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 June 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 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 August 9, 2000, 26,258,670 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 June 30 and March 31, 2000 3
Condensed Consolidated Unaudited
Statements of Operations
Three Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Unaudited
Statements of Cash Flows
Three Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Unaudited
Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 15
Part II OTHER INFORMATION
Item 1. Legal Proceedings Inapplicable
Item 2. Changes in Securities 16
Item 3. Default Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a
Vote of Security Holders Inapplicable
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $158,898,510 $20,093,156
Accounts receivable, net 44,335,608 39,965,335
Prepaid expenses and other current assets 4,507,738 3,576,033
------------- -------------
Total current assets 207,741,856 63,634,524
Furniture, fixtures and equipment 166,011,117 120,604,893
Less accumulated depreciation and amortization (38,331,540) (29,369,433)
------------- -------------
Total furniture, fixtures and equipment, net 127,679,577 91,235,460
Deferred financing costs and other assets 10,987,878 7,363,368
------------- -------------
Total assets $346,409,311 $162,233,352
============= =============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses $35,057,979 $46,328,757
Accrued salaries and related taxes 2,313,456 2,482,800
Current portion of obligations under
capital leases 9,866,608 8,413,414
Current portion of notes payable 1,749,342 1,749,342
------------- -------------
Total current liabilities 48,987,385 58,974,313
Long-term debt:
Obligations under capital leases,
net of current portion 33,447,136 15,031,108
Notes payable, net of current portion 104,134,701 103,928,207
------------- -------------
Total long-term debt 137,581,837 118,959,315
Series B redeemable convertible preferred stock 194,046,107 0
Stockholders' deficit:
Common stock 261,638 257,736
Additional paid in capital 92,224,615 90,652,020
Deferred compensation (79,910) (106,410)
Retained deficit (126,612,361) (106,503,622)
--------------- -------------
Total stockholders' deficit (34,206,018) (15,700,276)
--------------- -------------
Total liabilities and stockholders' deficit $346,409,311 $162,233,352
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30,2000 June 30,1999
<S> <C> <C>
Telecommunications revenues $52,469,087 $31,046,851
Operating costs and expenses:
Cost of telecommunications revenues,
excluding depreciation 40,101,657 26,089,184
Selling, general and
administrative expenses 17,711,341 14,242,124
Depreciation 8,962,107 2,103,500
--------------- ------------
Total operating costs and expenses 66,775,105 42,434,808
--------------- ------------
Loss from operations (14,306,018) (11,387,957)
Other income (expense), net:
Interest income 1,372,442 341
Interest expense (4,907,115) (3,770,715)
Other income 0 39,518
--------------- ------------
Total other expense, net (3,534,673) (3,730,856)
--------------- ------------
Net loss (17,840,691) (15,118,813)
=============== ============
Net loss per common share:
Basic and diluted $(0.77) $(0.99)
=============== ============
Weighted average number of common shares:
Basic and diluted 25,966,463 15,571,548
=============== ============
</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 CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(17,840,691) $(15,118,813)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 8,962,107 2,103,500
Stock compensation expense 26,500 2,479,619
Interest related to warrants and certain fees 118,116 1,265,464
Changes in working capital items:
Accounts receivable (4,370,273) (6,313,346)
Prepaid expenses and other current assets (931,705) (554,947)
Deferred financing costs and other assets (3,730,267) (40,809)
Accounts payable and accrued expenses (11,270,778) 9,291,280
Accrued salaries and related taxes (169,344) (31,068)
--------------- ---------------
Net cash used by operating activities (29,206,335) (6,919,120)
INVESTING ACTIVITY:
Additions to furniture, fixtures and equipment (23,029,807) (7,059,028)
--------------- ---------------
Net cash used in investing activities (23,029,807) (7,059,028)
FINANCING ACTIVITIES:
Proceeds from the issuance of Series B Redeemable
Convertible Preferred Stock, net of offering costs 191,778,059 0
Proceeds from the issuance of common stock 1,576,497 193,927
Repayment of amount due from stockholders 0 15,659
Proceeds from notes payable 25,000,000 26,890,026
Repayment of notes payable (25,168,480) (12,766,197)
Repayments under capital lease obligations (2,144,580) (1,481,506)
--------------- ---------------
Net cash provided by financing activities 191,041,496 12,851,909
--------------- ---------------
Increase in cash and cash equivalents 138,805,354 (1,126,239)
Cash and cash equivalents at beginning of year 20,093,156 2,254,258
--------------- ---------------
Cash and cash equivalents at end of period $158,898,510 $1,128,019
============== ===============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Network, related equipment and building acquired
under capital leases $22,013,802 $1,781,967
Network and related equipment acquired under
notes payable $362,615 $4,073,085
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
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 generally
accepted accounting principles 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 months ended June 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
June 30,
2000 1999
----------------------------
Numerator:
<S> <C> <C>
Net loss $(17,840,691) $(15,118,813)
Accretion to redemption value on
redeemable preferred stock (2,268,048) (327,004)
Numerator for basic net loss
per share and diluted net ----------------------------
loss per share $(20,108,739) $(15,445,817)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 25,966,463 15,571,548
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ----------------------------
loss per share-weighted-average shares 25,966,463 15,571,548
============================
Basic and diluted net loss per share $(0.77) $(0.99)
============================
</TABLE>
6
<PAGE>
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 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 feet from a limited liability company in which two executive officers,
including the chairman, own a majority of membership interests, and in which
four executive officers 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.
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133") was issued, as amended by SFAS No. 137, 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 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 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 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.
7
<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 ("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 either as of the
quarter ended June 30, 2000 or as of the last quarter of the transition
period ending December 31, 2000. The Company has elected to implement this
change as of the last quarter of the transition period ending December 31,
2000 and 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.
8
<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 and data
telecommunications 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 217 sales people supported by 163 network coordinators as of
August 4, 2000. Our sales force is located close to our customers in 36 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, which allows the network to transmit
multiple types of media, such as voice, data and video. The first phase of
our network includes 22 Cisco Systems, or Cisco, advanced data switches and
two network operations centers. We are interconnecting 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 on our nationwide fiber optic
network. 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. Cisco has
reviewed and approved our network design and has designated our network as a
Cisco Powered Network. In May 1999, we began the testing of our integrated
communications network, or ICN, with some of our customers. In September
1999, we began providing commercial service on our network and by June 30,
2000, we were servicing over 1,000 customers on our ICN.
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 Bell Atlantic), based on agency revenues. At the end of 1997, before
leaving the Bell Atlantic 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 June
30, 2000, after only 30 months as an integrated communications provider, we
9
<PAGE>
were serving over 13,000 customers and had 361,752 access lines and equivalent
circuits, 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, consulting and network monitoring services, customized private
networks, virtual private networks and other data, and voice and
sophisticated network products.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000
AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999.
Total revenues for the quarter ended June 30, 2000 ("2000 Quarter") were
$52,469,000, as compared to $31,047,000 for the quarter ended June 30, 1999
("1999 Quarter"), or an increase of 69%. The 2000 Quarter revenues also
represented an increase of 13% over the revenues of $46,576,000 for the
quarter ended March 31, 2000. Revenues for local, Internet access and data
services increased a combined 14% on a sequential quarter basis due primarily
to the addition of new customer relationships.
10
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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 47,136 net ALEs, bringing the total
lines in service to 361,752. Net lines provisioned through the 2000 Quarter
represented a 15% sequential increase over net lines provisioned through the
quarter ended March 31, 2000. We experienced the strongest growth in data
ALEs with an approximately 27% sequential increase from the quarter ended
March 31, 2000, which brings data ALEs in service to 80,061, or 22% of total
ALEs as of June 30, 2000.
Costs of telecommunications revenues, excluding depreciation, for the 2000
Quarter were $40,102,000, as compared to $26,089,000 for the 1999 Quarter. As
a percentage of telecommunications revenues, cost of telecommunications
revenues was 76% for the 2000 Quarter, as compared to 84% for the 1999
Quarter. The decrease in the percentage of the cost of the telecommunications
revenues primarily reflects lower rates obtained from Bell Atlantic and
improved network margins.
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 24% to $17,711,000 from $14,242,000 for the 1999 Quarter. This
increase was due to the opening of additional branch sales offices and the
associated increased number of sales and service employees hired in connection
with the transition to the ICP platform. As of June 30, 2000, we employed 648
people including 221 account executives and 154 network coordinators in 36
branch locations throughout the Northeast and mid-Atlantic states.
Depreciation and amortization expense increased to $8,962,000 in the 2000
Quarter from $2,104,000 for the 1999 Quarter. 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 5% to $3,535,000 for the 2000 Quarter.
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 loss amounted to $17,841,000 for the
2000 Quarter.
11
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Liquidity and Capital Resources
Working capital at June 30, 2000 was $158.8 million compared to $4.7 million
at March 31, 2000, an increase of $154.1 million. Cash balances at June 30,
2000 and March 31, 2000 totaled $158,899,000 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 ICN expansion and new ICN 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 June 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 June 30, 2000, the aggregate amount borrowed under these
agreements was approximately $56.8 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 ICN and expansion
into new markets throughout New York and Washington D.C.
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.
12
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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
intend to initiate the expansion of our network coverage southward to include
Washington D.C., and implement our branch office expansion to cover the same
geography. 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 non-information 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, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133") was issued, as amended by SFAS No. 137, 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 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 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 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.
13
<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 ("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 either as of the
quarter ended June 30, 2000 or as of the last quarter of the transition period
ending December 31, 2000. The Company has elected to implement this change as
of the last quarter of the transition period ending December 31, 2000 and
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.
14
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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. We have not entered into any interest rate swap
agreements, or other instruments to minimize our exposure to interest rate
increases but will investigate such options should changes in market
conditions occur. We have not had any derivative instruments in the past,
however, our senior secured credit facility requires us to use derivative
instruments in the future to reduce our interest rate exposure as described
above.
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. 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 June 30, 2000. We
compared the market values resulting from these computations with the market
values of these financial instruments at June 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 June 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 $275,000
in the quarter ended June 30, 2000. A 10% decrease in interest rates would
result in reduced interest expense and cash expenditures of approximately
$275,000 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 June 30, 2000. We compared the market values
resulting from these computations with the market values of these financial
instruments at June 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 June 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 June 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 2. Changes in Securities
In May 2000, the Company issued a total of 200,000 shares of Series B
redeemable convertible preferred stock upon completion of a $200 million
preferred stock financing, completed a $200 million preferred stock financing,
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. The securities were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, as transactions by an issuer not involving
a public offering.
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
June 30, 2000:
Date Items Reported
------- ----------------------------------------------------------
1. April 19, 2000 Announcement that we have entered into an
agreement for preferred stock financing.
2. May 17, 2000 Announcement of the closing of the Series B
Preferred Stock financing.
3. May 23, 2000 Announcement of our fiber build out plan.
4. May 31, 2000 Announcement that Mark E. Nunnelly and Scott M.
Sperling have joined our Board of Directors.
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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: August 10, 2000 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: August 10, 2000 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer
