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 March 31, 2001
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 May 11, 2001, 26,737,184 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 March 31, 2001 and December 31, 2000 3
Condensed Consolidated Unaudited Statements of
Operations Three Months Ended March 31, 2001
and 2000 4
Condensed Consolidated Unaudited Statements of
Cash Flows Three Months Ended March 31, 2001
and 2000 5
Notes to Condensed Consolidated Unaudited
Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 16-17
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 Inapplicable
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 18
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
March 31, December, 31
2001 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $47,077,274 $80,029,442
Accounts receivable, net 37,966,655 43,137,423
Prepaid expenses and other current assets 5,132,787 10,137,037
------------- --------------
Total current assets 90,176,716 133,303,902
Property and equipment:
Property and equipment 284,798,399 259,615,413
Accumulated depreciation and amortization (80,465,462) (63,873,598)
------------- --------------
Total property and equipment, net 204,332,937 195,741,815
Deferred financing costs and other assets 15,288,670 15,082,876
------------- ---------------
Total assets $309,798,323 $344,128,593
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $41,743,876 $49,461,550
Accrued salaries and related taxes 4,264,716 3,282,079
Current portion of obligations under capital leases 27,216,930 27,055,850
Current portion of notes payables 1,577,438 1,983,984
------------- -------------
Total current liabilities 74,802,960 81,783,463
Long term debt:
Obligations under capital leases, net of current portion 53,261,176 52,763,576
Notes payable, net of current portion 104,699,533 103,018,589
------------- -------------
Total long term debt 157,960,709 155,782,165
Commitments and contingencies:
Series B redeemable convertible preferred stock, par
Value $1.00 per share; authorized 10,000,000 shares
in 2000, 200,000 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively
(liquidation preference $255,546,343 at March 31,2001) 208,003,881 203,249,272
Stockholders' deficit:
Common stock, par value $.01 per share: authorized
100,000,000 shares, 26,737,184 and 26,582,137 shares
issued and outstanding at March 31, 2001 and December 31,
2000, respectively 267,372 265,821
Additional paid-in capital 93,966,058 93,300,483
Deferred compensation 0 (26,910)
Other comprehensive income (loss) (1,273,693) 0
Retained deficit (223,928,964) (190,225,701)
------------- --------------
Total stockholders' deficit (130,969,227) (96,686,307)
------------- --------------
Total liabilities and stockholders' deficit $309,798,323 $344,128,593
============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
3
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------------------------------------
March 31, 2001 March 31, 2000 March 31, 2000
Pro forma *
---------------- --------------- ---------------
Telecommunications revenues $67,621,144 $46,575,908 $44,925,771
Operating costs and expenses:
Cost of telecommunications revenues
excluding depreciation and amortization 55,344,185 35,689,067 34,907,020
Selling, general and administrative expenses 21,199,766 15,480,615 15,453,628
Depreciation and amortization 16,634,236 7,072,992 7,072,992
---------------- --------------- --------------
Total operating costs and expenses 93,178,187 58,242,674 57,433,640
--------------- --------------- --------------
Loss from operations (25,557,043) (11,666,766) (12,507,869)
Other income (expense), net:
Interest income 861,349 131,025 131,025
Interest expense (4,252,959) (3,908,495) (3,908,495)
---------------- ---------------- --------------
Total other expense, net (3,391,610) (3,777,470) (3,777,470)
Loss before extraordinary item (28,948,653) (15,444,236) (16,285,339)
Extraordinary item- early extinguishment of debt 0 (2,430,456) (2,430,456)
---------------- ---------------- --------------
Net loss $(28,948,653) $(17,874,692) $(18,715,795)
================ ================ ==============
Net loss available to commonstockholders $(33,703,262) $(18,443,511) $(19,284,614)
================ ================ ==============
Net loss per common share before extraordinary item:
Basic and Diluted $(1.26) $(0.69) $(0.73)
================ =============== ==============
Net loss per common share:
Basic and Diluted $(1.26) $(0.80) $(0.83)
================ =============== ==============
Weighted average number of common shares:
Basic and Diluted 26,660,889 23,191,756 23,191,756
================ =============== ==============
The accompanying notes are an integral part of
these consolidated financial statements.
* See Note 2 for explanation of pro forma amounts
4
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
-----------------------------------
2001 2000
----------------- -------------
OPERATING ACTIVITIES:
Net loss $(28,948,653) $(17,874,692)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 16,634,236 7,072,992
Stock compensation expense 26,910 26,500
Extraordinary item- early extinguishment of debt 0 2,430,456
Interest related to warrants and certain fees 476,172 240,322
Changes in operating assets and liabilities:
Accounts receivable 5,170,768 (6,657,637)
Prepaid expenses and other current assets (410,426) 3,903,156
Deferred financing costs and other assets (485,330) (7,255,086)
Accounts payable and accrued expenses (7,717,674) 6,002,048
Accrued salaries and related taxes 982,637 632,788
------------- -------------
Net cash used by operating activities (14,271,360) (11,479,153)
INVESTING ACTIVITY:
Additions to property and equipment (20,187,067) (15,512,044)
Repayments of notes receivable from stockholders 5,414,676 0
------------- -------------
Net cash used in investing activities (14,772,391) (15,512,044)
FINANCING ACIVITIES:
Proceeds from the issuance of common stock 667,126 3,014,985
Repayment of amount due from stockholders 0 10,373
Proceeds from notes payable 0 120,883,518
Repayment of notes payable (476,567) (92,038,082)
Repayments under capital lease obligations (4,098,976) (308,665)
------------- -------------
Net cash provided by financing activities (3,908,417) 31,562,129
Increase (decrease) in cash and cash equivalents (32,952,168) 4,570,932
Cash and cash equivalents at beginning of year 80,029,442 15,522,224
------------- -------------
Cash and cash equivalents at end of period $47,077,274 $20,093,156
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Network and related equipment acquired under
capital leases $4,757,656 $10,863,279
Network and related equipment acquired under
notes payable $238,263 $3,400,383
Accretion of preferred stock $4,754,609 $568,819
The accompanying notes are an integral part of
these consolidated financial statements.
5
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 months ended March 31,
2001 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2001, 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 nine month
transition period ended December 31, 2000.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Telecommunication revenues primarily relate to customer usage of
services and recurring monthly fees to customers for certain other
services.
Revenues related to usage are recognized as usage accrues.
Retroactive to April 1, 2000, the Company revised 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. The new method of accounting
defers recognition of monthly recurring service fees to the period in which
the service is available to the customer. The Company's condensed
consolidated unaudited statement of operations for the three months ended
March 31, 2000 reflects the Company's revenue recognition policy prior to
the adoption of SAB101. For comparative purposes, the accompanying
financial statements include a pro forma condensed consolidated unaudited
statement of operations for the three month period ended March 31, 2000
prepared under the applicable provisions of SAB 101.
6
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities, and its Amendments, FASB Statements Nos. 137 and 138, in June
1999 and June 2000, respectively (collectively, FAS 133). The Statement
requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is designated and qualifies as a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings (fair value hedge), or,
for the effective portion of the hedge, recorded in other comprehensive
income until the hedged item is recognized in earnings (cash flow hedge).
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company adopted FAS 133 on January
1, 2001. The adoption of this statement resulted in a cumulative effect
adjustment to other comprehensive income (loss) of $(716,504), (see Note
7).
Cash Flow Hedging Strategy
As required by the Company's credit facility with TD Securities (US)
Inc. (the TD Credit Facility), the Company maintains an interest rate
collar and an interest rate swap. These instruments hedge the variable rate
of interest due on the TD Credit Facility. The interest rate collar
effectively locks $33 million of the TD Credit Facility borrowings between
12.25% and 9.67%. The interest rate swap effectively caps $17 million of
the TD Credit Facility borrowings at 10.75%. Both the collar and the swap
mature on September 22, 2003 and have been entered into for non-trading
purposes.
During the three months ended March 31,2001, the Company recorded a loss
of $716,504 in other comprehensive income (loss) as a cumulative effect
adjustment in connection with the adoption of FAS 133, effective January 1,
2001. Also, during this period, the Company recorded a loss of $783,837 in
other comprehensive income (loss) for the change in fair value of the
collar and swap. Furthermore, during this period, the Company reclassified
out of other comprehensive income (loss) to interest expense a loss of
$54,157 related to the ineffective portion of the collar and the swap and a
loss of $172,491 related to the collar and the swap excluded from the
assessment of hedge effectiveness.
For the period from January 1,2001 to December 31,2001, the Company
expects to reclassify approximately $280,000 of losses on the collar and
the swap from accumulated other comprehensive income (loss) to interest
expense due to the payment of variable interest associated with the TD
Credit Facility
7
NOTE 3: COMMITMENTS AND CONTINGENCIES
We are a party to a small number of suits arising in the normal course
of business which our management believes are not material individually or
in the aggregate.
NOTE 4: NET LOSS PER COMMON SHARE
The following tables set forth the computation of basic and diluted
net loss per share:
Three Months Ended
March 31,
------------------------------------------
2001 2000 2000
Pro forma*
------------------------------------------
Numerator:
Loss before extraordinary item $(28,948,653) $(15,444,236) $(16,285,339)
Extraordinary item-early
extinguishment of debt - (2,430,456) (2,430,456)
--------------------------------------------
Net loss $(28,948,653) $(17,874,692) $(18,715,795)
Less preferred stock dividends and
Accretion to redemption value of
preferred stock (4,754,609) (568,819) (568,819)
Equals: numerator for basic and diluted --------------------------------------------
net loss per share $(33,703,262) $(18,443,511) $(19,284,614)
============================================
Denominator for basic and diluted net
loss per share-weighted-average shares 26,660,889 23,191,756 23,191,756
==========================================
Basic and diluted loss per common share-
before extraordinary item $(1.26) $(0.69) $(0.73)
===========================================
Basic and diluted loss per common share-
extraordinary item $ - $(0.10) $(0.10)
===========================================
Basic and diluted net loss per share $(1.26) $(0.80) $(0.83)
===========================================
* See Note 2 for explanation of pro forma amounts
NOTE 5: RELATED PARTY
As of December 31,2000, the Company had advanced funds to certain
stockholders, who are executives and officers, amounting to $6,375,135
evidenced by fully secured promissory notes. These notes bear interest at
10.75%. During the quarter ended March 31, 2001, $5,414,676 was repaid
together with interest due and $960,459 of these loans remains outstanding.
8
NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS
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 has
adopted the Interpretation 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. No option grants have been
modified by a reduction of the exercise prices, therefore, the adoption of
the Interpretation has not had an impact on the Company's consolidated
financial statements, unless modifications are made in the future.
NOTE 7: COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) as required by Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income," (FAS 130). FAS 130 requires that changes in fair value of the
Company's derivative instruments designated as cash flow hedges, as well as
other certain changes in stockholders' equity, be included in other
comprehensive income (loss). For the three months ended March 31, 2001 and
2000, comprehensive income (loss) was $(30,222,346) and $(17,874,692)
respectively as follows:
Three Months Ended March 31,
2001 2000
-----------------------------------
Comprehensive income (loss):
Net loss $(28,948,653) $(17,874,692)
Cumulative effect of change in
accounting principle (716,504) -
Additions to other comprehensive
loss for changes in fair value of
cash flow hedges (783,837) -
Reclassification from other
comprehensive loss to interest
expense for ineffective portion and
time value of cash flow hedges 226,648 -
-----------------------------
Comprehensive income (loss) $(30,222,346) $(17,874,692)
========================================
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, data and Internet
communications services, or integrated communications provider, with 17
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 190 account executives supported by 162 network
coordinators as of March 31, 2001. Our sales force is located close to our
customers in 30 sales branches primarily in the Northeast and Mid-Atlantic
states.
We are currently operating our own state-of-the-art network facilities to
carry telecommunications traffic. Our PowerPath(sm) Network uses packet-
switching, a technology that transmits data in discrete packages. It uses
Internet protocol (IP), 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
permits the network to transmit multiple types of media, such as voice,
data and video with various levels of Quality of Service, or QOS. The
first phase of our network, which became operational for full production
mode in January 2000, included 22 Cisco Systems, or Cisco, advanced data
switches and two network operations centers. Presently, we are
interconnecting our facilities with leased transmission capacity over fiber
optic cable strands from Level 3 Communications and NorthEast Optic
Network. These leased transmission services will gradually be replaced by
fiber links, which we own following our investment in fiber strands through
Williams Communications and other regional and metro fiber carriers. We
have selected Cisco to provide the Wavelength Digital Multiplexing (WDM)
and SONET technology to activate or light up the fiber and complete a
highly competitive, scalable and secure fiber transport infrastructure.
Cisco has reviewed and certified our network design and has designated our
network as a Cisco Powered Network.
In May 1999, we began testing our network with some of our customers and in
September 1999, we initiated commercial service. By March 31, 2000, we were
servicing 575 customers on our network. As of March 31, 2001 we were
servicing more than 2,450 customers with PowerPath(sm) access across the
Northeast. In December 2000, we announced completion of a successful Class-
4/5 pilot phase using a softswitch from Telcordia. The softswitch technology
integrated with our PowerPath(sm) Network allows us to deliver both local
and long distance voice services using a Voice over IP (VoIP) packet based
network. We currently have 10 Beta customers using these services on a daily
basis and plan to introduce controlled production of Class-4/5 services in
the second quarter of this year, moving into full production in the latter
half of this year.
10
We became an integrated communications provider, or ICP, in January 1998.
Prior to that, based on agency revenues, we were the largest independent
sales agent for NYNEX Corp. and then Bell Atlantic (now Verizon). At the
end of 1997, before withdrawing from 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 March 31, 2001, after only 39 months as
an integrated communications provider, we were serving over 14,000
customers and had 494,800 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. 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 (ILECs). 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 have built an extensive IP network infrastructure
supported by our PowerPath(sm) Network. We became registered as an
official Internet Service Provider, or ISP, in early 2000, which enables us
to deliver Internet access to our customers as part of our PowerPath(sm)
Network converged services offering. We launched our iMail web based email
product during the summer of 2000 and plan to further expand this offering
to include unified messaging services in the latter half of 2001. We
provide the necessary configuration support and other network support
services on a 24-hour,7-day a week basis.
11
Application Service Provider (ASP) Service. We opened our Springfield data
center providing web hosting services in early 2001. We now have the ability
to offer our customers shared and dedicated web hosting services as well as
server collocation services. Approximately 70 customers are in the pilot
phase. We are planning to extend our entry into the Applications Services
Provider (ASP) market by adding a suite of value added services in the
latter half of 2001, such as managed network services, storage and unified
messaging. The Information Technology (IT) infrastructure has been designed
to support our strategic direction of introducing content based services in
conjunction with a rapidly developing E-Mobile market place. To that extent,
we are planning to open a second data center in our newly constructed 50,000
square foot data center in Waltham, Massachusetts during the second quarter
of 2001. We are further developing services such as 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, voice and sophisticated network
products that will be based in this data center.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 2000.
Adoption of Staff Accounting Bulletin 101.
Retroactive to April 1, 2000, the Company has revised 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
Company's condensed consolidated unaudited statement of operations for the
three months ended March 31,2000 reflects the Company's revenue recognition
policy prior to the adoption of SAB101. For comparative purposes, the
accompanying financial statements include a pro forma condensed
consolidated unaudited statement of operations for the three month period
ended March 31, 2000 prepared under the applicable provisions of SAB101.
Comparisons made to the prior year for the purposes of this discussion have
been made to the pro forma presentation of the results of operations for
the three months ended March 31, 2000.
12
Total revenues for the quarter ended March 31, 2001 ("2001 Quarter") were
$67,621,000, as compared to $44,926,000 for the pro forma quarter ended
March 31, 2000 ("2000 pro forma Quarter"), or an increase of 51%. The 2001
Quarter revenues also represented an increase of 9% over the revenues of
$62,306,000 for the quarter ended December 31, 2000. We have added
approximately 180,000 access lines since the quarter ending March 31, 2000
resulting in the increase in revenue due to the addition of these new
customer relationships.
A common basis for measurement of an ICP's progress is the growth in ALEs.
During the 2001 Quarter, we provisioned 41,500 net ALEs, bringing the total
lines in service to 494,800. Net lines provisioned through the 2001
Quarter represented a 9% sequential increase over net lines provisioned
through the quarter ended December 31, 2000. Data ALEs represent 22% of
total ALEs as of March 31, 2001.
Costs of telecommunications revenues, excluding depreciation, for the 2001
Quarter were $55,344,000, as compared to $34,907,000 for the 2000 pro forma
Quarter. As a percentage of telecommunications revenues, cost of
telecommunications revenues was 82% for the 2001 Quarter, as compared to
78% for the 2000 pro forma Quarter. The increase in the percentage of the
cost of the telecommunications revenues primarily reflects the additional
fixed expenses incurred as a result of the PowerPath(sm) broadband network
expansion and additional expense incurred due to supplier delays in
delivery of lower cost fiber facilities.
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 2001 Quarter, selling, general and administrative expenses (SG&A)
increased 37% to $21,200,000 from $15,454,000 for the 2000 pro forma
Quarter; and decreased from $22,234,000 in the quarter ended December 31,
2000. The increase in SG&A from the 2000 pro forma quarter is due to an
increase in engineer and service employees as a result of the transition to
the ICP platform. The decrease from the December 31,2000 quarter represents
a full quarter's impact of the limit to our expansion and leverage of our
current branch infrastructure. For the 2001 Quarter, SG&A expenses were
31.4% of total revenue for the quarter as compared to 34.4% of total
revenue for the 2000 pro forma quarter. As of March 31, 2001, we employed
693 people including 190 account executives and 162 network coordinators in
branch locations throughout the Northeast and Mid-Atlantic states as
compared to 574 employees at March 31, 2000.
Depreciation and amortization expense increased to $16,634,000 in the 2001
Quarter from $7,073,000 for the 2000 pro forma 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.
13
Other expense, net, decreased by 10% to $3,392,000 for the 2001 Quarter
from the 2000 pro forma 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. We incurred an extraordinary item of
$2,430,000 relating to the early repayment of the senior secured Goldman
Sachs/Fleet credit facility for the 2000 pro forma Quarter. The cost
reflects the unamortized balance of the warrants and closing costs of the
credit facility which was repaid in March 2000.
As a result of the above factors, the net losses totaled to $28,949,000 for
the 2001 Quarter.
Liquidity and Capital Resources
Working capital at March 31, 2001 was $15,400,000 million compared to
$51,500,000 million at December 31, 2000, a decrease of $36,100,000
million, which was used to fund our operating losses and capital
expenditures. Cash balances at March 31, 2001 and December 31,2000 totaled
$47,077,000 and $80,029,000, respectively.
In May 2000, the Company increased its working capital 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 at any time of the option holder. The Company may
require conversion 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 or converted by May
2010. The net proceeds from the sale of the Series B redeemable preferred
stock are being used to fund strategic marketing and technology initiatives
of our business plan which include the purchase of dark fiber and
optronics, 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 an
existing credit facility 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 evolving 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. As of March 31,
2001, we are in compliance with all of the financial covenants. As of
March 31, 2001, $100 million of the TD Credit Facility was outstanding.
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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 March 31, 2001, the aggregate amount borrowed under these
agreements was approximately $105 million.
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.
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
also believe that the above noted sources fully fund our business plan. 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.
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities, and its Amendments FASB Statements Nos. 137 and 138, in June
1999 and June 2000, respectively (collectively FAS 133). The Statement
requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is designated and qualifies as a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings (fair value hedges) or,
for the effective portion of the hedge, recorded in other comprehensive
income until the hedged item is recognized in earnings (cash flow hedge).
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of FAS 133 on January 1,
2001, resulted in a charge for the cumulative effect of an accounting
change of $716,504 in other comprehensive income (loss).
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 has
adopted 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. No other option
grants have been modified by a reduction of the exercise prices, therefore,
the adoption of the Interpretation has not had an impact on the Company's
consolidated financial statements, unless modifications are made in the
future.
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.
Notional amounts outstanding at March 31, 2001 subject to 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%.
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Notional amount outstanding at March 31, 2001 subject to the 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 March 31, 2001. We
compared the market values resulting from these computations with the
market values of these financial instruments at March 31, 2001. 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 March 31, 2001, 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 $231,000 for the quarter ended March 31,
2001. A 10% decrease in interest rates would result in reduced interest
expense and cash expenditures of approximately $120,000 for the same period
taking into consideration the interest rate collar as noted.
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 March 31, 2001. We compared the
market values resulting from these computations with the market values of
these financial instruments at March 31, 2001. 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 March 31, 2001, 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 for the quarter
ended March 31, 2001. 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 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
99 Risk Factors
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter ended
March 31, 2001.
Date Items Reported
------- ----------------------------------------------------------
1. February 21, 2001 Announcement of December 31, 2000 financial highlights.
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: May 14, 2001 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: May 14, 2001 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer
18