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 December 31, 1999.
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 February 11, 2000, 15,228,660 shares of Common Stock were outstanding.
CTC COMMUNICATIONS GROUP, INC.
FORM 10-Q
INDEX
Part I FINANCIAL STATEMENTS PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Unaudited Balance Sheets
as of December 31 and March 31, 1999 3
Condensed Consolidated Unaudited
Statements of Operations
Three Months Ended December 31, 1999 and 1998 4
Condensed Consolidated Unaudited
Statements of Operations
Nine Months Ended December 31, 1999 and 1998 5
Condensed Consolidated Unaudited
Statements of Cash Flows
Nine Months Ended December 31, 1999 and 1998 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 16
Part II OTHER INFORMATION
Item 1. Legal Proceedings Inapplicable
Item 2. Changes in Securities 17
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 17
2
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
December 31, March 31,
1999 1999
(Restated)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,522,224 $ 2,254,258
Accounts receivable, net 33,307,698 19,200,931
Prepaid expenses and other current assets 7,479,189 5,890,840
------------- ------------
Total current assets 56,309,111 27,346,029
Furniture, fixtures and equipment 90,829,187 49,417,689
Less accumulated depreciation (22,296,441) (10,615,766)
------------- -------------
Total furniture, fixtures and equipment 68,532,746 38,801,923
Deferred financing costs and other assets 1,903,557 3,333,950
------------- ------------
Total Assets $126,745,414 $69,481,902
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 40,326,709 $27,439,488
Accrued salaries and related taxes 1,850,012 1,656,367
Current portion of obligations under
capital leases 4,627,047 3,230,077
Current portion of note payable 1,243,775 1,705,141
------------- ------------
Total current liabilities 48,047,543 34,031,073
Obligations under capital leases,
net of current portion 8,262,861 8,004,366
Notes payable, net of current portion 71,312,452 51,918,492
------------- ------------
Total long-term debt 79,575,313 59,922,858
Series A redeemable convertible
preferred stock 13,712,329 12,671,797
Stockholders' deficit:
Common stock 146,105 103,525
Additional paid in capital 73,467,518 8,386,816
Deferred compensation (132,910) (212,410)
Retained deficit (88,060,111) (45,390,732)
------------- -------------
(14,579,398) (37,112,801)
Amounts due from stockholders (10,373) (31,025)
------------- -------------
Total stockholders' deficit (14,589,771) (37,143,826)
------------- ------------
Total Liabilities and
Stockholders' Deficit $126,745,414 $69,481,902
============= ============
The accompanying notes are an integral part of these financial statements.
3
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended
December 31, December 31,
1999 1998
(Restated)
-------------- -------------
Telecommunications revenues $40,369,021 $19,024,531
Costs and expenses
Cost of telecommunications revenues
excluding depreciation 30,409,039 16,429,094
Selling, general and administrative expenses 14,277,715 12,428,522
Depreciation and amortization 5,924,366 1,058,000
------------ -------------
Total costs and expenses 50,611,120 29,915,616
------------ -------------
Loss from operations (10,242,099) (10,891,085)
Other income (expense)
Interest income 391,138 12,405
Interest expense (4,262,574) (1,468,817)
Other income/(expense) (102,996) 3,472
------------ -------------
Total other expense (3,974,432) (1,452,940)
------------ ------------
Loss before income taxes (14,216,531) (12,344,025)
Income tax benefit 0 864,000
------------ -------------
Net loss ($14,216,531) ($11,480,025)
============= ============
Net loss per common share:
Basic and diluted ($1.00) ($1.15)
============= =============
Weighted average number of common shares:
Basic and diluted 14,575,350 10,260,932
============= =============
The accompanying notes are an integral part of these financial statements.
4
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Nine Months Ended
December 31, December 31,
1999 1998
(Restated)
-------------- -------------
Telecommunications revenues $106,525,027 $46,376,407
Costs and expenses
Cost of telecommunications revenues
excluding depreciation 83,896,482 40,426,058
Selling, general and administrative expenses 41,196,154 33,566,645
Depreciation and amortization 11,680,675 2,173,000
------------- -------------
Total costs and expenses 136,773,311 76,165,703
------------- -------------
Loss from operations (30,248,284) (29,789,296)
Other income (expense)
Interest income 865,259 183,237
Interest expense (12,254,341) (2,948,063)
Other 8,518 36,473
------------- -------------
Total other expense (11,380,564) (2,728,353)
------------- ------------
Loss before income taxes (41,628,848) (32,517,649)
Income tax benefit 0 2,276,000
------------ -------------
Net loss ($41,628,848) ($30,241,649)
============== =============
Net loss per common share:
Basic and diluted ($3.31) ($3.08)
============= =============
Weighted average number of common shares:
Basic and diluted 12,891,960 10,080,465
============= =============
The accompanying notes are an integral part of these financial statements.
5
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31, December 31,
1999 1998
(Restated)
------------- ------------
OPERATING ACTIVITIES
Net loss $(41,628,848) $(30,241,649)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 11,680,675 2,173,000
Stock compensation expense 2,532,619 79,500
Interest related to warrants and certain fees 2,514,234 210,926
Changes in working capital items:
Accounts receivable (14,106,767) (9,174,678)
Other current assets (1,588,349) (5,522,115)
Other assets (46,761) (1,261,898)
Accounts payable 12,887,221 20,595,538
Accrued salaries and related taxes 193,645 1,586,140
------------- -------------
Net cash used by operating activities (27,562,331) (21,555,236)
INVESTING ACTIVITIES
Network and related equipment (26,155,168) (14,198,266)
------------- -------------
Net cash used in investing activities (26,155,168) (14,198,266)
FINANCING ACTIVITIES
Proceeds from notes payable 64,282,374 36,770,000
Proceeds from the issuance of redeemable
preferred stock 0 11,861,321
Repayments of note payable (55,958,505) (12,377,071)
Repayments under capital leases (4,029,220) (187,505)
Repayment of amount due from stockholders 20,652 (30,000)
Proceeds from the issuance of common stock 62,670,164 145,943
------------- -------------
Net cash provided by financing activities 66,985,465 36,182,688
------------- -------------
Increase in cash and cash equivalents 13,267,966 429,186
Cash at beginning of year 2,254,258 2,167,930
------------- -------------
Cash and cash equivalents at end of period $15,522,224 $2,597,116
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES
Network and related equipment
acquired under financing arrangements $15,256,331 $8,063,565
Common stock purchase warrants issued
in connection with notes payable and
Series A Redeemable Convertible Preferred Stock $ 0 $2,436,623
The accompanying notes are an integral part of these financial statements.
6
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 and nine months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2000. These statements should be read in conjunction
with the financial statements and related notes included in the our Annual
Report on Form 10-K/A for the fiscal year ended March 31, 1999.
Restatement of Financial Statements
In our Quarterly Report on Form 10-Q for the quarter ended December 31,
1998, we reported a loss before taxes of $12,900,000 and recorded a tax
benefit of $903,000 for a net loss of $11,997,000 or $1.20 per share. For
the nine months ended December 31, 1998, we reported a loss before taxes of
$33,238,600 and recorded a tax benefit of $2,327,000 for a net loss of
$30,911,600 or $3.15 per share. We subsequently determined, in connection
with our July 1999 public offering of common stock that the legal costs
accrued in fiscal year 1998 related to the Bell Atlantic litigation should
have been recorded as incurred throughout fiscal year 1999. Accordingly,
an adjustment was made to fiscal years 1999 and 1998. The depreciation
method on certain assets was also adjusted for the fiscal year 1999.
Accordingly, the effect of these adjustments on the quarter ended December
31, 1998 have been included in the December 31, 1998 statement of
operations decreasing the net loss by $517,000 to $11,480,000 or $1.15 per
share. The effect of these adjustments on the nine months ended December
31, 1998 have been included in the accompanying December 31, 1998 statement
of operations decreasing the net loss by $670,000 to $30,241,600 or $3.08
per share. The total related to the restatement adjustments resulted in an
increase to the stockholders' equity of $2,345,500 as of March 31, 1999.
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.
7
NOTE 3. NET LOSS PER SHARE
The following tables set forth the computation of basic and diluted
net loss per share:
Three Months Ended
December 31,
1999 1998
----------------------------
Numerator:
Net loss $(14,216,531) $(11,480,025)
Accretion to redemption value on
redeemable preferred stock (351,148) (302,200)
Numerator for basic net loss
per share and diluted net ----------------------------
loss per share $(14,567,679) $(11,782,225)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 14,575,350 10,260,932
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ----------------------------
loss per share-weighted-average shares 14,575,350 10,260,932
============================
Basic and diluted net loss per share $(1.00) $(1.15)
============================
Nine Months Ended
December, 31,
1999 1998
----------------------------
Numerator:
Net loss $(41,628,848) $(30,241,649)
Accretion to redemption value on
redeemable preferred stock (1,040,532) (840,252)
Numerator for basic net loss
per share and diluted net ---------------------------
loss per share $(42,669,380) $(31,081,901)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 12,891,960 10,080,465
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ---------------------------
loss per share-weighted-average shares 12,891,960 10,080,465
============================
Basic and diluted net loss per share $(3.31) $(3.08)
============================
8
NOTE 4 SUBSEQUENT EVENTS
On January 25, 2000, we obtained a commitment from Toronto Dominion Bank to
underwrite a $225 million senior secured credit facility to fund our base
plan for expansion of our branch sales offices and our Integrated
Communications Network. The proceeds will also be used to retire our
current $75 million senior secured credit facility upon which there is an
outstanding balance of approximately $43 million. The Toronto Dominion
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. The entire $225 million
will be available following the closing which we anticipate will occur
prior to March 31, 2000. The funding of the Toronto Dominion facility is
subject to the execution of a formal agreement embodying all of the terms
of the commitment and certain other legal matters.
9
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 15
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 194 sales people supported by 119 network
coordinators. Our sales force is located close to our customers in 28 sales
branches primarily in New England and New York State.
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. 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 network
with some of our customers. In September 1999, we began providing
commercial service on our network and by December 31, 1999, we were
servicing 238 customers on our 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 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 December 31, 1999, after only 24 months as an integrated
communications provider, we were serving over 12,000 customers and had
269,468 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.
10
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 ISDN, frame relay and ATM products.
Internet Services. We offer high speed, continuously connected internet
access and services through various digital connections. In addition, we
offer switched digital access to the internet via ISDN. We provide the
necessary communications hardware, configuration support and other support
services on a 24-hour, 7-day a week basis.
Wholesale Services to Internet Service Providers. We provide a full array
of local services to internet service providers including telephone numbers
and switched and continuously connected access to the internet.
Future Service Offerings. Following deployment of 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 and other data, and voice and sophisticated network products.
Prior to deploying the Integrated Communications Network, or ICN, we are
building a base of installed access lines through reselling the network
services of other telecommunications carriers to targeted customers who can
later be transitioned to our network, or "on-net.".
We bill our customers for local and long distance usage based on the type
of local service utilized, the number, time and duration of calls, the
geographic location of the terminating phone numbers and the applicable
rate plan in effect at the time of the call.
11
During the period in which we resell the services of other
telecommunications carriers prior to deploying our ICN, cost of services
includes the cost of local and long distance services charged by carriers
for recurring charges, per minute usage charges and feature charges, as
well as the cost of fixed facilities for dedicated services and special
regional calling plans. Following the deployment of the ICN, the cost of
services for "on-net" customers will include the leasing costs associated
with transmission, co-location and access facilities, depreciation charges
and costs associated with our network and related equipment.
We have experienced significant growth in the past and, depending on the
extent of our future growth, we may experience a significant strain on
management, personnel and information systems. To accommodate this growth,
we intend, subject to the availability of adequate financing, to continue
to implement and improve operational, financial and management information
systems. Since implementing our ICP strategy, we have expanded our staff
to include three additional senior executives and 189 additional employees.
We are also expanding our information systems to provide enhanced
recordkeeping for customer information and management of uncollectible
accounts and fraud control.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED DECEMBER 31, 1999
AS COMPARED TO THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1998.
Total revenues for the third fiscal quarter were $40,369,000, as compared
to $19,024,500 for the same period of the preceding fiscal year, or an
increase of 112%. Total revenues for the nine months ended December 31,
1999 were $106,525,000, as compared to $46,376,000 for the same period of
the preceding fiscal year. The December quarter revenues also represented
an increase of 15% over the September 1999 quarter revenues of $35,109,000.
Revenues for local, Internet access and data services increased a combined
16% on a sequential quarter basis due primarily to the addition of new
customer relationships.
A common basis for measurement of an ICP's progress is the growth in ALEs.
During the quarter ended December 31, 1999, we provisioned 43,089 net
access line equivalents, bringing the total lines in service to 269,468.
Net lines provisioned during the quarter ended December 31, 1999
represented a 19% sequential increase over net lines provisioned during the
quarter ended September 30, 1999. We experienced the strongest growth in
data ALEs with an approximately 24% sequential increase from the quarter
ended September 30, 1999, which brings data ALEs in service to 57,713, or
21% of total ALEs as of December 31, 1999.
Costs of telecommunications revenues, excluding depreciation, for the
quarter ended December 31, 1999 were $30,409,000, as compared to
$16,429,100 for the same period of the preceding fiscal year, and for the
nine months ended December 31, 1999, were $83,896,500, as compared to
$40,426,100 for the same period of the preceding fiscal year. As a
percentage of telecommunications revenues, cost of telecommunications
revenues was 75% for the quarter ended December 31,1999, as compared to 78%
for the quarter ended September 30, 1999. The decrease in the percentage
of the cost of the telecommunications revenues primarily reflects lower
rates obtained from our major suppliers, Bell Atlantic and Frontier
Communications.
12
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 quarter ended December 31, 1999, selling, general and
administrative expenses (SG&A) increased 15% to $14,278,000 from
$12,428,000 for the same period of the preceding fiscal year, and for the
nine months ended December 31, 1999 increased 23% to $41,196,000 from
$33,567,000 for the same period of the preceding fiscal year. 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 December 31,
1999, we employed 496 people including 194 account executives and 119
network coordinators in 28 branch locations throughout New England and New
York. In addition, SG&A expenses increased due to a $2.2 million non-cash
compensation expense recognized in the first quarter in conjunction with
the extension of certain stock options to a former employee. Depreciation
and amortization expense increased to $5,924,000 in the quarter ended
December 31, 1999 from $1,058,000 for the quarter ended December 30, 1998,
and for the nine months ended December 31, 1999, increased to $11,681,000
from $2,173,000 for the same period of the preceding fiscal year. These
increases are attributable to the increases in capital expenditures
primarily related to the ICN.
Interest expense increased to $4,263,000 and $12,254,000 for the three and
nine months ended December 31, 1999, respectively. The increases are due
to increased borrowings to fund our operating cost and working capital
requirements and the investment in the ICN, the fees associated with the
credit facility and vendor financing facility, and the amortization of the
interest expense associated with the warrants and financing fees issued to
our lenders under the credit facility.
As a result of the above factors, the net losses were $14,217,000 for the
three months ended December 31, 1999 and $41,629,000 for the nine months
ended December 31, 1999.
Liquidity and Capital Resources
Working capital at December 31, 1999 was $8.2 million compared to a working
capital deficit of $6.7 million at March 31, 1999, an increase of $14.9
million. Cash balances at December 31, 1999 and March 31, 1999 totaled
$15,522,000 and $2,254,000, respectively.
The increase in working capital is due primarily to the net proceeds
realized as a result of the July 20, 1999 public offering in which we sold
4,025,000 shares, including 525,000 shares issued upon exercise of the
underwriters' over-allotment option. After underwriting discounts and
estimated expenses related to the offering, we realized net proceeds of
$61,800,000, of which $6.2 million was used to repay the principal and
interest due under the $30 million credit facility provided by Toronto
Dominion (Texas), Inc. in March 1999, which credit facility was terminated
following repayment of the outstanding balance.
13
We will continue to use the balance of the proceeds realized from the
public offering 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 Boston -
Washington, D.C. corridor. Until utilized, the net proceeds from the
offering are invested in short-term, interest-bearing instruments and other
investment-grade securities.
In April 1998, we received $12.0 million from a private placement of our
Series A redeemable convertible preferred stock and warrants to Spectrum
Equity Investors II, L.P. The preferred stock is convertible at anytime by
the holder and we may effect the conversion of the preferred stock under
certain circumstances. The principal plus accrued dividends, if not
converted, is redeemable by the holder on or after April 9, 2003.
In September 1998, we entered into a three-year $75 million senior secured
credit facility with Goldman Sachs Credit Partners and Fleet National Bank.
As of December 31, 1999, we had availability under the credit facility of
$25,000 and had borrowed approximately $42.9 million. As of September 30,
1999 and December 31, 1999, we were not in compliance with the minimum
revenue financial covenant under the credit facility and have entered into
an amendment to the loan and security agreement covering such credit
facility under the terms of which the lenders waived non-compliance. We
also agreed to reduce the outstanding balance of our loan by $15 million,
pay an amendment fee of $187,500 (for each quarter) to be charged against
our loan account and have entered into a security agreement to perfect the
lenders' security interest in our cash depository accounts.
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 December 31, 1999, the aggregate amount borrowed under
these agreements was approximately $22.3 million.
In October 1998, we obtained a $25 million vendor financing facility from
Cisco Capital and as of December 31, 1999, we had utilized the entire
facility.
14
In January 2000, we obtained a commitment from Toronto Dominion Bank to
underwrite a $225 million senior secured credit facility to fund our base
plan for expansion of our branch sales offices and our Integrated
Communications Network. The proceeds will also be used to retire our
current $75 million senior secured credit facility upon which there is an
outstanding balance of approximately $43 million. The Toronto Dominion
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. The entire $225 million
will be available following the closing which we anticipate will occur
prior to March 31, 2000. The funding of the Toronto Dominion facility is
subject to the execution of a formal agreement embodying all of the terms
of the commitment letter and certain other legal matters.
The Toronto Dominion facility funds our base plan for branch and network
expansion and provides us with a solid financial foundation for executing
additional growth initiatives. As a starting point, 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 in addition to the Toronto Dominion credit
facility, additional financing will be available on terms acceptable to us
when we need it. If we are unable to obtain such financing when we need it,
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.
Overall, we incurred approximately $900,000 in total costs related
specifically to year 2000 issues.
15
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 and do not plan to in the future, other than possibly 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 December 31, 1999. We compared the market values resulting from these
computations with the market values of these financial instruments December
31, 1999. 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 December 31, 1999 a 10% decrease in the levels of interest
rates with all other variables held constant would result in an increase in
the fair value of our fixed rate debt obligations by approximately $2.3
million. A 10% increase in the levels of interest rates with all other
variables held constant would result in a decrease in the fair value of our
outstanding fixed rate debt obligations by approximately $2.7 million. With
respect to our variable rate debt obligations a 10% increase in interest
rates would result in increased interest expense and cash expenditures for
interest of approximately $536,000 in Q3 fiscal 2000. A 10% decrease in
interest rates would result in reduced interest expense and cash
expenditures of approximately $536,000 in Q3 fiscal 2000.
16
Part II
Item 2. Changes in Securities
(c) During the quarter ended December 31, 1999, we issued a total of
53,831 shares of common stock for an aggregate consideration of $96,297
pursuant to the exercise of stock options by 19 individuals. The shares
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. The recipients of the
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were attached to the shares
certificates and stop transfer orders given to our transfer agent. All
recipients had adequate access to information regarding our company.
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
December 31, 1999:
Date Items Reported
------- -----------------------------------------------------------
1. October 1, 1999 Announcement of our reorganization into a Delaware
holding company structure.
2. November 16, 1999 Announcement of our expansion into Pennsylvania
and New Jersey.
3. November 29, 1999 Announcement of our introduction of comprehensive
unified messaging capabilities for our growing
base of customers on our Integrated Communications
Network, IntelliNET(sm).
4. December 17, 1999 Announcement of the installation of 200 customers
on our IntelliNET(sm) ahead of schedule.
17
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: February 11, 2000 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: February 11, 2000 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer