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, 1999.
Commission File Number 0-27505.
CTC COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3469590
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
220 Bear Hill Rd., Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
(781) 466-8080
(Registrant's telephone number including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of Common Stock, as of the latest practicable date:
As of November 12, 1999, 14,554,804 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 Unaudited Balance Sheets
as of September 30 and March 31, 1999 3
Condensed Unaudited Statements of Operations
Three Months Ended September 30, 1999 and 1998 4
Condensed Unaudited Statements of Operations
Six Months Ended September 30, 1999 and 1998 5
Condensed Unaudited Statements of Cash Flows
Six Months Ended September 30, 1999 and 1998 6
Notes to Condensed Unaudited
Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 17
Part II OTHER INFORMATION
Item 1. Legal Proceedings Inapplicable
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a
Vote of Security Holders 18
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 19
2
CTC COMMUNICATIONS GROUP, INC.
CONDENSED UNAUDITED BALANCE SHEETS
September 30, March 31,
1999 1999
(Restated)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 44,571,938 $ 2,254,258
Accounts receivable, net 29,863,809 19,200,931
Prepaid expenses and other current assets 7,458,429 5,890,840
------------- ------------
Total current assets 81,894,176 27,346,029
Furniture, fixtures and equipment 71,533,834 49,417,689
Less accumulated depreciation (16,372,075) (10,615,766)
------------- -------------
Total Furniture, Fixtures and Equipment 55,161,759 38,801,923
Deferred financing costs and other assets 2,171,563 3,333,950
------------- ------------
Total Assets $139,227,498 $69,481,902
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 35,982,569 $27,439,488
Accrued salaries and related taxes 1,657,652 1,656,367
Current portion of obligations under
capital leases 3,915,526 3,230,077
Current portion of note payable 1,695,148 1,705,141
------------- ------------
Total Current Liabilities 43,250,895 34,031,073
Obligations under capital leases,
net of current portion 7,970,140 8,004,366
Notes payable, net of current portion 75,268,856 51,918,492
------------- ------------
Total Long-Term Debt $ 83,238,996 $59,922,858
Series A redeemable convertible
preferred stock 13,361,181 12,671,797
Stockholders' deficit:
Common stock 145,049 103,525
Additional paid in capital 72,895,200 8,386,816
Deferred compensation (159,410) (212,410)
Retained deficit (73,492,433) (45,390,732)
------------- -------------
(611,594) (37,112,801)
Amounts due from stockholders (11,980) (31,025)
------------- -------------
Total Stockholders' Deficit (623,574) (37,143,826)
------------- ------------
Total Liabilities and
Stockholders' Deficit $139,227,498 $69,481,902
============= ============
The accompanying notes are an integral part of these financial statements.
3
CTC COMMUNICATIONS GROUP, INC.
CONDENSED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended
September 30, September 30,
1999 1998
(Restated)
-------------- -------------
Telecommunications revenues $35,109,155 $14,516,189
Costs and expenses
Cost of telecommunications revenues
excluding depreciation 27,398,259 12,383,433
Selling, general and administrative expenses 12,676,315 12,043,233
Depreciation 3,652,809 610,000
------------ -------------
43,727,383 25,036,666
------------ -------------
Loss from operations (8,618,228) (10,520,477)
Other income (expense)
Interest income 473,780 38,437
Interest expense (4,221,052) (1,061,736)
Other 71,996 3,149
------------ -------------
(3,675,276) (1,020,150)
------------ ------------
Loss before income taxes (12,293,504) (11,540,627)
Income tax benefit 0 808,000
------------ -------------
Net loss ($12,293,504) ($10,732,627)
============= ============
Net loss per common share:
Basic and diluted ($0.92) ($1.10)
============= =============
Weighted average number of common shares:
Basic and diluted 13,756,533 10,002,370
============= =============
The accompanying notes are an integral part of these financial statements.
4
CTC COMMUNICATIONS GROUP, INC.
CONDENSED UNAUDITED STATEMENTS OF OPERATIONS
Six Months Ended
September 30, September 30,
1999 1998
(Restated)
-------------- -------------
Telecommunications revenues $66,156,006 $27,351,874
Costs and expenses
Cost of telecommunications revenues
excluding depreciation 53,487,443 23,996,901
Selling, general and administrative expenses 26,918,439 21,138,187
Depreciation 5,756,309 1,115,000
------------- -------------
86,162,191 46,250,088
------------- -------------
Loss from operations (20,006,185) (18,898,214)
Other income (expense)
Interest income 474,121 170,832
Interest expense (7,991,767) (1,479,246)
Other 111,514 33,001
------------- -------------
(7,406,132) (1,275,413)
------------- ------------
Loss before income taxes (27,412,317) (20,173,627)
Income tax benefit 0 1,412,000
------------ -------------
Net loss ($27,412,317) ($18,761,627)
============== =============
Net loss per common share:
Basic and diluted ($2.33) ($1.90)
============= =============
Weighted average number of common shares:
Basic and diluted 12,041,250 9,993,281
============= =============
The accompanying notes are an integral part of these financial statements.
5
CTC COMMUNICATIONS GROUP, INC.
CONDENSED UNAUDITED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30, September 30,
1999 1998
(Restated)
------------- ------------
OPERATING ACTIVITIES
Net loss $(27,412,317) $(18,761,627)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 5,756,309 1,115,000
Stock compensation expense 2,506,119 293,052
Interest related to warrants and certain fees 2,075,913 0
Changes in working capital items:
Accounts receivable (10,662,878) (8,250,115)
Prepaid expenses and other current assets (1,567,589) (2,044,714)
Other assets (47,959) (2,646,220)
Accounts payable 8,543,081 10,108,125
Accrued salaries and related taxes 1,285 1,410,027
------------- -------------
Net cash used by operating activities (20,808,036) (18,776,472)
INVESTING ACTIVITIES
Additions to equipment (11,745,132) (5,865,043)
------------- -------------
Net cash used in investing activities (11,745,132) (5,865,043)
FINANCING ACTIVITIES
Proceeds from notes payable 42,098,357 21,850,000
Proceeds from the issuance of redeemable
preferred stock 0 11,862,113
Repayments of note payable (26,839,164) (9,077,071)
Repayments under capital leases (2,504,179) (82,844)
Repayment of amount due from stockholders 19,045 0
Proceeds from the issuance of common stock 62,096,789 88,861
------------- -------------
Net cash provided by financing activities 74,870,848 24,641,059
------------- -------------
Increase (decrease) in cash and cash equivalents 42,317,680 (456)
Cash at beginning of year 2,254,258 2,167,930
------------- -------------
Cash and cash equivalents at end of period $44,571,938 $2,167,474
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES
Network and related equipment
acquired under capital leases $3,155,402 0
Network and related equipment
acquired under notes payable $7,215,611 0
Common stock purchase warrants issued
in connection with notes payable and
Series A Redeemable Convertible Preferred Stock 0 $2,436,623
The accompanying notes are an integral part of these financial statements.
6
CTC COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed unaudited financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnote disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the three and six months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2000. These statements should be read in conjunction
with the financial statements and related notes included in the our Annual
Report on Form 10-K/A for the fiscal year ended March 31, 1999.
Restatement of Financial Statements
In our Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, we reported a loss before taxes of $11,810,600 and recorded a tax
benefit of $827,000 for a net loss of $10,983,600 or $1.13 per share. For
the six months ended September 30, 1998, we reported a loss before taxes of
$20,338,600 and recorded a tax benefit of $1,424,000 for a net loss of
$18,914,600 or $1.92 per share. We subsequently determined, in connection
with a public offering of common stock (see Note 4) that the legal costs
accrued in fiscal year 1998 related to the Bell Atlantic litigation should
have been recorded as incurred throughout fiscal year 1999. Accordingly,
an adjustment was made to fiscal years 1999 and 1998. The depreciation
method on certain assets was also adjusted for the fiscal year 1999.
Accordingly, the effect of these adjustments on the quarter ended September
30, 1998 have been included in the September 30, 1998 statement of
operations decreasing the net loss by $251,000 to $10,732,600 or $1.10 per
share. The effect of these adjustments on the six months ended September
30, 1998 have been included in the accompanying September 30, 1998
statement of operations decreasing the net loss by $153,000 to $18,761,600
or $1.90 per share. The total related to the restatement adjustments
resulted in an increase to the stockholders' equity of $2,345,500 as of
March 31, 1999.
NOTE 2: COMMITMENTS AND CONTINGENCIES
We are a party to suits arising in the normal course of business which our
management believes are not material individually or in the aggregate.
7
NOTE 3. NET INCOME PER SHARE
The following tables set forth the computation of basic and diluted
net loss per share:
Three Months Ended
September 30,
1999 1998
----------------------------
Numerator:
Net loss $(12,293,504) $(10,732,627)
Accretion to redemption value on
redeemable preferred stock (362,380) (270,000)
Numerator for basic net loss
per share and diluted net ----------------------------
loss per share $(12,655,884) $(11,002,627)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 13,756,533 10,002,370
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ----------------------------
loss per share-weighted-average shares 13,756,533 10,002,370
============================
Basic and diluted net loss per share $(0.92) $(1.10)
============================
Six Months Ended
September 30,
1999 1998
----------------------------
Numerator:
Net loss $(27,412,317) $(18,761,627)
Accretion to redemption value on
redeemable preferred stock (689,384) (270,000)
Numerator for basic net loss
per share and diluted net ---------------------------
loss per share $(28,101,701) $(19,031,627)
============================
Denominator:
Denominator for basic net loss
per share-weighted average shares 12,041,250 9,993,281
Effect of dilutive securities:
Employee stock options 0 0
Denominator for diluted net ---------------------------
loss per share-weighted-average shares 12,041,250 9,993,281
============================
Basic and diluted net loss per share $(2.33) (1.90)
============================
8
NOTE 4 COMMON STOCK ISSUANCE
On July 20, 1999, we completed a public offering of 3,500,000 shares of our
common stock at $17.25 per share. Of the total shares, 3,200,000 shares
were sold for our own account and 300,000 shares were sold for the accounts
of selling shareholders. On August 10, 1999, the underwriters exercised
their over-allotment option to purchase an additional 525,000 shares of
common stock. After underwriting discounts and estimated expenses related
to the offering, we realized net proceeds from these transactions of
$61,800,000. We used $6.2 million of the net proceeds to repay the
principal and interest due under the $30 million credit facility provided
by Toronto Dominion (Texas), Inc. The Toronto Dominion credit facility was
terminated following repayment of the outstanding balance due.
NOTE 5 REORGANIZATION
On September 16, 1999, the shareholders of CTC Communications Corp.
("CTC Communications") at the 1999 Annual Meeting of Stockholders approved
the reorganization of the Company into a Delaware holding company
structure. The reorganization was implemented in accordance with Section
252 of the Delaware General Corporation Law and Section 79 of Chapter 156B
of the Massachusetts General Corporation Law by the merger ("Merger") of
CTC-Newco, Inc., a Delaware corporation and newly-formed subsidiary of CTC
Communications Group, Inc., a Delaware corporation ("CTC Group" or the
"Registrant"), with and into CTC Communications, the surviving corporation.
As a result of the Merger, CTC Group is the sole shareholder of CTC
Communications. In the Merger, which was consummated on September 30,
1999, each share of Common Stock, $.01 par value, and each share of Series
A Convertible Preferred Stock, $1.00 par value, was converted into one
share of Common Stock, $.01 par value and one share of Series A Convertible
Preferred Stock, $1.00 par value, of CTC Group. All of the shares of common
stock issuable under CTC Communications' employee benefit plans will be
shares of common stock of CTC Group, not CTC Communications. In approving
the Reorganization, the shareholders of CTC Communications approved the
adoption of all of the employee benefit plans by CTC Group.
At the effective date of the Merger, CTC Communications issued 100 shares
of its common stock, to CTC Group, which pledged the shares to Goldman
Sachs Credit Partners and Fleet National Bank under the terms of the three-
year $75 million senior secured credit facility entered into by CTC
Communications with the pledgees.
9
Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and Notes set forth elsewhere in this Report.
OVERVIEW
We are a rapidly growing single-source provider of voice and data
telecommunications services, or integrated communications provider, with 15
years of marketing, sales and service experience. We target predominantly
medium and larger-sized business customers who seek greater capacity for
voice and data traffic, a single provider for their telecommunications
requirements and improved levels of service. We have a large, experienced
sales force consisting of 166 sales people supported by 108 network
coordinators. Our sales force is located close to our customers in 28 sales
branches primarily in New England and New York State.
We are currently deploying our own state-of-the-art network facilities
to carry telecommunications traffic. Our network uses packet-switching, a
technology which transmits data in discrete packages. It also uses
internet protocol, which is a method that allows computers with different
architectures and operating systems to communicate over the internet, and
asynchronous transfer mode, or ATM, architecture, which allows the network
to transmit multiple types of media, such as voice, data and video. The
first phase of our network includes 22 Cisco Systems, or Cisco, advanced
data switches and two network operations centers. We are interconnecting
our facilities with leased transmission capacity over fiber optic cable
strands from Level 3 Communications and NorthEast Optic Network. Cisco has
reviewed and approved our network design and has designated our network as
a Cisco Powered Network. In May 1999, we began the testing of our network
with some of our customers. During September, we began providing
commercial service to a limited number of customers on our network.
We became an integrated communications provider, or ICP, in January
1998. Prior to that, we were the largest independent sales agent for NYNEX
Corp. (now Bell Atlantic), based on agency revenues. At the end of 1997,
before leaving the Bell Atlantic agency program, we were managing
relationships for approximately 7,000 customers, representing over 280,000
local access lines and over $200 million in annual local telecommunications
spending. As of September 30, 1999, after only 21 months as an integrated
communications provider, we were serving over 11,000 customers and had
226,379 access lines and equivalent circuits, or ALEs. ALEs are the total
number of voice circuits and equivalent data circuits we have in service.
Voice circuits are the actual number of voice circuits purchased by our
customers, while equivalent data circuits represent the data transmission
capacity purchased by our customers divided by 64 kilobits per second,
which is the capacity necessary to carry one voice circuit.
10
Our Services
We offer the following services:
Local Telephone Services. We offer connections between customers'
telecommunications equipment and the local telephone network, which we
currently lease from incumbent local exchange carriers. For large
customers or customers with specific requirements, we integrate their
private systems with analog or digital connections. We also provide all
associated call processing features as well as continuously connected
private lines for both voice and data applications.
Long Distance Telephone Services. We offer a full range of domestic and
international long distance services, including "1+" outbound calling,
inbound toll free service, standard and customized calling plans. We also
offer related services such as calling cards, operator assistance and
conference calling.
High Speed Data Services. We offer a wide array of both continuously
connected and switched high speed digital data services. Switched or high
speed digital data services include ISDN, frame relay and ATM products.
Internet Services. We offer high speed, continuously connected internet
access and services through various digital connections. In addition, we
offer switched digital access to the internet via ISDN. We provide the
necessary communications hardware, configuration support and other support
services on a 24-hour, 7-day a week basis.
Wholesale Services to Internet Service Providers. We provide a full array
of local services to internet service providers including telephone numbers
and switched and continuously connected access to the internet.
Future Service Offerings. Following deployment of the network, we may
offer the following additional services: hosting of web-sites, electronic
commerce over the internet, data security and storage services, systems
integration, consulting and network monitoring services, customized private
networks and other data, and voice and sophisticated network products.
Prior to deploying the Integrated Communications Network, or ICN, we are
building a base of installed access lines through reselling the network
services of other telecommunications carriers to targeted customers who can
later be transitioned to our network, or "on-net.".
We bill our customers for local and long distance usage based on the type
of local service utilized, the number, time and duration of calls, the
geographic location of the terminating phone numbers and the applicable
rate plan in effect at the time of the call.
11
During the period in which we resell the services of other
telecommunications carriers prior to deploying our ICN, cost of services
includes the cost of local and long distance services charged by carriers
for recurring charges, per minute usage charges and feature charges, as
well as the cost of fixed facilities for dedicated services and special
regional calling plans. Following the deployment of the ICN, the cost of
services for "on-net" customers will include the leasing costs associated
with transmission, co-location and access facilities, depreciation charges
and costs associated with our switching equipment.
We have experienced significant growth in the past and, depending on the
extent of our future growth, we may experience a significant strain on
management, personnel and information systems. To accommodate this growth,
we intend, subject to the availability of adequate financing, to continue
to implement and improve operational, financial and management information
systems. Since implementing our ICP strategy, we have expanded our staff
to include two additional senior executives and 130 additional employees.
We are also expanding our information systems to provide improved
recordkeeping for customer information and management of uncollectible
accounts and fraud control.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999
AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998.
Total revenues for the second fiscal quarter were $35,109,000, as compared
to $14,516,000 for the same period of the preceding fiscal year, or an
increase of 142%. Total revenues for the six months ended September 30,
1999 were $66,156,000, as compared to $27,352,000 for the same period of
the preceding fiscal year. The September quarter revenues also represented
an increase of 13% over the June 1999 quarter revenues of $31,047,000.
Revenues for local, Internet access and data services increased a combined
19% on a sequential quarter basis due primarily to the addition of new
customer relationships.
A common basis for measurement of an ICP's progress is the growth in ALEs.
During the quarter ended September 30, 1999, we provisioned 41,548 net
access line equivalents, bringing the total lines in service to 226,379.
Net lines provisioned during the quarter ended September 30, 1999
represented a 22% sequential increase over net lines provisioned during the
quarter ended June 30, 1999. We experienced the strongest growth in data
ALEs with an approximately 19% sequential increase from the quarter ended
June 30, 1999, which brings data ALEs in service to 46,315, or 21% of total
ALEs as of September 30, 1999.
Costs of telecommunications revenues, excluding depreciation, for the
quarter ended September 30, 1999 were $27,398,000, as compared to
$12,383,000 for the same period of the preceding fiscal year, and for the
six months ended September 30, 1999, were $53,487,000, as compared to
$23,997,000 for the same period of the preceding fiscal year. As a
percentage of telecommunications revenues, cost of telecommunications
revenues was 78% for the quarter ended September 30,1999, as compared to
84% for the quarter ended June 30, 1999. The decrease in the percentage of
the cost of the telecommunications revenues primarily reflects lower rates
obtained from our major suppliers, Bell Atlantic and Frontier
Communications.
12
Selling expense consists of the costs of providing sales and other support
services for customers including salaries, commissions and bonuses to
salesforce personnel. General and administrative expense consists of the
costs of the billing and information systems and personnel required to
support our operations and growth.
For the quarter ended September 30, 1999, selling, general and
administrative expenses (SG&A) increased 5% to $12,676,000 from
$12,043,000 for the same period of the preceding fiscal year, and for the
six months ended September 30, 1999 increased 27% to $26,918,000 from
$21,138,000 for the same period of the preceding fiscal year. This
increase was due to the opening of additional branch sales offices and the
associated increased number of sales and service employees hired in
connection with the transition to the ICP platform. As of September 30,
1999, we employed 436 people including 166 account executives and 108
network coordinators in 28 branch locations throughout New England and New
York. In addition, SG&A expenses increased due to a $2.2 million non-cash
compensation expense recognized in the first quarter in conjunction with
the extension of certain stock options to a former employee. Depreciation
and amortization expense increased to $3,653,000 in the quarter ended
September 30, 1999 from $610,000 for the quarter ended September 30, 1998,
and for the six months ended September 30, 1999, increased to $5,756,000
from $1,115,000 for the same period of the preceding fiscal year. These
increases are attributable to the increases in capital expenditures
primarily related to the ICN.
Interest expense increased to $4,221,000 and $7,992,000 for the three and
six months ended September 30, 1999, respectively. The increases are due
to increased borrowings to fund our losses and the investment in the ICN,
the fees associated with the credit facility and vendor financing facility,
and the amortization of the interest expense associated with the warrants
and financing fees issued to our lenders under the credit facility.
As a result of the above factors, the net losses were $12,294,000 for the
three months ended September 30, 1999 and $27,412,000 for the six months
ended September 30, 1999.
Liquidity and Capital Resources
Working capital at September 30, 1999 was $38.6 million compared to a
working capital deficit of $6.7 million at March 31, 1999, an increase of
$45.3 million. Cash balances at September 30, 1999 and March 31, 1999
totaled $44,572,000 and $2,254,000, respectively.
The increase in working capital is due primarily to the net proceeds
realized as a result of the July 20, 1999 public offering in which we sold
3,726,000 shares, including 525,000 shares issued upon exercise of the
underwriters' over-allotment option. After underwriting discounts and
estimated expenses related to the offering, we realized net proceeds of
$61,800,000, of which $6.2 million was used to repay the principal and
interest due under the $30 million credit facility provided by Toronto
Dominion (Texas), Inc. in March 1999. The Toronto Dominion credit facility
was terminated following repayment of the outstanding balance.
13
We will continue to use the balance of the proceeds realized from the
public offering for general corporate purposes including, capital
expenditures, working capital and operating losses associated with the
continued deployment of our network, further penetration of our existing
region and our expansion into new markets throughout the Boston -
Washington, D.C. corridor, as well as the reduction of the principal
balance of our Goldman Sachs/Fleet Bank credit facility. Until utilized,
the net proceeds from the offering are invested in short-term, interest-
bearing instruments and other investment-grade securities.
In April 1998, we received $12.0 million from a private placement of our
Series A redeemable convertible preferred stock and warrants to Spectrum
Equity Investors II, L.P. We also received a commitment on June 30, 1998
from Spectrum to purchase, at our option, an additional $5.0 million of
preferred stock on the same terms and conditions as the Series A preferred
stock. This option was not exercised and expired on June 30, 1999.
In September 1998, we entered into a three-year $75 million senior secured
credit facility with Goldman Sachs Credit Partners and Fleet National Bank.
As of September 30, 1999, we had availability under the credit facility of
$300,000 and had borrowed approximately $52.2 million. As of September 30,
1999, we were not in compliance with the minimum revenue financial covenant
under the credit facility and have entered into an amendment to the loan
and security agreement covering such credit facility under the terms of
which the lenders waived non-compliance. We also agreed to reduce the
outstanding balance of our loan by $15 million, pay an amendment fee of
$187,500 to be charged against our loan account and enter into a security
agreement to perfect the lenders' security interest in our depository
accounts.
We are working with Goldman Sachs Credit Partners and Fleet National Bank
to further amend our loan and security agreement to better match our
current business model.
Since September 30, 1998, we have entered into various lease and vendor
financing agreements which provide for the acquisition of up to
approximately $18.7 million of equipment and software. As of September 30,
1999, the aggregate amount borrowed under these agreements was
approximately $16.5 million.
In October 1998, we obtained a $25 million vendor financing facility from
Cisco Capital. As of September 30, 1999, we had borrowed $22.6 million.
As we continue to deploy our network, further penetrate our existing region
and expand into new markets throughout the Boston--Washington, D.C.
corridor, we will need significant additional capital. We believe that the
net proceeds of the public offering, together with cash on hand, the
proceeds of our bank, lease and vendor financing arrangements and the
amounts we expect to be available under our credit and vendor facilities
will be sufficient to fund our capital requirements for at least the next
15 months. During this period we will seek to raise additional capital
through the issuance of debt and possibly equity securities, the timing of
which will depend on market conditions, and which could occur in the near
future. We may also seek to raise additional capital through further vendor
financings, equipment lease financings and bank loans.
14
We cannot assure you that additional financing will be available on
terms acceptable to us when we need it. The agreements governing our
existing indebtedness limit our ability to obtain debt financing. If we are
unable to obtain financing when we need it, we may postpone or abandon our
development and expansion plans. That could have a material adverse effect
on our business, results of operations and financial condition. The actual
timing and amount of our capital requirements may be materially affected by
various factors, including the timing and actual cost of the network, the
timing and cost of our expansion into new markets, the extent of
competition and pricing of telecommunications services by others in our
markets, the demand by customers for our services, technological change and
potential acquisitions.
Year 2000 Compliance
Our State of Readiness
We have evaluated the effect of the year 2000 problem on our information
systems. We are implementing plans to permit our systems and applications
to effectively process information in order to support ongoing operations
in the year 2000 and beyond. We believe our information technology systems
and non- information systems will be year 2000 compliant by the end of
1999.
In connection with the deployment of our new network, we have designed a
new database architecture for our computer systems which we expect will be
year 2000 compliant. The installation of our network and related network
control software was completed in the summer of 1999. We expect
installation of phase one of our new information systems related to our new
network to be completed in the fourth quarter of 1999 and the second phase
to be completed by May 2000. We began testing our network, and these new
systems when we first began installation, and we expect testing to
continue. We are also upgrading our current information systems to be year
2000 compliant in the event we have not completed installing our new
systems by the end of 1999. Approximately 99% of our existing information
systems are now year 2000 compliant. We expect to complete Year 2000
verification and validation by December 1, 1999. While we expect that all
significant information systems will be year 2000 compliant in the fourth
quarter of 1999, we cannot assure you that all year 2000 problems in the
new system will be identified or that the necessary corrective actions will
be completed in a timely manner. We expect our non-information systems to
be year 2000 compliant in the fourth quarter of 1999.
We have requested certification from our significant vendors and
suppliers demonstrating their year 2000 compliance. Approximately 99% of
our vendors and suppliers have delivered certifications of year 2000
compliance. We will continue to seek certification from the other ventors.
However, we cannot assure you that such certifications will be forthcoming.
Generally these certifications state that our vendors and suppliers are
year 2000 compliant but do not require any affirmative action if these
certifications are inaccurate. We intend to continue to identify critical
vendors and suppliers and communicate with them about their plans and
progress in addressing year
15
2000 problems. We cannot assure you that the systems of these vendors and
suppliers will be timely converted. We also cannot assure you that any
failure of their systems to be year 2000 compliant will not adversely
affect our operations.
Our Costs of Year 2000 Remediation
We have incurred approximately $670,000 in costs to date related
specifically to year 2000 issues and expect to incur an additional
approximately $230,000 through the end of 1999. However, we cannot assure
you that the costs associated with year 2000 problems will not be greater
than we anticipate.
Our Year 2000 Risk
Based on the efforts described above, we currently believe that our
systems will be year 2000 compliant in a timely manner. We have completed
the process of identifying year 2000 issues in our information systems and
non-information systems and expect to complete any remediation efforts in
the fourth quarter of 1999.
We cannot assure you that our operations and financial results will not
be affected by year 2000 problems. We may experience interruptions in
service and not receive billing information in a timely manner if either
our systems or those of our vendors or suppliers are not year 2000
compliant in a timely manner. It is possible that we could experience other
serious year 2000 difficulties that we cannot presently predict.
Our Contingency Plans
We have begun upgrading our current information systems as part of our
contingency plans in case our new systems are not installed before the end
of 1999. In addition, we intend to seek to identify alternate service
providers in case our current providers are unable to adequately deliver
services in the year 2000.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to financial risk, including changes in interest rates,
relates primarily to outstanding debt obligations. We utilize our senior
secured credit facility to fund a substantial portion of our capital
requirements. This facility bears interest at a variable interest rate,
which is subject to market changes. We have not entered into any interest
rate swap agreements, or other instruments to minimize our exposure to
interest rate increases but will investigate such options should changes in
market conditions occur. We have not had any derivative instruments in the
past and do not plan to in the future, other than possibly to reduce our
interest rate exposure as described above.
For purposes of specific risk analysis we use sensitivity analysis to
determine the impacts that market risk exposure may have on the fair value
of our outstanding debt obligations. To perform sensitivity analysis, we
assess the risk of loss in fair values from the impact of hypothetical
changes in interest rates on market sensitive instruments. We compare the
market values for interest risk based on the present value of future cash
flows as impacted by the changes in the rates. We selected discount rates
for the present value computations based on market interest rates in effect
at September 30, 1999. We compared the market values resulting from these
computations with the market values of these financial instruments
September 30, 1999. The differences in the comparison are the hypothetical
gains or losses associated with each type of risk. As a result of our
analysis we determined at September 30, 1999 a 10% decrease in the levels
of interest rates with all other variables held constant would result in an
increase in the fair value of our fixed rate debt obligations by
approximately $2.1 million. A 10% increase in the levels of interest rates
with all other variables held constant would result in a decrease in the
fair value of our outstanding fixed rate debt obligations by approximately
$2.5 million. With respect to our variable rate debt obligations a 10%
increase in interest rates would result in increased interest expense and
cash expenditures for interest of approximately $162,000 in Q2 fiscal 2000.
A 10% decrease in interest rates would result in reduced interest expense
and cash expenditures of approximately $162,000 in Q2 fiscal 2000.
17
Part II
Item 2. Changes in Securities
(c) During the quarter ended September 30, 1999, we issued a total of
69,261 shares of common stock for an aggregate consideration of $84,446
pursuant to the exercise of stock options by 17 individuals. The shares
were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, as transactions by
an issuer not involving a public offering. The recipients of the
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were attached to the shares
certificates and stop transfer orders given to our transfer agent. All
recipients had adequate access to information regarding our company.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The 1999 Annual Meeting of Stockholders of the Company was held
on September 16, 1999.
(b) Not applicable.
(c) Each nominee for Class II director received the following votes:**
Name Votes For Abstentions
- -----------------------------------------------------------------
Richard J. Santagati 13,422,852 288,959
J. Richard Murphy 13,422,852 288,959
Katherine Dietze Courage 13,423,352 288,459
The following table sets forth the other matters voted upon and the
respective number of votes cast for, against, number of abstentions and
broker nonvotes.
Matter Votes Votes Delivered
Voted Upon For Against Abstentions Non Voted
- ---------------------------------------------------------------------------------
To approve the Amendment to**
the 1998 Incentive Plan 8,510,699 66,332 2,036,827 3,117,852
To approve the 1999 Equity**
Incentive Plan for
Non-Employee Directors 8,605,327 27,578 1,980,954 3,117,852
To approve the plan of
reorganization of the
company into a Delaware
holding company structure
Common Stock votes 8,765,504 21,368 1,578,229 2,804,390
Preferred Stock votes 1,623,977 0 0 6,315
---------- ------ --------- ---------
Total votes 10,389,481 21,368 1,578,229 2,810,705
<FN>
**The votes with respect to the nominees for directors, the Amendment to the 1998
Incentive Plan and the 1999 Equity Incentive Plan for Non-Employee Directors
represent the common and preferred shares voting together as a single class. The
reorganization proposal required an affirmative 2/3 vote of the common and
preferred shares voting together as a single class and an affirmative 2/3 vote of
the preferred shares voting separately.
</FN>
(d) Not applicable.
18
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.1 Amendment No. 1 to Loan and Security Agreement dated as of
September 30, 1999 among CTC Communications Corp., Fleet
National Bank and Goldman Sachs Credit Partners L.P
27 Financial Data Schedule
99.1 Risk Factors
(b) Reports on Form 8-K
CTC Communications Group, Inc. did not file any reports on Form 8-K
during the quarter ended September 30, 1999. CTC Communications Corp.
filed the following reports on Form 8-K during the quarter ended
September 30, 1999:
Date Items Reported
------- -----------------------------------------------------------
1. July 9, 1999 Announcement of our resale agreement with Bell
Atlantic.
2. July 19, 1999 Announcement of the implementation of an electronic
data interchange with Bell Atlantic.
3. July 20, 1999 Announcement that our July 1999 public offering has
been successfully completed.
4. August 10, 1999 Announcement that the over-allotment option granted
in our July 1999 public offering had been exercised
by the underwriters.
5. August 26, 1999 Announcement of our three year alliance agreement
with Cisco Systems, Inc.
6. September 7, 1999 Announcement of our ability to provide converged
voice, data and internet services.
7. September 29, 1999 Announcements of (1) our agreement with Accelerated
Networks and (2) that our Cisco Powered Network (tm)
is proceeding at a record pace.
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: November 15, 1999 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: November 15, 1999 /S/ JOHN D. PITTENGER
-----------------------------
John D. Pittenger
Executive Vice President,
and Chief Financial
Officer