-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kr/l3ECykiuLd5QDkodSqiu5lbB+BXqRLsdq7aOJo1iAr28D047GqNMC+iVXhfrw JQA3QFQNCMJUgT29tBjDEg== /in/edgar/work/0001056114-00-000025/0001056114-00-000025.txt : 20001115 0001056114-00-000025.hdr.sgml : 20001115 ACCESSION NUMBER: 0001056114-00-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTC COMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001092319 STANDARD INDUSTRIAL CLASSIFICATION: [7385 ] IRS NUMBER: 043469590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27505 FILM NUMBER: 765475 BUSINESS ADDRESS: STREET 1: 220 BEAR HILL RD CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 7814668080 MAIL ADDRESS: STREET 1: 220 BEAR HILL RD CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 0001.txt 09/30/00 10-Q 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, 2000 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 fiscal year: March 31, 2001 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of Common Stock, as of the latest practicable date: As of November 14, 2000, 26,577,387 shares of Common Stock were outstanding. CTC COMMUNICATIONS GROUP, INC. FORM 10-Q INDEX
Part I FINANCIAL STATEMENTS PAGE NO. Item 1. Financial Statements Condensed Consolidated Unaudited Balance Sheets as of September 30 and March 31, 2000 3 Condensed Consolidated Unaudited Statements of Operations Three Months Ended September 30, 2000 and 1999 4 Condensed Consolidated Unaudited Statements of Operations Six Months Ended September 30, 2000 and 1999 5 Condensed Consolidated Unaudited Statements of Cash Flows Six Months Ended September 30, 2000 and 1999 6 Notes to Condensed Consolidated Unaudited Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15-16 Part II OTHER INFORMATION Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities Inapplicable Item 3. Default Upon Senior Securities Inapplicable Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information Inapplicable Item 6. Exhibits and Reports on Form 8-K 17
2 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
September 30, March 31, 2000 2000 ------------- ------------- Assets Current assets: Cash and cash equivalents $120,872,166 $20,093,156 Accounts receivable, net 49,197,397 39,965,335 Prepaid expenses and other current assets 3,767,597 3,576,033 ------------- ------------- Total current assets 173,837,160 63,634,524 Property and equipment 214,238,602 120,604,893 Less accumulated depreciation and amortization (49,937,442) (29,369,433) ------------- ------------- Total property and equipment, net 164,301,160 91,235,460 Deferred financing costs and other assets 15,930,236 7,363,368 ------------- ------------- Total assets $354,068,556 $162,233,352 ============= ============= Liabilities and stockholders' deficit Current liabilities: Accounts payable and accrued expenses $43,462,079 $46,328,757 Accrued salaries and related taxes 3,158,146 2,482,800 Current portion of obligations under capital leases 15,111,626 8,413,414 Current portion of notes payable 1,749,342 1,749,342 ------------- ------------- Total current liabilities 63,481,193 58,974,313 Long-term debt: Obligations under capital leases, net of current portion 47,877,806 15,031,108 Notes payable, net of current portion 103,584,924 103,928,207 ------------- ------------- Total long-term debt 151,462,730 118,959,315 Series B redeemable convertible preferred stock 198,539,851 0 Stockholders' deficit: Common stock 263,308 257,736 Additional paid in capital 93,051,980 90,652,020 Deferred compensation (53,410) (106,410) Retained deficit (152,677,096) (106,503,622) --------------- ------------- Total stockholders' deficit (59,415,218) (15,700,276) --------------- ------------- Total liabilities and stockholders' deficit $354,068,556 $162,233,352 =============== =============
The accompanying notes are an integral part of these financial statements. 3 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2000 1999 Telecommunications revenues $58,508,354 $35,109,155 Operating costs and expenses: Cost of telecommunications revenues, excluding depreciation 45,421,733 27,398,259 Selling, general and administrative expenses 20,536,134 12,676,315 Depreciation 11,975,575 3,652,809 --------------- ------------ Total operating costs and expenses 77,933,442 43,727,383 --------------- ------------ Loss from operations (19,425,088) (8,618,228) Other income (expense), net: Interest income 2,146,554 473,780 Interest expense (4,246,670) (4,221,052) Other income 0 71,996 --------------- ------------ Total other expense, net (2,100,116) (3,675,276) --------------- ------------ Net loss $(21,525,204) $(12,293,504) =============== ============ Net loss per common share: Basic and diluted $(0.99) $(0.61) =============== ============ Weighted average number of common shares: Basic and diluted 26,267,495 20,634,800 =============== ============
The accompanying notes are an integral part of these financial statements. 4 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Six Months Ended September 30, 2000 1999 Telecommunications revenues $110,977,441 $66,156,006 Operating costs and expenses: Cost of telecommunications revenues, excluding depreciation 85,523,390 53,487,443 Selling, general and administrative expenses 38,247,475 26,918,439 Depreciation 20,937,682 5,756,309 --------------- ------------- Total operating costs and expenses 144,708,547 86,162,191 --------------- ------------- Loss from operations (33,731,106) (20,006,185) Other income (expense), net: Interest income 3,518,996 474,121 Interest expense (9,153,785) (7,991,767) Other income 0 111,514 --------------- ------------- Total other expense, net (5,634,789) (7,406,132) --------------- ------------- Net loss $(39,365,895) $(27,412,317) =============== ============= Net loss per common share: Basic and diluted $(1.77) $(1.56) =============== ============= Weighted average number of common shares: Basic and diluted 26,118,831 18,061,875 =============== =============
The accompanying notes are an integral part of these financial statements. 5 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Six Months Ended September 30, 2000 1999 ---------------- --------------- OPERATING ACTIVITIES: Net loss $(39,365,895) $(27,412,317) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 20,937,682 5,756,309 Stock compensation expense 53,000 2,506,119 Interest related to warrants and certain fees 464,249 2,075,913 Changes in working capital items: Accounts receivable (9,232,062) (10,662,878) Prepaid expenses and other current assets (191,564) (1,567,589) Other assets (5,489,223) (5,400) Accounts payable and accrued expenses (2,866,679) 8,543,081 Accrued salaries and related taxes 675,346 1,285 --------------- --------------- Net cash used by operating activities (35,015,146) (20,765,477) INVESTING ACTIVITY: Additions to property and equipment (49,044,678) (11,745,132) --------------- --------------- Net cash used in investing activities (49,044,678) (11,745,132) FINANCING ACTIVITIES: Proceeds from the issuance of Series B Redeemable Convertible Preferred Stock, net of offering costs 191,732,272 0 Proceeds from the issuance of common stock 2,405,533 62,096,789 Repayment of amount due from stockholders 0 19,045 Proceeds from notes payable 25,000,000 42,098,357 Repayment of notes payable (25,730,618) (26,839,164) Deferred financing costs (3,517,174) (42,559) Repayments under capital lease obligations (5,051,179) (2,504,179) --------------- --------------- Net cash provided by financing activities 184,838,834 74,828,289 --------------- --------------- Increase in cash and cash equivalents 100,779,010 42,317,680 Cash and cash equivalents at beginning of year 20,093,156 2,254,258 --------------- --------------- Cash and cash equivalents at end of period $120,872,166 $44,571,938 ============== =============== NONCASH INVESTING AND FINANCING ACTIVITIES: Network, related equipment and building acquired under capital leases $44,596,089 $3,155,402 Network and related equipment acquired under notes payable $362,615 $7,215,611
The accompanying notes are an integral part of these financial statements. 6 CTC COMMUNICATIONS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying condensed consolidated unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the transition period ending December 31, 2000, as noted below. These statements should be read in conjunction with the financial statements and related notes included in the our Annual Report on Form 10-K for the fiscal year ended March 31, 2000. Change in Fiscal Year At the Annual Meeting of our Board of Directors held on July 27, 2000, our fiscal year end was changed from March 31 of each year to December 31 of each year. The transition period will be reported on Form 10-K for the period ending December 31, 2000. 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. NOTE 3: NET LOSS PER SHARE The following tables set forth the computation of basic and diluted net loss per share:
Three Months Ended September 30, 2000 1999 ---------------------------- Numerator: Net loss $(21,525,204) $(12,293,504) Accretion to redemption value on redeemable preferred stock (4,539,531) (362,380) Numerator for basic net loss per share and diluted net ---------------------------- loss per share $(26,064,735) $(12,655,884) ============================ Denominator: Denominator for basic net loss per share-weighted average shares 26,267,495 20,634,800 Effect of dilutive securities: Employee stock options 0 0 Denominator for diluted net ---------------------------- loss per share-weighted-average shares 26,267,495 20,634,800 ============================ Basic and diluted net loss per share $(0.99) $(0.61) ============================
7
Six Months Ended September 30, 2000 1999 Numerator: ---------------------------- Net loss $(39,365,895) $(27,412,317) Accretion to redemption value on redeemable preferred stock (6,807,579) (689,384) Numerator for basic net loss per share and diluted net ---------------------------- loss per share $(46,173,474) $(28,101,701) ============================ Denominator: Denominator for basic net loss per share-weighted average shares 26,118,831 18,061,875 Effect of dilutive securities: Employee stock options 0 0 Denominator for diluted net ---------------------------- loss per share-weighted-average shares 26,118,831 18,061,875 ============================ Basic and diluted net loss per share $(1.77) $(1.56) ============================
NOTE 4: PREFERRED STOCK In May 2000, the Company completed a $200 million preferred stock financing with Bain Capital Inc., Thomas H. Lee Partners, L.P. and CSFB Private Equity, consisting of 8.25% Series B redeemable convertible preferred stock which converts into common stock at $50 per share. The preferred stockholders may require redemption 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 by May 2010. Bain Capital and Thomas H. Lee each invested $75 million and CSFB Private Equity has invested $50 million. NOTE 5: RELATED PARTY TRANSACTION In May 2000, the Company entered into a 15 year lease for approximately 71,250 square feet from a limited liability company in which two of the Company's executive officers, including the chairman, own a majority of membership interests, and in which four executive officers of the Company each own a minority membership interest. The annual base rental under the lease is $1,778,100, which is subject to annual cost of living adjustments. The lease obligation has been capitalized in the accompanying condensed consolidated unaudited financial statements. NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133, as amended") was issued, as amended by SFAS Nos. 137 and 138, which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133, as amended, is effective for all fiscal quarters 8 of fiscal years beginning after June 15, 2000. The Company is presently analyzing the impact, if any, that the adoption of SFAS No. 133, as amended, will have on its financial condition or results of operations. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB Opinion No. 25." The Company is required to adopt the Interpretation on July 1, 2000. The Interpretation requires, among other things, that stock options that have been modified to reduce the exercise price be accounted for as variable. The Company modified one stock option agreement in April 1999, which resulted in a stock compensation charge of approximately $2.2 million. No other option grants have been modified by a reduction of the exercise prices, therefore, the adoption of the Interpretation is not expected to have an impact on the Company's consolidated financial statements, unless modifications are made in the future. Adoption of Staff Accounting Bulletin 101. The Company, as described below, will revise its revenue recognition policy for certain recurring monthly fees to be consistent with applicable provisions of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Previously, monthly recurring fees for the next month's service were recognized at the time all of the Company's significant performance obligations had been fulfilled and the related monthly service fee became nonrefundable based on the terms of the Company's contract with its customers which require 60 days notice for cancellation. Since SAB 101 now indicates that nonrefundability of revenues and fulfillment of all significant performance obligations are not a basis for revenue recognition, the Company has determined that deferral of the monthly recurring service fees to the period in which the service is available to the customer is a preferable method of accounting. The impact of the change in recognizing recurring service fees will be reported as a cumulative effect of a change in accounting principle as of April 1, 2000 in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. The cumulative effect of this change will increase the Company's loss by approximately $1.8 million as of April 1, 2000. This amount represents the income attributable to the deferral, as of that date, of one month's recurring service fee revenue totaling approximately $9.3 million. SAB 101 as amended, allows the Company to implement this change as of the last quarter of the transition period ending December 31, 2000. The previously reported quarterly financial information for the transition period will be restated so that annual operating results for the transition period ending December 31, 2000 will be presented on the new basis. There will be no impact to the Company's cash flow from operations as a result of this change. Also, it is believed that the adoption of this change in accounting for fiscal 2000 or prior periods will not have a material effect on the Company's previously reported results of operations, financial position or cash flows for those periods. 9 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this Report. OVERVIEW We are a rapidly growing single-source provider of voice, data and Internet communications services, or integrated communications provider, with 16 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 253 sales people supported by 182 network coordinators as of September 30, 2000. Our sales force is located close to our customers in 38 sales branches primarily in the Northeast and Mid-Atlantic states. 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. These network technologies allow the network to transmit multiple types of media, such as voice, data, Internet and video. The first phase of our network included 22 Cisco Systems, or Cisco, advanced data switches and two network operations centers. We have interconnected our facilities with leased transmission capacity over fiber optic cable strands from Level 3 Communications and NorthEast Optic Network. In March 2000, we signed a $115 million agreement to purchase more than 8,300 route miles of dark fiber covering the eastern half of the United States from Williams Communications to implement our fiber network program. The contract includes co-location space and ongoing network maintenance services. The fiber acquired will expand our current network presence along the Boston to Washington, D.C. corridor into 40 major markets extending from the central United States throughout the eastern United States. In August 2000, we signed a $3.3 million agreement to purchase 325 route miles of dark fiber in northern New England. The contract includes co-location space and ongoing network maintenance services. Cisco has reviewed and approved our network design and has designated our network as a Cisco Powered Network(tm). In May 1999, we began the testing of our integrated communications network, or service marked as PowerPath(sm) Network, with some of our customers. In September 1999, we began providing commercial service on our PowerPath(sm) Network and by September 30, 2000, we were servicing over 1,300 customers on our PowerPath(sm) 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 Verizon), based on agency revenues. At the end of 1997, before leaving the Verizon agency program, we were managing relationships for approximately 7,000 customers, representing over 280,000 local access lines and over $200 million in annual local telecommunications spending. As of September 30, 2000, after only 33 months as an integrated communications provider, we were servicing 407,052 access lines and equivalent circuits, 10 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. 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 Integrated Services Digital Network, or ISDN, frame relay and ATM products. Internet Services. We offer high speed, continuously connected internet access and services through various digital connections. We provide the necessary configuration support and other support services on a 24-hour, 7-day a week basis. Future Service Offerings. As we continue deploying 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, managed services, consulting and network monitoring services, customized private networks, virtual private networks and other data, and voice and sophisticated network products. RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999. Total revenues for the quarter ended September 30, 2000 ("2000 Quarter") were $58,508,000, as compared to $35,109,000 for the quarter ended September 30, 1999 ("1999 Quarter"), or an increase of 67%. Total revenues for the six months ended September 30, 2000 ("2000 Six Months") were $110,977,000, as compared to $66,156,000 for the six months ended September 30, 1999 ("1999 Six Months"). The 2000 Quarter revenues also represented an increase of 12% over the revenues of $52,469,000 for the quarter ended June 30, 2000. Revenues for local, Internet access and data services increased a combined 13% on a sequential quarter basis due primarily to the addition of new customer relationships. 11 A common basis for measurement of an ICP's progress is the growth in ALEs. During the 2000 Quarter, we provisioned 45,300 net ALEs, bringing the total lines in service to 407,052. Net lines provisioned through the 2000 Quarter represented a 13% sequential increase over net lines provisioned through the quarter ended June 30, 2000. Data ALEs represent 22% of total ALEs as of September 30, 2000. Costs of telecommunications revenues, excluding depreciation, for the 2000 Quarter were $45,422,000, as compared to $27,398,000 for the 1999 Quarter; and were $85,523,000 for the 2000 Six Months, as compared to $53,487,000 for the 1999 Six Months. As a percentage of telecommunications revenues, cost of telecommunications revenues was 77% for the 2000 Quarter, as compared to 76% for the quarter ended June 30,2000. The increase in the percentage of the cost of the telecommunications revenues primarily reflects lower rates on toll revenue due to rate decreases and the effect of the Verizon strike on our network installations. 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 2000 Quarter, selling, general and administrative expenses (SG&A) increased 62% to $20,536,000 from $12,676,000 for the 1999 Quarter; and for the 2000 Six Months, increased 42% to $38,247,000 from $26,918,000 for the 1999 Six Months. This increase was due to the opening of additional branch sales offices and the associated increased number of sales, service and engineering employees hired in connection with the transition to the ICP platform. As of September 30, 2000, we employed 757 people including 253 account executives and 182 network coordinators in branch locations throughout the Northeast and Mid-Atlantic states. Depreciation and amortization expense increased to $11,976,000 in the 2000 Quarter from $3,653,000 for the 1999 Quarter; and for the 2000 Six Months, increased to $20,938,000 from $5,756,000 for the 1999 Six Months. This increase was a result of additional expenses associated with the equipment and software relating to the network deployment and the upgrade of our information systems. Network equipment and software is being depreciated over 3-5 years, reflecting the risk of rapid technological change. Other expense, net decreased by 43% to $2,100,000 and decreased by 24% to $5,635,000 for the 2000 Quarter and 2000 Six Months, respectively, from the same periods in 1999. Interest expense increased due to the increase in borrowings required in connection with the deployment of our network, working capital requirements and funding our operating losses. This increase is offset by an increase in interest income from the proceeds of our preferred stock financing. As a result of the above factors, the net losses amounted to $21,525,000 for the 2000 Quarter and $39,366,000 for the 2000 Six Months. 12 Liquidity and Capital Resources Working capital at September 30, 2000 was $110.4 million compared to $4.7 million at March 31, 2000, an increase of $105.7 million. Cash balances at September 30, 2000 and March 31, 2000 totaled $120,872,000 and $20,093,000, respectively. The increase in working capital resulted 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. The preferred stockholders may require redemption 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 by May 2010. The net proceeds are being used to fund strategic marketing and technology initiatives of our accelerated business plan which include the purchase of dark fiber and optronics, branch sales office and PowerPath(sm) Network expansion and new PowerPath(sm) Network product and applications development. In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior secured credit facility ("TD credit facility") to fund our base plan for expansion of our branch sales offices and our Integrated Communications Network. The proceeds were used to retire the $43 million balance of the $75 million Goldman Sachs/Fleet Credit Facility and to repay in full the $25 million Cisco vendor financing facility. The TD credit facility includes a $50 million senior secured 7-1/2 year revolving credit facility, a $100 million senior secured 7-1/2 year delayed draw term loan and a $75 million senior secured 8 year term loan. As of September 30, 2000, we entered into an amendment to the TD credit facility to modify certain provisions of the agreement and we are in compliance with all of the financial convenants. As of September 30, 2000, $100 million of the TD credit facility was outstanding. Since September 30, 1998, we have entered into various lease and vendor financing agreements which provide for the acquisition of equipment and software. As of September 30, 2000, the aggregate amount borrowed under these agreements was approximately $68.2 million. In July 1999, we completed a public offering (including the exercise of the underwriters' overallotment option) of 6,037,500 shares of common stock at $11.50 per share, adjusted for the March 2000 three-for-two stock split with net proceeds of approximately $62.1 million. The proceeds were used for general corporate purposes and continued deployment of the PowerPath(sm) Network and expansion into new markets throughout the Northeast and Mid- Atlantic states. We will continue to use the balance of the proceeds realized from the TD credit facility and Series B redeemable convertible preferred stock financing for general corporate purposes including, capital expenditures, working capital and operating losses associated with the continued deployment of our network, further penetration of our existing region and our expansion into new markets throughout the Northeast and Mid-Atlantic states. Until utilized, the net proceeds from the TD credit facility and Series B redeemable convertible preferred stock financing are being invested in short-term, interest-bearing instruments and other investment-grade securities. 13 We believe that proceeds available from the Series B redeemable convertible preferred stock financing and the TD credit facility, cash on hand and the amounts expected to be available under our bank and lease financing arrangements will be sufficient to fund our planned capital expenditures, working capital and operating losses for at least the next 12 months. We cannot assure you that if we require funds in addition to the funds made available through the TD credit facility and the preferred stock financing, such financing will be available, or if available, on terms acceptable to us when needed. If we are unable to obtain such financing when needed, we may postpone or abandon our development and expansion plans which could have a material adverse effect on our business, results of operations and financial condition. The actual timing and amount of our capital requirements may be materially affected by various factors, including the timing and actual cost of the network, the timing and cost of our expansion into new markets, the extent of competition and pricing of telecommunications services by others in our markets, the demand by customers for our services, technological change and potential acquisitions. Year 2000 Compliance Our information technology systems and non-information systems were year 2000 compliant prior to the end of 1999. We did not incur any year 2000 problems in our systems that required any corrective actions and did not experience any interruptions in service as a result of the year 2000 compliance status of any of our vendors. Our systems and applications are effectively processing information in order to support ongoing operations in the year 2000 and beyond. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133, as amended") was issued, as amended by SFAS Nos. 137 and 138, which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is presently analyzing the impact, if any, that the adoption of SFAS No. 133, as amended, will have on its financial condition or results of operations. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB Opinion No. 25." The Company is required to adopt the Interpretation on July 1, 2000. The Interpretation requires, among other things, that stock options that have been modified to reduce the exercise price be accounted for as variable. The Company modified one stock option agreement in April 1999, which resulted in a stock compensation charge of approximately $2.2 million. No other option grants have been modified by a reduction of the exercise prices, therefore, the adoption of the Interpretation is not expected to have an impact on the Company's consolidated financial statements, unless modifications are made in the future. 14 Adoption of Staff Accounting Bulletin 101. The Company, as described below, will revise its revenue recognition policy for certain recurring monthly fees to be consistent with applicable provisions of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Previously, monthly recurring fees for the next month's service were recognized at the time all of the Company's significant performance obligations had been fulfilled and the related monthly service fee became nonrefundable based on the terms of the Company's contract with its customers which require 60 days notice for cancellation. Since SAB 101 now indicates that nonrefundability of revenues and fulfillment of all significant performance obligations are not a basis for revenue recognition, the Company has determined that deferral of the monthly recurring service fees to the period in which the service is available to the customer is a preferable method of accounting. The impact of the change in recognizing recurring service fees will be reported as a cumulative effect of a change in accounting principle as of April 1, 2000 in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. The cumulative effect of this change will increase the Company's loss by approximately $1.8 million as of April 1, 2000. This amount represents the income attributable to the deferral, as of that date, of one month's recurring service fee revenue totaling approximately $9.3 million. SAB 101 as amended, allows the Company to implement this change as of the last quarter of the transition period ending December 31, 2000. The previously reported quarterly financial information for the transition period will be restated so that annual operating results for the transition period ending December 31, 2000 will be presented on the new basis. There will be no impact to the Company's cash flow from operations as a result of this change. Also, it is believed that the adoption of this change in accounting for fiscal 2000 or prior periods will not have a material effect on the Company's previously reported results of operations, financial position or cash flows for those periods. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to financial risk, including changes in interest rates, relates primarily to outstanding debt obligations. We utilize our senior secured credit facility to fund a substantial portion of our capital requirements. This facility bears interest at a variable interest rate, which is subject to market changes. Our earnings are affected by changes in short- term interest rates as a result of our borrowings under the TD credit facility. The TD credit facility interest payments are determined by the outstanding indebtedness and the LIBOR rate at the beginning of the period in which interest is computed. As required under the TD credit facility, we utilize interest rate swap and collar agreements to hedge variable rate interest risk on 50% of the TD credit facility. All of our derivative financial instrument transactions are entered into for non-trading purposes. 15 Notional amount outstanding at September 30, 2000, for the interest rate collar is $33 million, with an expected maturity date in the year 2003. The interest rate collar effectively locks $33 million of our TD credit facility borrowings between 12.25% and 9.67%. Notional amount outstanding at September 30, 2000, for interest rate swap is $17 million, with an expected maturity date in the year 2003. The interest rate swap effectively caps $17 million of our TD credit facility borrowings at 10.75%. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding debt obligations. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in interest rates on market sensitive instruments, considering the hedge agreements noted above. We compare the market values for interest risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market interest rates in effect at September 30, 2000. We compared the market values resulting from these computations with the market values of these financial instruments at September 30, 2000. 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, 2000, 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 $259,000 in the quarter ended September 30, 2000. A 10% decrease in interest rates would result in reduced interest expense and cash expenditures of approximately $259,000 for the same period. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding fixed rate redeemable convertible preferred stock. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in dividend rates on market sensitive instruments. We compare the market values for dividend risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market dividend rates in effect at September 30, 2000. We compared the market values resulting from these computations with the market values of these financial instruments at September 30, 2000. 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, 2000, with respect to our fixed rate redeemable convertible preferred stock, a 10% increase in dividend rates with all other variables held constant would result in increased dividends of approximately $412,500 in the quarter ended September 30, 2000. A 10% decrease in dividend rates would result in reduced dividends of approximately $412,500 for the same period. 16 Part II Item 4 - Submission of Matters to a Vote of Security Holders (a) The 2000 Annual Meeting of Stockholders of the Company was held on July 27, 2000. (b) Not applicable. (c) Each nominee for Class III director received the following votes:
Name Votes For Abstentions - ----------------------------------------------------------------- Robert J. Fabbricatore 24,148,950 301,470 Ralph S. Troupe 24,161,571 288,849 Scott M. Sperling 24,164,346 286,074 Katherine Dietze Courage 24,164,346 286,074 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 2000 Flexible Stock Plan 14,321,274 3,635,017 42,213 6,451,916 To approve the retention of Ernst & Young LLP as independent accountants 24,442,476 3,372 4,572 -
(d) Not applicable. Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 27 Financial Data Schedule 99.1 Risk Factors (b) Reports on Form 8-K We filed the following reports on Form 8-K during the quarter ended September 30, 2000. Date Items Reported ------- ---------------------------------------------------------- 1. July 12, 2000 Announcement that we have selected Telcordia Technologies to provide core components of Class 5 Local Dial Tone Services on our Integrated Communications Network and that we expect to have customers using Class 5 local services on our network in the first calendar quarter of 2001. 2. July 18, 2000 Announcement that we have expanded our Integrated Communications Network into the Philadelphia PA and Baltimore MD markets. 3. July 31, 2000 Announcement of the change in our fiscal year to December 31 of each year from March 31 of each year. 4. August 3, 2000 Announcement that the Telecordia Softswitch is providing VoIP Voice Services Between 11 CTC Branch Sales Offices 5. August 29, 2000 Announcement that Verizon Strike Will Not Materially Impact Revenue and Access line Growth and of the Dark Fiber Purchase from NorthEast Optic Network 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. CTC COMMUNICATIONS GROUP, INC. Date: November 14, 2000 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: November 14, 2000 /S/ JOHN D. PITTENGER ----------------------------- John D. Pittenger Executive Vice President, and Chief Financial Officer EX-27 2 0002.txt FDS FOR Q.E. 09/30/00
5 1,000 6-MOS DEC-31-2000 SEP-30-2000 120,872 0 52,001 2,804 0 173,837 214,239 49,937 354,069 63,481 0 0 198,540 263 (59,678) 354,069 110,977 110,977 85,523 144,709 0 0 9,154 (39,366) 0 (39,366) 0 0 0 (39,366) (1.77) (1.77)
EX-99.1 3 0003.txt RISK FACTORS EXHIBIT 99.1 RISK FACTORS From time to time we have, and may in the future make, forward-looking statements, based on our then-current expectations, including statements made in Securities and Exchange Commission filings, in press releases and oral statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties, and actual results could differ materially from those expressed or implied in the forward- looking statements for a variety of reasons. These reasons include, but are not limited to, factors outlined below. We do not undertake to update or revise our forward-looking statements publicly even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. BECAUSE OUR REVENUES PRIOR TO JANUARY 1998 RESULTED FROM A BUSINESS STRATEGY WE ARE NO LONGER PURSUING, YOU MAY HAVE DIFFICULTY EVALUATING US. We began offering local services under our own brand name in January 1998 and began providing network services to customers since September 1999. As a result, we can only provide limited historical operating and financial information about our current business strategy for you to evaluate. IF WE DO NOT SUCCESSFULLY EXECUTE OUR NEW BUSINESS STRATEGY, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. Our business strategy is complex and requires that we successfully complete many tasks, a number of which we must complete simultaneously. If we are unable to effectively implement or coordinate the implementation of these multiple tasks, we may be unable to compete effectively in our markets and our financial results may suffer. OUR INCURRENCE OF NEGATIVE CASH FLOWS AND OPERATING LOSSES DURING THE NEXT SEVERAL YEARS MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. During recent periods we have experienced substantial net losses, operating losses and negative cash flow. Our expenses have increased significantly, and we expect our expenses to continue to increase as we deploy our network and implement our business plan. Accordingly, we expect to incur significant operating losses, net losses and negative cash flow during the next several years, which may adversely affect the price of our common stock. IF OUR NETWORK DOES NOT FUNCTION PROPERLY, WE WILL BE UNABLE TO PROVIDE THE TELECOMMUNICATIONS SERVICES ON WHICH OUR FUTURE PERFORMANCE WILL IN LARGE PART DEPEND. Because the design of our network has not been widely deployed, we cannot assure you that our network will provide the functionality that we expect. We also cannot be sure that we will be able to incorporate local dial tone capabilities into our network because this technology has not been widely implemented. Without this capability we will not be able to provide on our network all of our target customers' fixed line telecommunications services. IF WE DO NOT OBTAIN INTERCONNECTION AGREEMENTS WITH OTHER CARRIERS, WE WILL BE UNABLE TO PROVIDE ENHANCED SERVICES ON OUR NETWORK. Negotiation of interconnection agreements with incumbent local exchange carriers, or ILECs, can take considerable time, effort and expense, and these agreements are subject to federal, state and local regulation. We may not be able to effectively negotiate the necessary interconnection agreements. Without these interconnection agreements, we will be unable to provide enhanced connectivity to our network and local dial tone services and to achieve the financial results we expect. BECAUSE OF OUR LIMITED EXPERIENCE, WE MAY NOT BE ABLE TO PROPERLY OR TIMELY DEPLOY, OPERATE AND MAINTAIN OUR NETWORK, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL RESULTS. The failure of our network equipment to operate as anticipated or the inability of equipment suppliers to timely supply such equipment could materially and adversely affect our financial results. Because we have limited experience operating and maintaining telecommunications networks, we may not be able to deploy our network properly or do so within the time frame we expect. In addition, we may encounter unanticipated difficulties in operating and maintaining our network. If network implementation does not occur in a timely and effective manner, our financial results could be adversely affected. OUR HIGH LEVERAGE CREATES FINANCIAL AND OPERATING RISK THAT COULD LIMIT THE GROWTH OF OUR BUSINESS. We have a significant amount of indebtedness. As of September 30, 2000, we had approximately $168.3 million of total indebtedness outstanding. We do not expect to generate sufficient cash flow from operations to repay our existing credit facilities. We have incurred substantial debt financing to fund our business plan. Our high leverage could have important consequences to us, including, . limiting our ability to obtain necessary financing for future working capital, capital expenditures, debt service, or refinancing requirements or other purposes; . limiting our flexibility in planning for, or reacting to, changes in our business; . placing us at a competitive disadvantage to competitors with less leverage; . increasing our vulnerability in the event of a downturn in our business or the economy generally; . requiring that we use a substantial portion of our cash flow from operations for debt service and not for other purposes. WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL WE WILL REQUIRE TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH ON ACCEPTABLE TERMS OR AT ALL, WHICH COULD CAUSE US TO DELAY OR ABANDON OUR DEVELOPMENT AND EXPANSION PLANS. We will need significant additional capital to expand our business plan. We cannot assure you that capital will be available to us when we need it or at all. If we are unable to obtain capital when we need it, we may delay or abandon our expansion plans. That could have a material adverse effect on our business and financial condition. OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED COMPETITORS WITH GREATER FINANCIAL RESOURCES AND MORE EXPERIENCE. We operate in a highly competitive environment. We have no significant market share in any market in which we operate. We will face substantial and growing competition from a variety of data transport, data networking, telephony service and integrated telecommunications service providers. We also expect that the incumbent local exchange carriers ultimately will be able to provide the range of services we currently offer. Many of our competitors are larger and better capitalized than we are, are incumbent providers with long-standing customer relationships, and have greater name recognition. We may not be able to compete effectively against our competitors. OUR INFORMATION SYSTEMS MAY NOT PRODUCE ACCURATE AND PROMPT BILLS WHICH COULD CAUSE A LOSS OR DELAY IN THE COLLECTION OF REVENUE AND COULD ADVERSELY AFFECT OUR RELATIONS WITH OUR CUSTOMERS. We depend on our information systems to bill our customers accurately and promptly. Because of the deployment of our network and our expansion plans, we are continuing to upgrade our information systems. Our failure to identify all of our information and processing needs or to adequately upgrade our information systems could delay our collection efforts, cause us to lose revenue and adversely affect our relations with our customers. WE MAY NOT RECEIVE TIMELY AND ACCURATE CALL DATA RECORDS FROM OUR SUPPLIERS WHICH COULD CAUSE A LOSS OR DELAY IN THE COLLECTION OF REVENUE AND COULD ADVERSELY AFFECT OUR RELATIONS WITH OUR SUPPLIERS. Our billing and collection activities are dependent upon our suppliers providing us with accurate call data records. If we do not receive accurate call data records in a timely manner, our collection efforts could suffer and we could lose revenue. In addition, we pay our suppliers according to our calculation of the charges based upon invoices and computer tape records provided by these suppliers. Disputes may arise between us and our suppliers because these records may not always reflect current rates and volumes. If we do not pay disputed amounts, a supplier may consider us to be in arrears in our payments until the amount in dispute is resolved, which could adversely affect our relations with our suppliers. WE DEPEND ON THE NETWORKS AND SERVICES OF THIRD PARTY PROVIDERS TO SERVE OUR CUSTOMERS AND OUR RELATIONSHIPS WITH OUR CUSTOMERS COULD BE ADVERSELY AFFECTED BY FAILURES IN THOSE NETWORKS AND SERVICES. We depend on other carriers for the switching and transmission of our customer traffic. After we complete deploying our network, we will still rely to some extent on others for switching and transmission of customer traffic. We cannot be sure that any third party switching or transmission facilities will be available when needed or on acceptable terms. Although we can exercise direct control of the customer care and support we provide, most of the services we currently offer are provided by others. The availability of these services are subject to work stoppages, lack of available facilities, physical damage, power loss, capacity limitations, software defects, breaches of security and other factors which may cause interruptions in service or reduced capacity for our customers. These problems, although not within our control, could adversely affect customer confidence and damage our relationships with our customers. INCREASES IN CUSTOMER ATTRITION RATES COULD ADVERSELY AFFECT OUR OPERATING RESULTS. Our customers may not continue to purchase local, long distance, data or other services from us. Because we have been selling voice and data telecommunications under our own brand name for a short time, our customer attrition rate is difficult to evaluate. We could lose customers as a result of national advertising campaigns, telemarketing programs and customer incentives provided by major competitors as well as for other reasons not in our control as well as a result of our own performance. Increases in customer attrition rates could have a material adverse effect on our results of operations. WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WHICH COULD MATERIALLY ADVERSELY AFFECT ALL ASPECTS OF OUR BUSINESS. We are pursuing a business plan that will result in rapid growth and expansion of our operations if we are successful. This rapid growth would place significant additional demands upon our current management and other resources. Our success will depend on our ability to manage our growth. To accomplish this we will have to train, motivate and manage an increasing number of employees. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition. WE MAY BE UNABLE TO RETAIN OR REPLACE OUR SENIOR MANAGEMENT OR HIRE AND RETAIN OTHER HIGHLY SKILLED PERSONNEL UPON WHICH OUR SUCCESS WILL DEPEND. We believe that our continued success will depend upon the abilities and continued efforts of our management, particularly members of our senior management team. The loss of the services of any of these individuals could have a material adverse effect on our business, results of operations and financial condition. Our success will also depend upon our ability to identify, hire and retain additional highly skilled sales, service and technical personnel. Demand for qualified personnel with telecommunications experience is high and competition for their services is intense. If we cannot attract and retain the additional employees we need, we will be unable to successfully implement our business strategy. CHANGES TO THE REGULATIONS APPLICABLE TO OUR BUSINESS COULD INCREASE OUR COSTS AND LIMIT OUR OPERATIONS. We are subject to federal, state, and local regulation of our local, long distance, and data services. The outcome of the various administrative proceedings at the federal and state level and litigation in federal and state courts relating to this regulation as well as federal and state legislation may increase our costs, increase competition and limit our operations. RAPID TECHNOLOGICAL CHANGES IN THE TELECOMMUNICATIONS INDUSTRY COULD RENDER OUR SERVICES OR NETWORK OBSOLETE FASTER THAN WE EXPECT OR REQUIRE US TO SPEND MORE THAN WE CURRENTLY ANTICIPATE. The telecommunications industry is subject to rapid and significant changes in technology. Any changes could render our services or network obsolete, require us to spend more than we anticipate or have a material adverse effect on our operating results and financial condition. Advances in technology could also lead to more entities becoming our direct competitors. Because of this rapid change, our long-term success will increasingly depend on our ability to offer advanced services and to anticipate or adapt to these changes, such as evolving industry standards. We cannot be sure that: . we will be able to offer the services our customers require; . our services will not be economically or technically outmoded by current or future competitive technologies; . our network or our information systems will not become obsolete; . we will have sufficient resources to develop or acquire new technologies or introduce new services that we need to effectively compete; or . our cost of providing service will decline as rapidly as the costs of our competitors. WE MAY PURSUE ACQUISITIONS WHICH COULD DISRUPT OUR BUSINESS AND MAY NOT YIELD THE BENEFITS WE EXPECT. We may pursue strategic acquisitions as we expand. Acquisitions may disrupt our business because we may: . experience difficulties integrating acquired operations and personnel into our operations; . divert resources and management time; . be unable to maintain uniform standards, controls, procedures and policies . enter markets or businesses in which we have little or no experience; and . find that the acquired business does not perform as we expected. OUR EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS CONTROL A SUBSTANTIAL AMOUNT OF OUR VOTING SHARES AND WILL BE ABLE TO SIGNIFICANTLY INFLUENCE ANY MATTER REQUIRING SHAREHOLDER APPROVAL. Our officers and directors and parties related to them now control approximately 35.1% of the voting power of our outstanding capital stock. Robert J. Fabbricatore, our Chairman and Chief Executive Officer, controls approximately 13.4% of our voting power. Therefore, the officers and directors are able to significantly influence any matter requiring shareholder approval. FLUCTUATIONS IN OUR OPERATING RESULTS COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our annual and quarterly revenue and results could fluctuate as a result of a number of factors, including: . variations in the rate of timing of customer orders, . variations in our provisioning of new customer services, . the speed at which we expand our network and market presence, . the rate at which customers cancel services, or churn, . costs of third party services purchased by us, and . competitive factors, including pricing and demand for competing services. Also, our revenue and results may not meet the expectations of securities analysts and our stockholders. As a result of fluctuations or a failure to meet expectations, the price of our common stock could be materially adversely affected. OUR STOCK PRICE IS LIKELY TO BE VOLATILE. The trading price of our common stock is likely to be volatile. The stock market in general, and the market for technology and telecommunications companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. Other factors that could cause the market price of our common stock to fluctuate substantially include: . announcements of developments related to our business, or that of our competitors, our industry group or our customers; . fluctuations in our results of operations; . hiring or departure of key personnel; . a shortfall in our results compared to analysts' expectations and changes in analysts' recommendations or projections; . sales of substantial amounts of our equity securities into the marketplace; . regulatory developments affecting the telecommunications industry or data services; and . general conditions in the telecommunications industry or the economy as a whole. -----END PRIVACY-ENHANCED MESSAGE-----