SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter ended September 30, 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 November 14, 2001, 27,098,785 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 September 30, 2001 and December 31, 2000 3
Condensed Consolidated Unaudited Statements of
Operations Three Months Ended September 30, 2001
and 2000 4
Condensed Consolidated Unaudited Statements of
Operations Nine Months Ended September 30, 2001
and 2000 5
Condensed Consolidated Unaudited Statements of
Cash Flows Nine Months Ended September 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 20-21
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 22
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
September 30, December, 31
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $100,649,591 $80,029,442
Accounts receivable, net 45,360,645 43,137,423
Prepaid expenses and other current assets 6,737,851 10,137,037
------------- --------------
Total current assets 152,748,087 133,303,902
Property and equipment:
Property and equipment 342,755,703 259,615,413
Accumulated depreciation and amortization (113,989,044) (63,873,598)
------------- --------------
Total property and equipment, net 228,766,659 195,741,815
Deferred financing costs and other assets 12,238,124 15,082,876
------------- ---------------
Total assets $393,752,870 $344,128,593
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $48,856,517 $49,461,550
Accrued salaries and related taxes 3,689,304 3,282,079
Current portion of obligations under capital leases 32,481,804 27,055,850
Current portion of notes payables 3,680,998 1,983,984
------------- -------------
Total current liabilities 88,708,623 81,783,463
Long term debt:
Obligations under capital leases, net of current portion 58,514,840 52,763,576
Notes payable, net of current portion 227,705,828 103,018,589
------------- -------------
Total long term debt 286,220,668 155,782,165
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
September 30, 2001 and December 31, 2000,
(liquidation preference $255,546,343 at Sept. 30, 2001) 217,783,560 203,249,272
Stockholders' deficit:
Common stock, par value $.01 per share: authorized
100,000,000 shares, 27,093,985 and 26,582,137 shares
issued and outstanding at September 30, 2001 and
December 31, 2000, respectively 270,940 265,821
Additional paid-in capital 95,381,824 93,300,483
Deferred compensation - (26,910)
Other accumulated comprehensive income (loss) (3,063,748) -
Retained deficit (291,548,997) (190,225,701)
------------- --------------
Total stockholders' deficit (198,959,981) (96,686,307)
------------- --------------
Total liabilities and stockholders' deficit $393,752,870 $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
-------------------------------------
September 30, 2001 September 30, 2000
Restated *
------------------ ------------------
Telecommunications revenues $78,166,156 $56,993,993
Operating costs and expenses:
Cost of telecommunications revenues
excluding depreciation and amortization 61,989,987 44,386,041
Selling, general and administrative expenses 20,400,071 20,433,701
Depreciation and amortization 20,301,786 11,975,575
---------------- ---------------
Total operating costs and expenses 102,691,844 76,795,317
--------------- --------------
Loss from operations (24,525,688) (19,801,324)
Other income (expense), net:
Interest income 888,828 2,146,554
Interest expense (6,589,743) (4,246,670)
---------------- ----------------
Total other expense, net (5,700,915) (2,100,116)
---------------- ----------------
Net loss $(30,226,603) $(21,901,440)
================ ================
Net loss available to common stockholders $(35,162,134) $(26,440,971)
================ ================
Net loss per common share:
Basic and Diluted $(1.30) $(1.01)
================ ===============
Weighted average number of common shares:
Basic and Diluted 27,035,449 26,267,495
================ ===============
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
Nine Months Ended
-------------------------------------------------------
September 30, 2001 September 30, 2000 September 30, 2000
Pro forma *
------------------ ------------------ ------------------
Telecommunications revenues $220,299,607 $154,622,734 $152,972,597
Operating costs and expenses:
Cost of telecommunications revenues
excluding depreciation and amortization 177,186,737 119,253,701 118,471,654
Selling, general and administrative expenses 62,187,790 53,468,473 53,441,486
Depreciation and amortization 54,030,546 28,010,674 28,010,674
---------------- --------------- -------------
Total operating costs and expenses 293,405,073 200,732,848 199,923,814
--------------- --------------- -------------
Loss from operations (73,105,466) (46,110,114) (46,951,217)
Other income (expense), net:
Interest income 2,292,155 3,650,021 3,650,021
Interest expense (15,975,697) (13,062,280) (13,062,280)
---------------- ---------------- -------------
Total other expense, net (13,683,542) (9,412,259) (9,412,259)
Loss before extraordinary item and
cumulative effect of change in accounting principle (86,789,008) (55,522,373) (56,363,476)
Extraordinary item - early extinguishment of debt - (2,430,456) (2,430,456)
---------------- ---------------- -------------
Loss before cumulative effect of change in accounting
principle (86,789,008) (57,952,829) (58,793,932)
Cumulative effect of change in accounting principle - (2,878,949) (2,878,949)
---------------- ---------------- -------------
Net loss $(86,789,008) $(60,831,778) $(61,672,881)
================ ================ =============
Net loss available to common stockholders $(101,323,296) $(68,208,176) $(69,049,279)
================ ================ =============
Net loss per common share before extraordinary item
and cumulative effect of change in accounting principle:
Basic and Diluted $(3.78) $(2.50) $(2.54)
================ ================ =============
Net loss per common share before cumulative effect
of change in accounting principle:
Basic and Diluted $(3.78) $(2.60) $(2.63)
================ ================ =============
Net loss per common share:
Basic and Diluted $(3.78) $(2.71) $(2.75)
================ ================ =============
Weighted average number of common shares:
Basic and Diluted 26,837,277 25,142,455 25,142,455
================ ================ =============
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
Nine Months Ended September 30,
-----------------------------------
2001 2000
----------------- -------------
OPERATING ACTIVITIES:
Net loss $(86,789,008) $(60,831,778)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 54,030,546 28,010,674
Stock compensation expense 26,910 79,500
Extraordinary item- early extinguishment of debt - 2,430,456
Interest related to warrants and certain fees 390,655 704,571
Changes in operating assets and liabilities:
Accounts receivable (2,223,222) (3,136,407)
Prepaid expenses and other current assets (1,925,490) 3,711,592
Deferred financing costs and other assets 2,006,148 (16,261,483)
Accounts payable and accrued expenses (605,033) (6,026,731)
Accrued salaries and related taxes 407,225 1,308,134
------------- -------------
Net cash used by operating activities (34,681,269) (50,011,472)
INVESTING ACTIVITY:
Additions to property and equipment (57,455,642) (64,556,722)
Notes receivable from stockholders (90,000) -
Repayment of notes receivable from stockholders 5,414,676 10,373
------------- -------------
Net cash used in investing activities (52,130,966) (64,546,349)
FINANCING ACIVITIES:
Proceeds from the issuance of Series B redeemable
convertible preferred stock, net of offering costs - 191,732,272
Proceeds from the issuance of common stock 2,086,460 5,420,517
Proceeds from notes payable 125,000,000 145,883,518
Repayment of notes payable (1,358,658) (117,768,700)
Repayments under capital lease obligations (18,295,418) (5,359,844)
------------- -------------
Net cash provided by financing activities 107,432,384 219,907,763
Increase in cash and cash equivalents 20,620,149 105,349,942
Cash and cash equivalents at beginning of year 80,029,442 15,522,224
------------- -------------
Cash and cash equivalents at end of period $100,649,591 $120,872,166
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Network and related equipment acquired under
capital leases $30,265,634 $55,459,368
Network and related equipment acquired under
notes payable - $3,762,998
Accretion of preferred stock $14,534,288 $7,376,398
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 nine months ended September 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 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 three months ended September 30, 2000 have been
restated to reflect the adoption of SAB 101. The Company's condensed
consolidated unaudited statements of operations for the nine months
ended September 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 six months ended September 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 nine month
period ended September 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 nine months ended September 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 nine months
ended September 30, 2001, the Company recorded a loss of $(1,161,190)
and $(1,989,324), respectively in other comprehensive income (loss) for
the change in fair value of the collar and swap. Furthermore, during
the three months and nine months ended September 30, 2001, the Company
reclassified out of other comprehensive income (loss) to interest
expense a gain of $176,940 and $123,998, respectively related to the
ineffective portion of the collar and the swap and gains of $111,056
and $233,922 for the same periods related to the time value
deterioration on the collar.
For the period from January 1, 2001 to December 31, 2001, the
Company expects to reclassify approximately $(900,000) 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
September 30,
-----------------------------
2001 2000
restated *
-----------------------------
Numerator:
Net loss $(30,226,603) $(21,901,440)
Less preferred stock dividends and accretion to
redemption value of preferred stock (4,935,531) (4,539,531)
Equals: numerator for basic and diluted -----------------------------
net loss per share $(35,162,134) $(26,440,971)
=============================
Denominator for basic and diluted net loss
per share-weighted-average shares 27,035,449 26,267,495
============================
Basic and diluted net loss per share $(1.30) $(1.01)
=============================
9
Nine Months Ended
September 30,
------------------------------------------
2001 2000 2000
Pro forma *
------------------------------------------
Numerator:
Loss before extraordinary item and
cumulative effect of change in
accounting principle $(86,789,008) $(55,522,373) $(56,363,476)
Extraordinary item-early
extinguishment of debt - (2,430,456) (2,430,456)
--------------------------------------------
Loss before cumulative effect of change
in accounting principle $(86,789,008) $(57,952,829) $(58,793,932)
Cumulative effect of change in
accounting principle - (2,878,949) (2,878,949)
--------------------------------------------
Net loss $(86,789,008) $(60,831,778) $(61,672,881)
Less preferred stock dividends and
accretion to redemption value of
preferred stock (14,534,288) (7,376,398) (7,376,398)
Equals: numerator for basic and diluted --------------------------------------------
net loss per share $(101,323,296) $(68,208,176) $(69,049,279)
============================================
Denominator for basic and diluted net
loss per share-weighted-average shares 26,837,277 25,142,455 25,142,455
==========================================
Basic and diluted loss per common share-
before extraordinary item and
cumulative effect of accounting change $(3.78) $(2.50) $(2.54)
===========================================
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 $(3.78) $(2.71) $(2.75)
===========================================
* 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 September 30, 2001 an
additional $90,000 was advanced to an executive under a fully secured
promissory note, bearing interest at 10.75%. At September 30, 2001,
$1,189,187 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 November
2001, we entered into an amendment to the TD Credit Facility to modify
certain provisions of the agreement. As of September 30, 2001, we are
in compliance with all of the covenants and $225 million of the TD
Credit Facility was outstanding. The Company has classified the revolving
line of credit as long term debt as it expects the revolving line of credit
amount to be outstanding for the full commitment period under the TD credit
facility.
The Company has entered into an equipment lease financing arrangement which
restricts $7.5 million of cash as security for this arrangement.
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.
In July, 2001, the FASB issued SFAS No. 141, "Business Combinations"
(FAS 141) and SFAS No. 142, "Goodwill and Other Intangible Assets"
(FAS 142). FAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. FAS 141 further
clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of Statement 141 are effective for any
business combination accounted for by the purchase method that is
completed after June 30, 2001. Under FAS 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001,
companies are required to adopt FAS 142 in their fiscal year beginning
after December 15, 2001. For the intangible assets acquired on or
before June 30, the intangibles will be amortized during this
transition period until adoption of FAS 142. The Company is not
expecting any material impact from the adoption FAS 142 on its
financial position and results of operations.
NOTE 8: 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 comprehensive
11
income (loss). For the three months ended September 30, 2001 and 2000,
comprehensive income (loss) was $(31,675,789) and $(21,901,440)
respectively, and for the nine months ended September 30, 2001 and
2000, comprehensive income (loss) was $(89,852,756) and $(60,831,778)
respectively, as follows:
Three Months Ended
September 30,
2001 2000
-----------------------------
- ------
Comprehensive income (loss):
Net loss $(30,226,603)
$(21,901,440)
Additions to comprehensive
loss for changes in fair value of
cash flow hedges (1,161,190) -
Reclassification of gain from
comprehensive loss line as offset to interest
expense for ineffective portion and
time value of cash flow hedges (287,996) -
-------------------------
- ----
Comprehensive income (loss) $(31,675,789)
$(21,901,440)
===================================
Nine Months Ended September
30,
2001 2000
------------------------------
- -----
Comprehensive income (loss):
Net loss $(86,789,008)
$(60,831,778)
Cumulative effect of change in
accounting principle (716,504) -
Additions to comprehensive
loss for changes in fair value of
cash flow hedges (1,989,324)
- -
Reclassification of gain from
comprehensive loss line as offset to interest
expense for ineffective portion and
time value of cash flow hedges (357,920)
- -
--------------------------
- ---
Comprehensive income (loss) $(89,852,756)
$(60,831,778)
===================================
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 186 account
executives supported by 163 network coordinators as of September 30,
2001. Our sales force is located close to our customers in 27 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 September
30, 2001 we were servicing more than 4,200 customer locations with
PowerPath(sm) access across the Northeast and Mid-Atlantic states. In
December 2000, we announced completion of a successful Class-4/5 pilot
phase using a softswitch from Telcordia Technologies. 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 350 customer
locations with these voice services on a daily basis as of September
30, 2001.
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 September 30, 2001, after only 45
months as an integrated communications provider, we were serving over
15,000 customers and had 565,800 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, the
majority of which we 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. We are in the process of turning up local telephone
services using the Company's PowerPath(sm) Network through the use of the
softswitch provided by Telcordia Technologies.
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 56kbps 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 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
Hosting Services. We opened our Springfield Data Center and began
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
hardware 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 fourth quarter 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 communications 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 reviewing and 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 NINE MONTHS ENDED SEPTEMBER 30, 2001
AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 three months ended September 30, 2000 have been restated to reflect
the adoption of SAB 101. The Company's condensed consolidated unaudited
statements of operations for the nine months ended September 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
six months ended September 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
six months ended September 30, 2000 for the adoption of SAB 101 on
April 1, 2000. Comparisons for the nine month period 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 nine months
ended September 30, 2000.
15
Total revenues for the quarter ended September 30, 2001 ("2001
Quarter") were $78,166,000, as compared to $56,994,000 for restated
quarter ended September 30, 2000 ("2000 restated Quarter"), or an
increase of 37%. Total revenues for the nine months ended September 30,
2001 ("2001 Nine Months") were $220,300,000 as compared to $152,973,000
for pro forma nine months ended September 30, 2000 ("2000 pro forma
Nine Months) or an increase of 44%. The 2001 Quarter revenues also
represented an increase of 5% over the revenues of $74,512,000 for the
quarter ended June 30, 2001. We have added approximately 159,000 ALE's
since the quarter ended September 30, 2000 resulting in the increase in
revenue due to the addition of ALE's for both new and existing
customer relationships.
A common basis for measurement of an ICP's progress is the growth in
ALEs. During the 2001 Quarter, we provisioned 30,400 net ALEs, bringing
the total lines in service to 565,800. Net lines provisioned through
the 2001 Quarter represented a 6% sequential increase over net lines
provisioned through the quarter ended June 30, 2001 and a 39% increase
over the 2000 quarter.
Costs of telecommunications revenues, excluding depreciation, for the
2001 Quarter were $61,990,000, as compared to $44,386,000 for the 2000
restated Quarter; and were $177,187,000 for the 2001 Nine Months as
compared to $118,472,000 for the 2000 pro forma Nine Months. As a
percentage of telecommunications revenues, cost of telecommunications
revenues was 79% for the 2001 Quarter and 80% for the 2001 Nine Months,
as compared to 78% for the 2000 restated Quarter and 77% for the 2000
pro forma Nine 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) remained at the same level of $20,400,000 from $20,434,000 for
the 2000 restated Quarter; and for the 2001 Nine Months, increased 16%
to $62,188,000 from $53,441,000 for the 2000 pro forma Nine Months. The
SG&A expenses for the 2001 Quarter decreased 1% from $20,588,000 in the
quarter ended June 30, 2001. The increase in SG&A from the 2000 pro
forma Nine Months is due to an increase in engineering and service
employees as a result of the transition to the ICP platform. The
decrease from the June 30, 2001 quarter represents our continued effort
to limit our expansion to control costs and therefore leverage our
current branch infrastructure. For the 2001 Quarter and 2001 Nine
Months, SG&A expenses were 26.1% and 28.2% respectively of total
revenue as compared to 35.9% and 34.9% of total revenue for the 2000
restated quarter and 2000 pro forma Nine Months respectively.
As of September 30, 2001, we employed 712 people including 186 account
executives and 163 network coordinators in 27 branch locations
throughout the Northeast and Mid-Atlantic states as compared to 757
employees at September 30, 2000.
Depreciation and amortization expense increased to $20,302,000 in the
2001 Quarter from $11,976,000 for the 2000 restated Quarter; and for
the 2001
16
Nine Months increased to $54,031,000 from $28,011,000 for the 2000 pro
forma Nine Months. This increase was a result of additional expense
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 to $5,701,000 for the 2001 Quarter from
$2,100,000 for the 2000 restated Quarter and increased to $13,684,000
for the 2001 Nine Months from the 2000 pro forma Nine Months. 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 Nine 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 $30,227,000
and $86,789,000 for the 2001 Quarter and 2001 Nine Months,
respectively.
Liquidity and Capital Resources
Working capital at September 30, 2001 was $64,039,000 million compared
to $51,520,000 million at December 31, 2000, an increase of $12,519,000
million. The increase is the result of our additional draw down of the
TD Credit Facility offset by our operating losses and payments for
capital expenditures. Cash balances at September 30, 2001 and December
31, 2000 totaled $100,650,000 and $80,029,000, respectively. The Company
has entered into an equipment lease financing arrangement which restricts
$7.5 million of cash as security for this arrangement.
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 November 2001, we entered into
an amendment to the TD Credit
17
Facility to modify certain provisions of the agreement. Reference is made to
the Third Amendment to Credit Agreement dated as of November 1, 2001 attached
hereto as Exhibit 10.1 for all of the terms and conditions of the Amendment.
As of September 30, 2001, we are in compliance with all of the covenants.
As of September 30, 2001, $225 million of the TD Credit Facility was
outstanding.
Since September 30, 1998, we have entered into various lease and vendor
financing agreements which provide for the acquisition of equipment and
software. As of September 30, 2001, the aggregate amount borrowed under
these agreements was approximately $129 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.
Reference is made to the Risk Factors attached hereto as Exhibit 99.1
for a discussion of the facts which could adversely affect our
business, revenues, or results of operations.
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.
In July, 2001, the FASB issued SFAS No. 141, "Business Combinations"
(FAS 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (FAS
142). FAS 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. FAS 141 further clarifies
the criteria to recognize intangible assets separately from goodwill.
The requirements of Statement 141 are effective for any business
combination accounted for by the purchase method that is completed
after June 30, 2001. Under FAS 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually (or
more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite
life will continue to be amortized over their useful lives. The
amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001,
companies are required to adopt FAS 142 in their fiscal year beginning
after December 15, 2001. For the intangible assets acquired on or
before June 30, the intangibles will be amortized during this
transition period until adoption of FAS 142. The Company is not
expecting any material impact from the adoption FAS 142 on its
financial position and results of operations.
19
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 September 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%.
Notional amount outstanding at September 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 September 30, 2001. We compared the market values
resulting from these computations with the market values of these
financial instruments at September 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 September
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 $444,000 for the quarter ended September 30, 2001. A
10% decrease in interest rates would result in reduced interest expense
and cash expenditures of approximately $233,000 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 September 30, 2001. We compared the market values resulting from
these computations with the market values of these financial
instruments at September 30, 2001. The differences in the
20
comparison are the hypothetical gains or losses associated with each
type of risk. As a result of our analysis we determined at September
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 $461,500 for the quarter ended September 30, 2001. A 10%
decrease in dividend rates would result in reduced dividends of
approximately $461,500 for the same period.
>
21
Part II
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.1 Third Amendment to Credit Agreement dated as of 11/1/01.
99.1 Risk Factors
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter
ended September 30, 2001
Date Items Reported
-------------- -----------------------------------------------------
- -----
1. July 6, 2001 Announcement of preliminary estimates for quarter
ended June 30, 2001.
2. July 11, 2001 Announcement that we have activated our
fiber network in NH.
3. July 26, 2001 Announcement of revenue and operating results for
the
quarter ended June 30, 2001.
4. August 6, 2001 Announcement that we have completed the beta trial
in
western MA and that CTC packet dial tone and voice
services now available to all MA customers.
5. August 8, 2001 Announcement that we have activated our fiber
network
in downtown Boston MA.
4. September 21, 2001 Announcement that CTC packet dial tone and voice
services now available to all NH customers.
4. September 26, 2001 Announcement that 11 new fiber locations have
been added in MA.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf by the undersigned thereunto duly authorized.
CTC COMMUNICATIONS GROUP, INC.
Date: November 14, 2001 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: November 14, 2001 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer
23