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, 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 August 13, 2001, 26,898,390 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 June 30, 2001 and December 31, 2000 3
Condensed Consolidated Unaudited Statements of
Operations Three Months Ended June 30, 2001
and 2000 4
Condensed Consolidated Unaudited Statements of
Operations Six Months Ended June 30, 2001 and
2000 5
Condensed Consolidated Unaudited Statements of
Cash Flows Six Months Ended June 30, 2001
and 2000 6
Notes to Condensed Consolidated Unaudited
Financial Statements 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-19
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 19-20
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 21
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 21
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
June 30, December, 31
2001 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $30,074,051 $80,029,442
Accounts receivable, net 42,046,855 43,137,423
Prepaid expenses and other current assets 5,732,685 10,137,037
------------- --------------
Total current assets 77,853,591 133,303,902
Property and equipment:
Property and equipment 312,309,739 259,615,413
Accumulated depreciation and amortization (94,401,574) (63,873,598)
------------- --------------
Total property and equipment, net 217,908,165 195,741,815
Deferred financing costs and other assets 14,673,902 15,082,876
------------- ---------------
Total assets $310,435,658 $344,128,593
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $41,567,312 $49,461,550
Accrued salaries and related taxes 4,040,576 3,282,079
Current portion of obligations under capital leases 27,296,373 27,055,850
Current portion of notes payables 1,392,440 1,983,984
------------- -------------
Total current liabilities 74,296,701 81,783,463
Long term debt:
Obligations under capital leases, net of current portion 57,009,776 52,763,576
Notes payable, net of current portion 129,367,038 103,018,589
------------- -------------
Total long term debt 186,376,814 155,782,165
Commitments and contingencies:
Series B redeemable convertible preferred stock, par
Value $1.00 per share; authorized 10,000,000 shares,
200,000 shares issued and outstanding at
June 30, 2001 and December 31, 2000,
(liquidation preference $255,546,343 at June 30,2001) 212,848,028 203,249,272
Stockholders' deficit:
Common stock, par value $.01 per share: authorized
100,000,000 shares, 26,883,390 and 26,582,137 shares
issued and outstanding at June 30, 2001 and December 31,
2000, respectively 268,834 265,821
Additional paid-in capital 94,646,707 93,300,483
Deferred compensation - (26,910)
Other comprehensive income (loss) (1,614,562) -
Retained deficit (256,386,864) (190,225,701)
------------- --------------
Total stockholders' deficit (163,085,885) (96,686,307)
------------- --------------
Total liabilities and stockholders' deficit $310,435,658 $344,128,593
============== =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------------------
June 30, 2001 June 30, 2000
Restated *
---------------- -------------
Telecommunications revenues $74,512,308 $51,052,833
Operating costs and expenses:
Cost of telecommunications revenues
excluding depreciation and amortization 59,852,566 39,178,593
Selling, general and administrative expenses 20,587,956 17,554,157
Depreciation and amortization 17,094,524 8,962,107
---------------- --------------
Total operating costs and expenses 97,535,046 65,694,857
--------------- --------------
Loss from operations (23,022,738) (14,642,024)
Other income (expense), net:
Interest income 541,979 1,372,442
Interest expense (5,132,995) (4,907,115)
---------------- ----------------
Total other expense, net (4,591,016) (3,534,673)
Loss before cumulative effect of change in
accounting principle (27,613,754) (18,176,697)
Cumulative effect of change in accounting principle - (2,878,949)
---------------- ----------------
Net loss $(27,613,754) $(21,055,646)
================ ================
Net loss available to common stockholders $(32,457,901) $(23,323,694)
================ ================
Net loss per common share before cumulative effect of
change in accounting principle:
Basic and Diluted $(1.21) $(0.79)
================ ===============
Net loss per common share:
Basic and Diluted $(1.21) $(0.90)
================ ===============
Weighted average number of common shares:
Basic and Diluted 26,810,572 25,966,463
================ ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
* See Note 2 for explanation of restated amounts
4
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Six Months Ended
-------------------------------------------------------
June 30, 2001 June 30, 2000 June 30, 2000
Pro forma *
---------------- --------------- ---------------
Telecommunications revenues $142,133,452 $97,628,741 $95,978,603
Operating costs and expenses:
Cost of telecommunications revenues
excluding depreciation and amortization 115,196,751 74,867,660 74,085,613
Selling, general and administrative expenses 41,787,722 33,034,772 33,007,784
Depreciation and amortization 33,728,760 16,035,099 16,035,099
---------------- --------------- --------------
Total operating costs and expenses 190,713,233 123,937,531 123,128,496
--------------- --------------- --------------
Loss from operations (48,579,781) (26,308,790) (27,149,893)
Other income (expense), net:
Interest income 1,403,328 1,503,467 1,503,467
Interest expense (9,385,954) (8,815,610) (8,815,610)
---------------- ---------------- --------------
Total other expense, net (7,982,626) (7,312,143) (7,312,143)
Loss before extraordinary item and
cumulative effect of change in accounting principle (56,562,407) (33,620,933) (34,462,036)
Extraordinary item - early extinguishment of debt - (2,430,456) (2,430,456)
---------------- ---------------- --------------
Loss before cumulative effect of change in accounting
principle (56,562,407) (36,051,389) (36,892,492)
Cumulative effect of change in accounting principle - (2,878,949) (2,878,949)
---------------- ---------------- --------------
Net loss $(56,562,407) $(38,930,338) $(39,771,441)
================ ================ ==============
Net loss available to common stockholders $(66,161,163) $(41,767,205) $(42,608,308)
================ ================ ==============
Net loss per common share before extraordinary item
and cumulative effect of change in accounting principle:
Basic and Diluted $(2.47) $(1.48) $(1.52)
================ =============== ==============
Net loss per common share before cumulative effect
of change in accounting principle:
Basic and Diluted $(2.47) $(1.58) $(1.62)
================ =============== ==============
Net loss per common share:
Basic and Diluted $(2.47) $(1.70) $(1.73)
================ =============== ==============
Weighted average number of common shares:
Basic and Diluted 26,736,549 24,571,468 24,571,468
================ =============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
* See Note 2 for explanation of pro forma amounts
5
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-----------------------------------
2001 2000
----------------- -------------
OPERATING ACTIVITIES:
Net loss $(56,562,407) $(38,930,338)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 33,728,760 16,035,099
Stock compensation expense 26,910 53,000
Extraordinary item- early extinguishment of debt - 2,430,456
Interest related to warrants and certain fees 429,126 358,437
Changes in operating assets and liabilities:
Accounts receivable 1,090,568 233,472
Prepaid expenses and other current assets (920,324) 2,971,450
Deferred financing costs and other assets (150,096) (10,985,353)
Accounts payable and accrued expenses (7,894,238) (13,315,155)
Accrued salaries and related taxes 758,497 463,444
------------- -------------
Net cash used by operating activities (29,493,204) (40,685,488)
INVESTING ACTIVITY:
Additions to property and equipment (40,249,319) (38,541,851)
Notes receivable from stockholders (90,000) -
Repayment of notes receivable from stockholders 5,414,676 10,373
------------- -------------
Net cash used in investing activities (34,924,643) (38,531,478)
FINANCING ACIVITIES:
Proceeds from the issuance of Series B redeemable
convertible preferred stock, net of offering costs - 191,778,059
Proceeds from the issuance of common stock 1,349,237 4,591,482
Proceeds from notes payable 25,000,000 145,883,518
Repayment of notes payable (812,455) (117,206,562)
Repayments under capital lease obligations (11,074,326) (2,453,245)
------------- -------------
Net cash provided by financing activities 14,462,456 222,593,252
Increase (decrease) in cash and cash equivalents (49,955,391) 143,376,286
Cash and cash equivalents at beginning of year 80,029,442 15,522,224
------------- -------------
Cash and cash equivalents at end of period $30,074,051 $158,898,510
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Network and related equipment acquired under
capital leases $17,025,993 $32,877,081
Network and related equipment acquired under
notes payable - $3,762,998
Accretion of preferred stock $9,598,756 $2,836,867
The accompanying notes are an integral part of these condensed consolidated 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 accounting principles generally accepted in
the United States for complete financial statements. In the opinion
of management all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 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 statements of operations for the six months ended June 30,
2000 reflects the three months ended March 31, 2000 under the
Company's revenue recognition policy prior to the adoption of SAB
101 and the restated three months ended June 30, 2000 for the
adoption of SAB 101 on April 1, 2000. For comparative purposes, the
accompanying financial statements include a pro forma condensed
consolidated unaudited statement of operations for the six month
period ended June 30, 2000 prepared under the applicable provisions
of SAB 101.
7
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). FAS 133 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 8).
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 six months ended June 30,2001, 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. During the three months and six
months ended June 30, 2001, the Company recorded a loss of $44,297
and $828,134, respectively in other comprehensive income (loss) for
the change in fair value of the collar and swap. Furthermore, during
the three months and six months ended June 30, 2001, the Company
reclassified out of other comprehensive income (loss) to interest
expense a gain of $1,215 and a loss of $(52,942), respectively
related to the ineffective portion of the collar and the swap and
gains of $295,357 and $122,866 for the same periods 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.
8
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
June 30,
-------------------------
- ----
2001 2000
restated *
-------------------------
- ----
Numerator:
Loss before cumulative effect of change in
accounting principle $(27,613,754)
$(18,176,697)
Cumulative effect of change in accounting
principle -
(2,878,949)
--------------------------
- -----
Net loss $(27,613,754)
$(21,055,646)
Less preferred stock dividends and accretion to
redemption value of preferred stock (4,844,147)
(2,268,048)
Equals: numerator for basic and diluted -------------------------
- ----
net loss per share $(32,457,901)
$(23,323,694)
=============================
Denominator for basic and diluted net loss
per share-weighted-average shares 26,810,572
25,966,463
============================
Basic and diluted loss per common share- before
cumulative effect of change in accounting
principle $(1.21)
$(0.79)
=============================
Basic and diluted loss per common share- cumulative
effect of change in accounting principle $ -
$(0.11)
=============================
Basic and diluted net loss per share $(1.21)
$(0.90)
=============================
9
Six Months Ended
June 30,
------------------------------------------
2001 2000 2000
Pro forma *
------------------------------------------
Numerator:
Loss before extraordinary item and
cumulative effect of change in
accounting principle $(56,562,407) $(33,620,933) $(34,462,036)
Extraordinary item-early
extinguishment of debt - (2,430,456) (2,430,456)
-------------------------------------------
- -
Loss before cumulative effect of change
in accounting principle $(56,562,407) $(36,051,389) $(36,892,492)
Cumulative effect of change in
accounting principle - (2,878,949) (2,878,949)
--------------------------------------------
Net loss $(56,562,407) $(38,930,338) $(39,771,441)
Less preferred stock dividends and
accretion to redemption value of
preferred stock (9,598,756) (2,836,867) (2,836,867)
Equals: numerator for basic and diluted -------------------------------------------
net loss per share $(66,161,163) $(41,767,205) $(42,608,308)
============================================
Denominator for basic and diluted net
loss per share-weighted-average shares 26,736,549 24,571,468 24,571,468
==========================================
Basic and diluted loss per common share-
before extraordinary item and
cumulative effect of accounting change $(2.47) $(1.48) $(1.52)
===========================================
Basic and diluted loss per common share-
extraordinary item $ - $(0.10) $(0.10)
===========================================
Basic and diluted loss per common share-
cumulative effect of change in accounting
principle $ - $(0.12) $(0.12)
===========================================
Basic and diluted net loss per share $(2.47) $(1.70) $(1.73)
===========================================
* See Note 2 for explanation of restated and pro forma amounts
NOTE 5: RELATED PARTY TRANSACTIONS
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. As of June 30,
2001 an additional $90,000 was advanced to an executive under a
fully secured promissory note, bearing interest at 10.75% and
$1,101,093 of these loans remains outstanding.
10
NOTE 6: FINANCING ARRANGEMENTS
In March 2000, TD Securities (U.S.) Inc. underwrote a $225
million senior secured credit facility ("TD Credit Facility") to
fund the Company's base plan for expansion of its branch sales
offices and its 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 revolving credit facility, a $100 million senior secured 7-1/2
year delayed draw term loan and a $75 million senior secured 8 year
term loan. As of September 30, 2000, we entered into an amendment
to the TD Credit Facility to modify certain provisions of the
agreement. As of June 30, 2001, we are in compliance with all of the
covenants and $125 million of the TD Credit Facility was
outstanding. In July 2001, the Company borrowed the remaining $100
million available under the facility.
NOTE 7: 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.
NOTE 8: OTHER 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 June 30, 2001 and 2000, comprehensive income
(loss) was $(27,954,623) and $(21,055,646) respectively, and for the
six months ended June 30, 2001 and 2000, comprehensive income (loss)
was $(58,176,969) and $(38,930,338) respectively, as follows:
<TABLE
Three Months Ended June 30,
2001 2000
-----------------------------------
Other Comprehensive income (loss):
Net loss $(27,613,754) $(21,055,646)
Additions to other comprehensive
loss for changes in fair value of
cash flow hedges (44,297) -
Reclassification of gain from other
comprehensive loss line as offset to
interest expense for ineffective portion
and time value of cash flow hedges (296,572) -
------------------------------------
Other Comprehensive income (loss) $(27,954,623) $(21,055,646)
===========================================
11
Six Months Ended June 30,
2001 2000
-----------------------------------
Other Comprehensive income (loss):
Net loss $(56,562,407) $(38,930,338)
Cumulative effect of change in
accounting principle (716,504) -
Additions to other comprehensive
loss for changes in fair value of
cash flow hedges (828,134) -
Reclassification of gain from other
comprehensive loss line as offset to interest
expense for ineffective portion and
time value of cash flow hedges (69,924) -
-----------------------------
Other Comprehensive income (loss) $(58,176,969) $(38,930,338)
===================================
12
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 carrier, 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 179 account executives supported by 156 network
coordinators as of June 30, 2001. Our sales force is located close to our
customers in 29 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. 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 are gradually being 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. We
currently have a combination of leased and owned fiber facilities.
In May 1999, we began testing our network with some of our customers and
in September 1999, we initiated commercial service. As of June 30, 2001 we
were servicing more than 3,400 customer locations 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 100 customers taking
these voice services on a daily basis as of June 30, 2001 and plan to move
into full production in the latter half of this year.
13
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 June 30, 2001, after only 42 months as
an integrated communications provider, we were serving over 14,000
customers and had 535,400 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 high speed data
services. Our portfolio includes point to point as well as frame relay
solutions from 50kbps to 45mbps.
Internet Services. We have built an extensive IP network
infrastructure for 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. We
offer Internet access from 56k to 45mbps to our business customers.
14
Advanced Technology Center Services. 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. 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 backup
and restoral services, managed 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. We have
opened a second data center in our newly constructed 50,000 square foot
Advanced Technology Center in Waltham, Massachusetts during the second
quarter of 2001. We are further developing services such as electronic
commerce over the Internet, managed security and storage services, managed
firewall services, consulting and network monitoring services and other
data, voice and sophisticated network products that will be based in this
data center.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2001 AS
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30 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 statements of operations for the
six months ended June 30, 2000 reflects the three months ended March 31,
2000 of the Company's revenue recognition policy prior to the adoption of
SAB 101 and the restated three months ended June 30, 2000 for the adoption
of SAB 101 on April 1, 2000. 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 and the restated three
months ended June 30, 2000 for the adoption of SAB 101 on April 1, 2000.
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 six months ended June 30, 2000.
15
Total revenues for the quarter ended June 30, 2001 ("2001 Quarter") were
$74,512,000, as compared to $51,053,000 for restated quarter ended June 30,
2000 ("2000 restated Quarter"), or an increase of 46%. Total revenues for
the six months ended June 30, 2001 ("2001 Six Months") were $142,133,000 as
compared to $95,979,000 for pro forma six months ended June 30, 2000 ("2000
pro forma Six Months) or an increase of 48%. The 2001 Quarter revenues also
represented an increase of 10% over the revenues of $67,621,000 for the
quarter ended March 31, 2001. We have added approximately 170,000 ALE's
since the quarter ending June 30, 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 40,600 net ALEs, bringing the total
lines in service to 535,400. Net lines provisioned through the 2001
Quarter represented an 8% sequential increase over net lines provisioned
through the quarter ended March 31, 2001.
Costs of telecommunications revenues, excluding depreciation, for the 2001
Quarter were $59,853,000, as compared to $39,179,000 for the 2000 restated
Quarter; and were $115,197,000 for the 2001 Six Months as compared to
$74,086,000 for the 2000 pro forma Six Months. As a percentage of
telecommunications revenues, cost of telecommunications revenues was 80%
for the 2001 Quarter and 81% for the 2001 Six Months, as compared to 77%
for the 2000 restated Quarter and 2000 pro forma Six Months. 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 17% to $20,588,000 from $17,554,000 for the 2000 restated
Quarter; and for the 2001 Six Months, increased 27% to $41,788,000 from
$33,008,000 for the 2000 pro forma Six Months. The SG&A expenses for the
2001 Quarter decreased 3% from $21,200,000 in the quarter ended March 31,
2001. The increase in SG&A from the 2000 restated quarter and 2000 pro
forma Six Months is due to an increase in engineer and service employees as
a result of the transition to the ICP platform. The decrease from the March
31, 2001 quarter represents a full quarter's impact of our effort to limit
our expansion and therefore leverage our current branch infrastructure. For
the 2001 Quarter and 2001 Six Months, SG&A expenses were 27.6% and 29.4%
respectively of total revenue as compared to 34.4% of total revenue for the
2000 restated quarter and 2000 pro forma Six Months.
As of June 30, 2001, we employed 676 people including 179 account
executives and 156 network coordinators in 29 branch locations throughout
the Northeast and Mid-Atlantic states as compared to 648 employees at June
30, 2000.
Depreciation and amortization expense increased to $17,095,000 in the 2001
Quarter from $8,962,000 for the 2000 restated Quarter; and for the 2001 Six
Months increased to $33,729,000 from $16,035,000 for the 2000 pro forma Six
16
Months. This increase was a result of additional expenses associated with
the equipment and software relating to the network deployment and the
upgrade of our information systems. Network equipment and software is
being depreciated over 3-5 years, reflecting the risk of rapid
technological change.
Other expense, net, increased by 30% to $4,591,000 for the 2001 Quarter and
increased by 9% to $7,983,000 for the 2001 Six Months from the same periods
in 2000. 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. 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 Six Months. 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 $27,614,000 and
$56,562,000 for the 2001 Quarter and 2001 Six Months, respectively.
Liquidity and Capital Resources
Working capital at June 30, 2001 was $3,600,000 million compared to
$51,500,000 million at December 31, 2000, a decrease of $47,900,000
million, which was used to fund our operating losses and capital
expenditures. Cash balances at June 30, 2001 and December 31,2000 totaled
$30,074,000 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 revolving credit facility, a $100 million senior secured 7-1/2
year delayed draw term loan and a $75 million senior secured 8 year term
loan. As of September 30, 2000, we entered into an amendment to the TD
Credit Facility to modify certain provisions of the agreement. As of June
30, 2001, we are in compliance with all of the covenants. As of June 30,
2001, $125 million of the TD Credit Facility was outstanding. In July 2001,
we borrowed the remaining $100 million available under the facility.
17
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, 2001, the aggregate amount borrowed under these
agreements was approximately $115 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.
18
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 June 30, 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%.
19
Notional amount outstanding at June 30, 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 June 30, 2001. We
compared the market values resulting from these computations with the
market values of these financial instruments at June 30, 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 June 30, 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 $258,000 for the quarter ended June 30, 2001.
A 10% decrease in interest rates would result in reduced interest expense
and cash expenditures of approximately $73,000 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 June 30, 2001. We compared the market
values resulting from these computations with the market values of these
financial instruments at June 30, 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 June 30, 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 $452,200 for the quarter ended June
30, 2001. A 10% decrease in dividend rates would result in reduced
dividends of approximately $452,200 for the same period.
20
Part II
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The 2001 Annual Meeting of Stockholders of the Company was held
on June 11, 2001.
(b) Not applicable.
(c) Each nominee for Class I director received the following votes:
Name Votes For Abstentions
- -----------------------------------------------------------------
Henry Hermann 22,567,068 149,330
Kevin J. Maroni 22,227,845 438,553
Carl Redfield 22,560,605 155,793
Ralph C. Sillari 22,563,718 152,680
The following table sets forth the other matters voted upon and the
respective number of votes cast for, against, number of abstentions and
broker nonvotes.
Matter Votes Votes Delivered
Voted Upon For Against Abstentions Non Voted
- ---------------------------------------------------------------------------------
To approve the retention
of Ernst & Young LLP as
independent accountants 22,662,469 42,649 11,280 -
(d) Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
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, 2001
Date Items Reported
------- --------------------------------------------------------
1. May 17, 2001 Slide presentation prepared for use by our
executives for a securities analysts meeting
held on May 16, 2001.
2. June 6, 2001 Announcement that we have activated our
fiber network in Springfield MA area.
3. June 27, 2001 Announcement that we have completed construction
of our Class A Data Center building in Waltham
MA and have placed our second Network SuperNode
in operation.
21
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 13, 2001 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: August 13, 2001 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer
22