SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter ended March 31, 2002
Commission File Number 0-27505.
CTC COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3469590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
220 Bear Hill Rd., Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
(781) 466-8080
(Registrant's telephone number including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of Common Stock, as of the latest practicable date:
As of May 10, 2002, 27,206,681 shares of Common Stock were outstanding.
CTC COMMUNICATIONS GROUP, INC.
FORM 10-Q
INDEX
Part I FINANCIAL STATEMENTS PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Unaudited Balance Sheets
as of March 31, 2002 and December 31, 2001 3
Condensed Consolidated Unaudited Statements of
Operations for the Three Months Ended
March 31, 2002 and 2001 4
Condensed Consolidated Unaudited Statements of
Cash Flows for the Three Months Ended
March 31, 2002 and 2001 5
Notes to Condensed Consolidated Unaudited
Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 18-19
Part II OTHER INFORMATION
Item 1. Legal Proceedings Inapplicable
Item 2. Changes in Securities 19
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 19
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
March 31, December 31,
2002 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $49,578,554 $66,289,140
Restricted cash 375,000 550,000
Accounts receivable, net 45,113,664 47,059,065
Prepaid expenses and other current assets 6,582,426 4,762,692
------------- --------------
Total current assets 101,649,644 118,660,897
Property and equipment:
Property and equipment 380,286,130 366,087,446
Accumulated depreciation and amortization (159,762,149) (135,762,149)
------------- --------------
Total property and equipment, net 220,523,981 230,325,297
Deferred financing costs and other assets 13,990,081 11,502,131
Restricted cash 7,125,000 6,950,000
------------- ---------------
Total assets $343,288,706 $367,438,325
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $69,431,845 $58,298,679
Accrued salaries and related taxes 3,286,033 2,995,383
Current portion of obligations under capital leases 26,481,444 33,036,325
Current portion of notes payables 2,998,013 3,354,399
------------- -------------
Total current liabilities 102,197,335 97,684,786
Long term debt:
Obligations under capital leases, net of current portion 61,388,676 60,324,538
Notes payable, net of current portion 225,000,000 225,000,000
Other 871,096 2,665,710
------------- -------------
Total long term debt 287,259,772 287,990,248
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 March 31,
2002 and December 31, 2001, respectively
(liquidation preference $255,546,343 at March 31,2002) 228,036,354 222,812,360
Stockholders' deficit:
Common stock, par value $.01 per share: authorized
100,000,000 shares, 27,206,681 and 27,103,730 shares
issued and outstanding at March 31, 2002 and December 31,
2001, respectively 272,067 271,037
Additional paid-in capital 97,278,264 95,528,040
Other accumulated comprehensive loss (1,381,640) (2,886,424)
Retained deficit (370,373,446) (333,961,722)
------------- --------------
Total stockholders' deficit (274,204,755) (241,049,069)
------------- --------------
Total liabilities and stockholders' deficit $343,288,706 $367,438,325
============== ===============
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
-------------------------------------
March 31, 2002 March 31, 2001
------------------ -------------------
>
Telecommunications revenues $83,084,944 $67,621,144
Operating costs and expenses:
Cost of telecommunications revenues
(excluding depreciation and amortization) 63,410,727 55,344,185
Selling, general and administrative expenses 20,597,167 21,199,766
Depreciation and amortization 24,042,371 16,634,236
---------------- ---------------
Total operating costs and expenses 108,050,265 93,178,187
--------------- ---------------
Loss from operations (24,965,321) (25,557,043)
Other income (expense), net:
Interest income 381,433 861,349
Interest expense (6,603,842) (4,252,959)
---------------- ----------------
Total other expense, net (6,222,409) (3,391,610)
---------------- ----------------
Net loss $(31,187,730) $(28,948,653)
================ ================
Net loss available to common stockholders $(36,411,724) $(33,703,262)
================ ================
Net loss per common share:
Basic and Diluted $(1.34) $(1.26)
================ ================
Weighted average number of common shares:
Basic and Diluted 27,187,334 26,660,889
================ ================
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
CTC COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
-----------------------------------
2002 2001
----------------- -------------
OPERATING ACTIVITIES:
Net loss $(31,187,730) $(28,948,653)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 24,042,372 16,634,236
Stock compensation expense - 26,910
Non-cash interest related to warrants 102,695 476,172
Changes in operating assets and liabilities:
Accounts receivable 1,945,401 5,170,768
Prepaid expenses and other current assets (1,374,491) (410,426)
Deferred financing costs and other assets (1,420,811) (485,330)
Accounts payable and accrued expenses 11,133,166 (7,717,674)
Accrued salaries and related taxes 290,650 982,637
------------- -------------
Net cash provided by (used in) operating activities 3,531,252 (14,271,360)
INVESTING ACTIVITY:
Additions to property and equipment (11,875,396) (20,187,067)
Notes receivable from stockholders (545,243) -
Repayments of notes receivable from stockholders 100,000 5,414,676
------------- ------------
Net cash used in investing activities (12,320,639) (14,772,391)
FINANCING ACIVITIES:
Proceeds from the issuance of common stock 249,217 667,126
Repayment of notes payable (356,385) (476,567)
Repayments under capital lease obligations (7,814,031) (4,098,976)
------------- -------------
Net cash used in financing activities (7,921,199) (3,908,417)
Decrease in cash and cash equivalents (16,710,586) (32,952,168)
Cash and cash equivalents at beginning of year 66,289,140 80,029,442
------------- -------------
Cash and cash equivalents at end of period $49,578,554 $47,077,274
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Network and related equipment acquired under
capital leases $2,323,288 $4,757,656
Network and related equipment acquired under
notes payable - $238,263
Accretion of preferred stock $5,223,994 $4,754,609
Issuance of warrants $1,487,997 $ -
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
CTC COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all the information and footnote disclosures required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
have been included. Operating results for the three months ended March 31,
2002 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2002, as noted below. These statements
should be read in conjunction with the financial statements and related
notes included in the Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
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. Revenues related
to recurring monthly fees are deferred and recognized in the period in which
the service is available to the customer.
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 7).
6
Cash Flow Hedging Strategy
As required by the Company's credit facility with TD Securities (US) Inc.
(the Senior Facility), the Company maintains an interest rate collar and an
interest rate swap. These instruments hedge the variable rate of interest
due on the Senior Facility. The interest rate collar effectively locks $33
million of the Senior Facility borrowings between 12.25% and 9.67%.
The interest rate swap effectively caps $17 million of the Senior Facility
borrowings at 10.75%. In December 2001 and January 2002, we entered into two
additional interest rate cap agreements of 6.5% maturing in October 2003 and
September 2003 on $12.5 million and $50 million of borrowings, respectively.
During the three months ended March 31,2002 and 2001, the Company
recorded a gain of $1,504,784 and a loss of $783,837 respectively in other
comprehensive income (loss) for the change in fair value of the collar and
swap. Furthermore, during these periods, the Company reclassified out of
other comprehensive income (loss) to interest expense a gain of $293,092 and
a loss of $54,157 respectively related to the ineffective portion of the
collar and the swap and a loss of $3,262 and $172,491 respectively related
to the collar and the swap excluded from the assessment of hedge
effectiveness.
For the period from January 1,2002 to December 31,2002, the Company
expects to reclassify approximately $1,690,000 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 Senior
Facility.
NOTE 3: FINANCING ARRANGEMENTS
In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior
secured credit facility ("Senior Facility") to fund our base plan for
expansion of our branch sales offices and our PowerPath(R) Network. The
proceeds were used to retire the $43 million balance of a $75 million
existing credit facility and to repay in full a $25 million vendor financing
facility. The Senior 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.
In March 2002, we amended the agreement covering our Senior Facility to
include new covenant levels as well as an increase in the interest rate
grids. The Senior Facility provides for certain financial and operational
covenants, including but not limited to minimum access lines installed and
billable, minimum quarterly revenue and operating cash flow, and maximum
capital expenditures and other investments. As of March 31, 2002, the
Company is in compliance with all amended covenants. In connection with the
amendment, the bank syndicate will receive common stock warrants, which
could total 3.25% of our outstanding shares of common stock if warrants to
purchase common stock are issued in conjunction with the Company's Vendor
Finance Facility, as discussed in the following paragraph. The issuance,
terms and prices of the warrants are structured in the same manner as the
warrants issuable under the Vendor Finance Facility. As of March 31, 2002,
the full $225 million of the Senior Facility has been utilized. Reference
is made to Exhibit 10.27 filed as part of our Annual Report on Form 10-K for
the year ended December 31, 2001 for a complete description of the amended
Senior Facility.
7
In March 2002, we entered into an agreement with a vendor("Vendor Finance
Facility"), which an executive officer thereof is on the Board of Directors
of the Company, which restructures approximately $48 million in outstanding
capital leases. The leases have been restructured into 36 month leases
beginning in February 2002. There will be no principle or interest payments
for the first six months and the leases will then be amortized over the
remaining 30 months. In addition, subject to meeting the conditions for the
financing, we will also receive up to $40 million in capital lease financing
from the finance subsidiary of this vendor for equipment purchases in 2002
available in four separate tranches of $10 million each. These are available
quarterly on the first days of February, May, August and November 2002. For
each new tranche of capital drawn, there are no payments required for the
first six months, and then the leases will be amortized over the next 30
months. This additional capital is dependent upon our compliance with the
conditions in the agreement, including compliance with financial and
operating covenants. These covenants are virtually the same as those in the
amended Senior Facility with an additional covenant relating to minimum
unrestricted cash balance.
Prior to each tranche period, we must elect to utilize the financing
tranche for that period or decline it and the remaining tranches. If we
elect to use a tranche, we will issue warrants before the beginning of the
tranche period equal to 2% of our outstanding common stock for the first $10
million, 1% of the then outstanding common stock for each of tranches two
and three, and 2.5% of the then outstanding common stock for the fourth
tranche. The number of shares of common stock outstanding for the first
tranche was determined as of January 1, 2002. The second through fourth
tranches are determined as of the first day of the month immediately
preceding the first day of the tranche period. The initial warrants will be
issued at an exercise price of $4.10. Subsequent warrants, if issued, would
be priced at the average of our stock price for the period from the 10th to
the 14th trading days of the month during which such warrants are issued.
On February 27,2002, the company elected to fully utilize the first $10
million tranche of the Vendor Financing Facility, resulting in the issuance
of 542,075 warrants to the vendor and 271,038 warrants to the bank
syndicate, at an exercise price of $4.10. At the date of issuance, these
warrants were valued at approximately $1,488,000 and will be recorded as
interest expense over the remaining term of the facility.
On May 1, 2002, the Company elected to fully utilize the second $10
million tranche of the Vendor Finance Facility, resulting in the issuance of
272,067 warrants to the vendor and 136,034 to the bank syndicate, at an
exercise price of $2.408.
The aforementioned warrants are subject to ant-dilution adjustments for
certain events.
NOTE 4: SERIES B PREFFERED STOCK
The conversion ratio for the Series B Preferred Stock is subject to ant-
dilution adjustments for certain events. As a result of the warrants issued
associated with the first tranche of the Vendor Financing Facility, the
conversion ratio associated with the series B Preferred Stock converts into
an additional 50,000 shares of common stock. The fair value associated with
these additional shares, $2,500,000 (as determined at the commitment date),
will be accreted as additional dividends to preferred stock from the date of
issuance of the warrants to the redemption date of the Series B Preferred
Stock.
8
NOTE 5: NET LOSS PER COMMON SHARE
The following tables set forth the computation of basic and diluted
net loss per share:
Three Months Ended
March 31,
----------------------------
2002 2001
----------------------------
Numerator:
Net loss $(31,187,730) $(28,948,653)
Less preferred stock dividends and
Accretion to redemption value of
preferred stock (5,223,994) (4,754,609)
Equals: numerator for basic and diluted ----------------------------
net loss per share $(36,411,724) $(33,703,262)
============================
Denominator for basic and diluted net
loss per share-weighted-average shares 27,187,334 26,660,889
============================
Basic and diluted loss per common share-
before extraordinary item $(1.34) $(1.26)
============================
NOTE 6: RELATED PARTY TRANSACTIONS
As of December 31,2001, the Company had advanced funds to certain
stockholders, who are executives and officers, amounting to $1,217,281
evidenced by fully secured promissory notes. These notes bear interest at
10.75%. In February 2002, the Company advanced $545,243 to two executives
that have been secured fully by promissory notes bearing interest at 10.75%.
During the quarter ended March 31, 2002, $100,000 was repaid. In April and
May 2002, an additional $190,064 was repaid. At March 31, 2002 $1,709,267
of these loans remains outstanding.
NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2001, the Financial Accounting Standards Board issued
Statement No. 141, "Business Combinations" (FAS 141) and Statement 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
9
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, 2001 the intangibles will be amortized during
this transition period until adoption of FAS 142. The adoption of FAS 141
and FAS 142 on January 1, 2002 did not have a material impact on our
financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (FAS 144), which addresses the financial accounting and reporting
for the impairment of long-lived assets. This statement supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provisions for the disposal of a segment of
a business of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
The provisions of this statement are effective for the financial statements
issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption permitted. The
adoption of FAS 144 on January 1, 2002 did not have a material impact on our
financial position or results of operations.
NOTE 8: COMPREHENSIVE LOSS
The Company reports comprehensive income (loss) as required by Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income," (FAS 130). FAS 130 requires that changes in fair value of the
Company's derivative instruments designated as cash flow hedges, as well as
other certain changes in stockholders' equity, be included in other
comprehensive income (loss). For the three months ended March 31, 2002 and
2001, comprehensive income (loss) was $(29,972,776) and $(30,222,346)
respectively as follows:
Three Months Ended March 31,
2002 2001
------------------------------
Comprehensive loss:
Net loss $(31,187,730) $(28,948,653)
Cumulative effect of change in
accounting principle - (716,504)
(Additions) subtractions to other
comprehensive loss for changes
in fair value of cash flow hedges $ 1,504,784 (783,837)
Reclassification from other
comprehensive loss to interest
expense for ineffective portion and
time value of cash flow hedges (289,830) 226,648
-----------------------------
Comprehensive loss $(29,972,776) $(30,222,346)
=============================
10
Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and Notes set forth elsewhere in this Report.
OVERVIEW
We are a rapidly growing single-source provider of voice, data and
Internet communications services, or integrated communications provider,
with 17 years of marketing, sales and service experience. We target
predominantly medium and larger-sized business customers who seek greater
capacity for voice and data traffic, a single provider for their
telecommunications requirements and improved levels of service. We have a
large, experienced sales force consisting of 153 account executives
supported by 193 network coordinators as of March 31, 2002. Our sales
force is located close to our customers in 25 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(R) Network uses packet-
switching, a technology that transmits data in discrete packages. It uses
Internet protocol (IP), which is a method that allows computers with
different architectures and operating systems to communicate over the
Internet, and asynchronous transfer mode, or ATM, architecture, which
permits the network to transmit multiple types of media, such as voice,
data and video with various levels of Quality of Service, or QOS. The
first phase of our network, which became operational for full production
mode in January 2000, included 22 Cisco Systems, or Cisco, advanced data
switches and two network operations centers. Presently, we are
interconnecting our facilities with a combination of our owned fiber
facilities and leased transmission capacity over fiber optic cable strands
from Level 3 Communications and NorthEast Optic Network. The remaining
leased transmission services will gradually be replaced by our fiber
links, which we own following our investment in fiber strands through
Williams Communications and other regional and metro fiber carriers. We
have selected Cisco to provide the Wavelength Digital Multiplexing (WDM)
and SONET technology to activate or light up the fiber and complete a
highly competitive, scalable and secure fiber transport infrastructure.
Cisco has reviewed and certified our network design and has designated our
network as a Cisco Powered Network.
In May 1999, we began testing our network with some of our customers and
in September 1999, we initiated commercial service. As of March 31, 2002
we were servicing more than 6,000 customer locations with PowerPath(R)
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(R) Network allows us to deliver both local
and long distance voice services using a Voice over IP (VoIP) packet based
network.
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
11
over 280,000 local access lines and over $200 million in annual local
telecommunications spending. As of March 31, 2002, after only 51 months as
an integrated communications provider, we were serving over 15,000
customers and had 607,000 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 our customers'
telecommunications equipment and the local telephone network which we lease
from incumbent phone companies in most instances. 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
voice interconnectivity between separate facilities. We are now actively
engaged in activating local dial tone services using the Company's
PowerPath(R) Network through the use of softswitch technology developed by
Telcordia Technologies. We will continue to rollout local dial tone services
market by market throughout 2002 as an addition to our existing converged
product portfolio. We also offer local telephone services through resale of
the incumbent local exchange carrier (ILEC) service.
Long Distance Telephone Services. We offer a full range of domestic and
international long distance services, including "1+" outbound calling,
inbound toll free service, and 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 Frame Relay as well as point to point
solutions from 56kbps to 45mbps.
Internet Services. We have built an extensive IP network infrastructure for
our PowerPath(R) Network. We became registered as an official Internet
Service Provider, or ISP, in 2000, which enabled us to deliver Internet
access to our customers as part of our PowerPath(R) 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. 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.
Hosting Services. We provide web hosting services via our Springfield,
Massachusetts Data Center opened in early 2001 and through our Advanced
Technology Center (ATC) in Waltham, Massachusetts opened in September 2001.
The ATC is a 50,000 square foot state of the art data center that houses
our Eastern Massachusetts Super Node for the PowerPath(R) Network and an
Internet/WAN Collocation Center. We currently offer customers hosting
solutions that include shared and dedicated web hosting and web site design
services, Internet/WAN collocation services and data center storage
networking services.
12
In 2002, we plan to offer network attached storage and remote data archiving
services, and optical networking services for storage area networking and
other high bandwidth applications. These services have been designed and
released to support our customers' growing E-business and business continuity
(continuous systems uptime) requirements. We currently support approximately
200 web sites for customers at our ATC in Waltham, Massachusetts. In
addition, we also support 15 Internet/WAN collocations customers that utilize
some or all of our complete suite of Hosting Solutions. We are also engaged
in the further analysis and potential development of services such as managed
firewall and monitoring service, data security, and other network operating
system support services.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 2001.
Total revenues for the quarter ended March 31, 2002 ("2002 Quarter") were
$83,085,000, as compared to $67,621,000 for the quarter ended March 31, 2001
("2001 Quarter"), or an increase of 23%. The 2002 Quarter revenues also
represented an increase of 5% over the revenues of $79,139,000 for the
quarter ended December 31, 2001. We have added approximately 112,200 access
lines since the quarter ending March 31, 2001 resulting in the increase in
revenue due to the addition of ALE's for both new and existing customer
relationships.
One basis for measurement of an ICP's progress is the growth in ALEs. During
the 2002 Quarter, we provisioned 18,000 net ALEs, bringing the total lines
in service to 607,000. Net lines provisioned through the 2002 Quarter
represented a 3% sequential increase over net lines provisioned through the
quarter ended December 31, 2001. Data ALEs represent more than 27% of total
ALEs as of March 31, 2002.
Costs of telecommunications revenues, excluding depreciation, for the 2002
Quarter were $63,411,000, as compared to $55,344,000 for the 2001 Quarter.
As a percentage of telecommunications revenues, cost of telecommunications
revenues was 76% for the 2002 Quarter, as compared to 82% for the 2001
Quarter. The decrease in the percentage of the cost of the
telecommunications revenues primarily reflects the migration of new and
existing customers onto our PowerPath(R)Network and the increased use of
our own 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 2002 Quarter, selling, general and administrative expenses (SG&A)
decreased 2.8% to $20,597,000 from $21,200,000 for the 2001 Quarter; and
increased from $20,347,000 in the quarter ended December 31, 2001. The
decrease in SG&A from the 2001 Quarter is due to the decision to limit our
expansion and leverage our current branch infrastructure. The increase from
the December 31,2001 quarter represents slightly higher payroll and payroll
related expenses. For the 2002 Quarter, SG&A expenses were 24.8% of total
revenue for the quarter as compared to 31.4% of total revenue for the 2001
quarter. As of March 31, 2002, we employed 700 people including 153 account
executives and 193 network coordinators in branch locations throughout the
Northeast and Mid-Atlantic states as compared to 693 employees at March 31,
2001.
13
Depreciation and amortization expense increased to $24,042,000 in the 2002
Quarter from $16,634,000 for the 2001 Quarter. This increase was a result
of additional expenses associated with the equipment and software relating
to the network deployment and the upgrade of our information systems.
Network equipment and software is being depreciated over 2-5 years,
reflecting the risk of rapid technological change.
Other expense, net, increased by 84% to $6,222,000 for the 2002 Quarter from
the 2001 Quarter. Interest expense increased due to the increase in
borrowings required in connection with the deployment of our network,
working capital requirements and funding our operating losses. The increase
is further effected by a decrease in interest income due to lower invested
cash balances throughout the quarter.
As a result of the above factors, the net losses totaled to $31,188,000 for
the 2002 Quarter.
Liquidity and Capital Resources
Working capital at March 31, 2002 was ($548,000) compared to $20,976,000, at
December 31, 2001, a decrease of $21,524,000 million, which was used to fund
our operating losses and capital expenditures including capital lease
payments. Cash balances at March 31, 2002 and December 31,2001 totaled
$49,579,000 and $66,289,000, respectively. The Company has entered into an
equipment lease financing arrangement that restricts $7.5 million of cash as
security for this arrangement.
Since September 30, 1998, we have entered into various lease and vendor
financing agreements which provide for the acquisition of equipment and
software. As of March 31, 2002, the aggregate amount borrowed under these
agreements was approximately $143.4 million with an outstanding balance of
approximately $91.0 million.
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(R) Network
expansion and new PowerPath(R) Network product and applications development.
In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior
secured credit facility ("Senior Facility") to fund our base plan for
expansion of our branch sales offices and our PowerPath(R) Network. The
proceeds were used to retire the $43 million balance of a $75 million
existing credit facility and to repay in full a $25 million vendor financing
facility. The Senior 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.
14
In March 2002, we amended the agreement covering our Senior Facility to
include new covenant levels as well as an increase in the interest rate
grids. The Senior Facility provides for certain financial and operational
covenants, including but not limited to minimum access lines installed and
billable, minimum quarterly revenue and operating cash flow, and maximum
capital expenditures and other investments. As of March 31, 2002, the
Company is in compliance with all the amended covenants. In connection with
the amendment, the bank syndicate will receive common stock warrants, which
could total 3.25% of our outstanding shares of common stock if warrants to
purchase common stock are issued in conjunction with the Company's Vendor
Finance Facility, as discussed in the following paragraph. The issuance,
terms and prices of the warrants are structured in the same manner as the
warrants issuable under the Vendor Finance Facility. As of March 31, 2002,
the full $225 million of the Senior Facility has been utilized.
In March 2002, we entered into an agreement with a vendor ("Vendor Finance
Facility"), which an executive officer thereof is on the Board of Directors
of the Company, which restructures approximately $48 million in outstanding
capital leases. The leases have been restructured into 36 month leases
beginning in February 2002. There will be no principle or interest payments
for the first six months and the leases will then be amortized over the
remaining 30 months. In addition, subject to meeting the conditions for the
financing, we will also receive up to $40 million in capital lease financing
from the finance subsidiary of this vendor for equipment purchases in 2002
available in four separate tranches of $10 million each. These are available
quarterly on the first days of February, May, August and November 2002. For
each new tranche of capital drawn, there are no payments required for the
first six months, and then the leases will be amortized over the next 30
months. This additional capital is dependent upon our compliance with the
conditions in the agreement, including compliance with financial and
operating covenants. These covenants are virtually the same as those in the
amended Senior Facility with an additional covenant relating to minimum
unrestricted cash balance.
Prior to each tranche period, we must elect to utilize the financing tranche
for that period or decline it and the remaining tranches. If we elect to use
a tranche, we will issue warrants before the beginning of the tranche period
equal to 2% of our outstanding common stock for the first $10 million, 1% of
the then outstanding common stock for each of tranches two and three, and
2.5% of the then outstanding common stock for the fourth tranche. The number
of shares of common stock outstanding for the first tranche is determined as
of January 1, 2002. The second through fourth tranches are determined as of
the first day of the month immediately preceding the first day of the
tranche period. The initial warrants will be issued at an exercise price of
$4.10. Subsequent warrants, if issued, would be priced at the average of
our stock price for the period from the 10th to the 14th trading days of the
month during which such warrants are issued.
On February 27,2002, the company elected to fully utilize the first $10
million tranche of the Vendor Financing Facility, resulting in the issuance
of 542,075 warrants to the vendor and 271,038 warrants to the bank
syndicate, at an exercise price of $4.10. At the date of issuance, these
warrants were valued at approximately $1,488,000 and will be recorded as
interest expense over the remaining term of the facility.
On May 1, 2002, the Company elected to fully utilize the second $10 million
tranche of the Vendor Finance Facility, resulting in the issuance of 272,067
warrants to the vendor and 136,034 to the bank syndicate, at an exercise
price of $2.408.
15
The aforementioned warrants are subject to ant-dilution adjustments for
certain events.
The conversion ratio for the Series B Preferred Stock is subject to ant-
dilution adjustments for certain events. As a result of the warrants issued
associated with the first tranche of the Vendor Financing Facility, the
conversion ratio associated with the series B Preferred Stock converts into
an additional 50,000 shares of common stock. The fair value associated with
these additional shares, $2,500,000 (as determined at the commitment date),
will be accreted as additional dividends to preferred stock from the date of
issuance of the warrants to the redemption date of the Series B Preferred
Stock.
We will continue to use the balance of the proceeds realized from the Senior
Facility and the 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 Senior 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 Senior 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 Senior 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.
The Company's covenants under its Senior Facility and Vendor Financing
Facility contemplate improvements in the Company's operating results in
fiscal 2002 over 2001. Among other things, these covenants require
significant improvement in Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA), as defined in the Senior Facility and the Vendor
Financing Facility. The Company's ability to remain in compliance with the
covenants is dependent upon the Company's continued execution of its
business plan which consists of the following primary initiatives; continued
migration of existing offnet customers onto the Company's network, improving
margins by reducing network costs of goods sold (primarily by replacing
leased network facilities with owned and operated fiber facilities),
16
controlling selling, general and administrative expenses and continued
revenue growth by adding new customers and selling new services. In the
event that conditions arise that do not allow the Company to meet all of the
primary initiatives of its business plan, management expects to take all
necessary actions to remain in compliance with its required covenants which
may include the reduction of certain operating expenses, migration of
customers onto the Company's network and elimination of certain
discretionary expenses. Management believes that if necessary, these
actions could be implemented to meet its covenants, including its EBITDA
covenant.
Recent Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" (FAS 141) and Statement 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, 2001 the intangibles will be amortized during
this transition period until adoption of FAS 142. The adoption FAS 141 and
FAS 142 on January 1, 2002 did not have a material impact on our financial
position or results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(FAS 144), which addresses the financial accounting and reporting for the
impairment of long-lived assets. This statement supercedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions for the disposal of a segment of a
business of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
The provisions of this statement are effective for the financial statements
issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption permitted. The
adoption of FAS 144 on January 1, 2002 did not have a material impact on our
financial position or results of operations.
17
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 Senior Facility. The
Senior 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 Senior Facility, we utilize
interest rate swap and collar agreements to hedge variable rate interest
risk on 50% of the Senior Facility. All of our derivative financial
instrument transactions are entered into for non-trading purposes.
Notional amounts outstanding at March 31, 2002 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 Senior Facility
borrowings between 12.25% and 9.67%.
Notional amount outstanding at March 31, 2002 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 Senior Facility
borrowings at 10.75%.
In December 2001 and January 2002, we entered into two additional interest
rate cap agreements of 6.5% maturing in October 2003 and September 2003 on
$12.5 million and $50 million of borrowings, respectively.
For purposes of specific risk analysis we use sensitivity analysis to
determine the impacts that market risk exposure may have on the fair value
of our outstanding debt obligations. To perform sensitivity analysis, we
assess the risk of loss in fair values from the impact of hypothetical
changes in interest rates on market sensitive instruments, considering the
hedge agreements noted above. We compare the market values for interest
risk based on the present value of future cash flows as impacted by the
changes in the rates. We selected discount rates for the present value
computations based on market interest rates in effect at March 31, 2002. We
compared the market values resulting from these computations with the market
values of these financial instruments at March 31, 2002. The differences in
the comparison are the hypothetical gains or losses associated with each
type of risk. As a result of our analysis we determined at March 31, 2002,
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 $335,000 for the quarter ended March 31, 2002. A 10% decrease
in interest rates would result in reduced interest expense and cash
expenditures of approximately $16,000 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
18
instruments. We compare the market values for dividend risk based on the
present value of future cash flows as impacted by the changes in the rates.
We selected discount rates for the present value computations based on
market dividend rates in effect at March 31, 2002. We compared the market
values resulting from these computations with the market values of these
financial instruments at March 31, 2002. The differences in the comparison
are the hypothetical gains or losses associated with each type of risk. As a
result of our analysis we determined at March 31, 2002, 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 $481,000 for the quarter ended March
31, 2001. A 10% decrease in dividend rates would result in reduced dividends
of approximately $481,000 for the same period.
Part II
Item 2. Changes in Securities
(c) On February 27,2002, we issued 542,075 five-year warrants to purchase
our common stock with an exercise price of $4.10 per share to Cisco Systems
Capital Corp. ("Cisco") in connection with the Company's election to utilize
the first tranche of $10 million of the Vendor Finance Facility provided by
Cisco. On February 27,2002, we also issued 271,038 five-year warrants with
an exercise price of $4.10 per share to Toronto Dominion (Texas) Inc. in
connection with the Company's election to utilize the first tranche of $10
million of the Cisco Vendor Finance Facility.
Reference is made to the disclosure set forth in the "Liquidity and Capital
Resources" section of Part I, Item 2 (Management's Discussion and Analysis
of Financial Condition And Results Of Operations) as part of this Quarterly
Report on Form 10-Q, Exhibit 10.1 filed herein and Exhibit 10.27 filed as
part of our Annual Report on Form 10-K for the year ended December 31, 2001
for a complete description of the transactions described above.
All of the warrants were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended, as transactions by an issuer not involving a public offering.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.1 Amended and Restated Master Agreement to Lease Equipment entered into
as of February 27, 2002 by and between Cisco Systems Capital Corp.
and CTC Communications Corp.**
10.2 Warrant dated February 27, 2002 issued to Toronto Dominion (Texas) Inc.
10.3 Warrant dated February 27, 2002 issued to Cisco Systems Capital Corp.
99 Risk Factors
** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT. OMITTED PORTIONS ARE FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter ended
March 31, 2002.
Date Items Reported
------- ----------------------------------------------------------
3/18/02 Announcement of the deployment of our Fiber Network
and Local Dial Tone Services into Rhode Island
3/25/02 Announcement that we have entered into a multi-year
agreement with Cape Cod Bank and Trust to provide
converged voice, data and Internet services to over
30 bank locations throughout southeastern Massachusetts.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf by the undersigned thereunto duly authorized.
CTC COMMUNICATIONS GROUP, INC.
Date: May 15, 2002 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: May 15, 2002 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer