Robert J. Fabbricatore 24,148,950 301,470
Ralph S. Troupe 24,161,571 288,849
Scott M. Sperling 24,164,346 286,074
Katherine Dietze Courage 24,164,346 286,074
<CAPTION>
The following table sets forth the other matters voted upon and the
respective number of votes cast for, against, number of abstentions and
broker nonvotes.
Matter Votes Votes Delivered
Voted Upon For Against Abstentions Non Voted
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
To approve the 2000
Flexible Stock Plan 14,321,274 3,635,017 42,213 6,451,916
To approve the retention
of Ernst & Young LLP as
independent accountants 24,442,476 3,372 4,572 -
</TABLE>
(d) Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
27 Financial Data Schedule
99.1 Risk Factors
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter ended
September 30, 2000.
Date Items Reported
------- ----------------------------------------------------------
1. July 12, 2000 Announcement that we have selected Telcordia Technologies
to provide core components of Class 5 Local Dial Tone
Services on our Integrated Communications Network and
that we expect to have customers using Class 5 local
services on our network in the first calendar quarter
of 2001.
2. July 18, 2000 Announcement that we have expanded our Integrated
Communications Network into the Philadelphia PA and
Baltimore MD markets.
3. July 31, 2000 Announcement of the change in our fiscal year to
December 31 of each year from March 31 of each year.
4. August 3, 2000 Announcement that the Telecordia Softswitch is providing
VoIP Voice Services Between 11 CTC Branch Sales Offices
5. August 29, 2000 Announcement that Verizon Strike Will Not Materially
Impact Revenue and Access line Growth and of the
Dark Fiber Purchase from NorthEast Optic Network
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf by the undersigned thereunto duly authorized.
CTC COMMUNICATIONS GROUP, INC.
Date: November 14, 2000 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: November 14, 2000 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer
