-----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, JujK43YihZPXWnnmwgaJ/qBAR2iK5+Bmtkzo7jXHeSKjVL20q1DcL6/wpXTRiGwU nTqUT/47t++7ItJ5DH3LdA== 0001056114-01-500030.txt : 20020410 0001056114-01-500030.hdr.sgml : 20020410 ACCESSION NUMBER: 0001056114-01-500030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTC COMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001092319 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 043469590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27505 FILM NUMBER: 1787077 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 sepq.txt CTC FORM 10-Q FOR QUARTER ENDED 9-30-01 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter ended September 30, 2001 Commission File Number 0-27505. CTC COMMUNICATIONS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 04-3469590 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 220 Bear Hill Rd., Waltham, Massachusetts 02451 (Address of principal executive offices) (Zip Code) (781) 466-8080 (Registrant's telephone number including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of Common Stock, as of the latest practicable date: As of November 14, 2001, 27,098,785 shares of Common Stock were outstanding. CTC COMMUNICATIONS GROUP, INC. FORM 10-Q INDEX
Part I FINANCIAL STATEMENTS PAGE NO. Item 1. Financial Statements Condensed Consolidated Unaudited Balance Sheets as of September 30, 2001 and December 31, 2000 3 Condensed Consolidated Unaudited Statements of Operations Three Months Ended September 30, 2001 and 2000 4 Condensed Consolidated Unaudited Statements of Operations Nine Months Ended September 30, 2001 and 2000 5 Condensed Consolidated Unaudited Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000 6 Notes to Condensed Consolidated Unaudited Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20-21 Part II OTHER INFORMATION Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities Inapplicable Item 3. Default Upon Senior Securities Inapplicable Item 4. Submission of Matters to a Vote of Security Holders Inapplicable Item 5. Other Information Inapplicable Item 6. Exhibits and Reports on Form 8-K 22
CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
September 30, December, 31 2001 2000 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $100,649,591 $80,029,442 Accounts receivable, net 45,360,645 43,137,423 Prepaid expenses and other current assets 6,737,851 10,137,037 ------------- -------------- Total current assets 152,748,087 133,303,902 Property and equipment: Property and equipment 342,755,703 259,615,413 Accumulated depreciation and amortization (113,989,044) (63,873,598) ------------- -------------- Total property and equipment, net 228,766,659 195,741,815 Deferred financing costs and other assets 12,238,124 15,082,876 ------------- --------------- Total assets $393,752,870 $344,128,593 ============== =============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $48,856,517 $49,461,550 Accrued salaries and related taxes 3,689,304 3,282,079 Current portion of obligations under capital leases 32,481,804 27,055,850 Current portion of notes payables 3,680,998 1,983,984 ------------- ------------- Total current liabilities 88,708,623 81,783,463 Long term debt: Obligations under capital leases, net of current portion 58,514,840 52,763,576 Notes payable, net of current portion 227,705,828 103,018,589 ------------- ------------- Total long term debt 286,220,668 155,782,165 Commitments and contingencies Series B redeemable convertible preferred stock, par value $1.00 per share; authorized 10,000,000 shares, 200,000 shares issued and outstanding at September 30, 2001 and December 31, 2000, (liquidation preference $255,546,343 at Sept. 30, 2001) 217,783,560 203,249,272 Stockholders' deficit: Common stock, par value $.01 per share: authorized 100,000,000 shares, 27,093,985 and 26,582,137 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 270,940 265,821 Additional paid-in capital 95,381,824 93,300,483 Deferred compensation - (26,910) Other accumulated comprehensive income (loss) (3,063,748) - Retained deficit (291,548,997) (190,225,701) ------------- -------------- Total stockholders' deficit (198,959,981) (96,686,307) ------------- -------------- Total liabilities and stockholders' deficit $393,752,870 $344,128,593 ============== ============= The accompanying notes are an integral part of these condensed consolidated financial statements.
3 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended ------------------------------------- September 30, 2001 September 30, 2000 Restated * ------------------ ------------------ Telecommunications revenues $78,166,156 $56,993,993 Operating costs and expenses: Cost of telecommunications revenues excluding depreciation and amortization 61,989,987 44,386,041 Selling, general and administrative expenses 20,400,071 20,433,701 Depreciation and amortization 20,301,786 11,975,575 ---------------- --------------- Total operating costs and expenses 102,691,844 76,795,317 --------------- -------------- Loss from operations (24,525,688) (19,801,324) Other income (expense), net: Interest income 888,828 2,146,554 Interest expense (6,589,743) (4,246,670) ---------------- ---------------- Total other expense, net (5,700,915) (2,100,116) ---------------- ---------------- Net loss $(30,226,603) $(21,901,440) ================ ================ Net loss available to common stockholders $(35,162,134) $(26,440,971) ================ ================ Net loss per common share: Basic and Diluted $(1.30) $(1.01) ================ =============== Weighted average number of common shares: Basic and Diluted 27,035,449 26,267,495 ================ =============== The accompanying notes are an integral part of these condensed consolidated financial statements.
* See Note 2 for explanation of restated amounts 4 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Nine Months Ended ------------------------------------------------------- September 30, 2001 September 30, 2000 September 30, 2000 Pro forma * ------------------ ------------------ ------------------ Telecommunications revenues $220,299,607 $154,622,734 $152,972,597 Operating costs and expenses: Cost of telecommunications revenues excluding depreciation and amortization 177,186,737 119,253,701 118,471,654 Selling, general and administrative expenses 62,187,790 53,468,473 53,441,486 Depreciation and amortization 54,030,546 28,010,674 28,010,674 ---------------- --------------- ------------- Total operating costs and expenses 293,405,073 200,732,848 199,923,814 --------------- --------------- ------------- Loss from operations (73,105,466) (46,110,114) (46,951,217) Other income (expense), net: Interest income 2,292,155 3,650,021 3,650,021 Interest expense (15,975,697) (13,062,280) (13,062,280) ---------------- ---------------- ------------- Total other expense, net (13,683,542) (9,412,259) (9,412,259) Loss before extraordinary item and cumulative effect of change in accounting principle (86,789,008) (55,522,373) (56,363,476) Extraordinary item - early extinguishment of debt - (2,430,456) (2,430,456) ---------------- ---------------- ------------- Loss before cumulative effect of change in accounting principle (86,789,008) (57,952,829) (58,793,932) Cumulative effect of change in accounting principle - (2,878,949) (2,878,949) ---------------- ---------------- ------------- Net loss $(86,789,008) $(60,831,778) $(61,672,881) ================ ================ ============= Net loss available to common stockholders $(101,323,296) $(68,208,176) $(69,049,279) ================ ================ ============= Net loss per common share before extraordinary item and cumulative effect of change in accounting principle: Basic and Diluted $(3.78) $(2.50) $(2.54) ================ ================ ============= Net loss per common share before cumulative effect of change in accounting principle: Basic and Diluted $(3.78) $(2.60) $(2.63) ================ ================ ============= Net loss per common share: Basic and Diluted $(3.78) $(2.71) $(2.75) ================ ================ ============= Weighted average number of common shares: Basic and Diluted 26,837,277 25,142,455 25,142,455 ================ ================ ============= The accompanying notes are an integral part of these condensed consolidated financial statements.
* See Note 2 for explanation of pro forma amounts 5 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, ----------------------------------- 2001 2000 ----------------- ------------- OPERATING ACTIVITIES: Net loss $(86,789,008) $(60,831,778) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 54,030,546 28,010,674 Stock compensation expense 26,910 79,500 Extraordinary item- early extinguishment of debt - 2,430,456 Interest related to warrants and certain fees 390,655 704,571 Changes in operating assets and liabilities: Accounts receivable (2,223,222) (3,136,407) Prepaid expenses and other current assets (1,925,490) 3,711,592 Deferred financing costs and other assets 2,006,148 (16,261,483) Accounts payable and accrued expenses (605,033) (6,026,731) Accrued salaries and related taxes 407,225 1,308,134 ------------- ------------- Net cash used by operating activities (34,681,269) (50,011,472) INVESTING ACTIVITY: Additions to property and equipment (57,455,642) (64,556,722) Notes receivable from stockholders (90,000) - Repayment of notes receivable from stockholders 5,414,676 10,373 ------------- ------------- Net cash used in investing activities (52,130,966) (64,546,349) FINANCING ACIVITIES: Proceeds from the issuance of Series B redeemable convertible preferred stock, net of offering costs - 191,732,272 Proceeds from the issuance of common stock 2,086,460 5,420,517 Proceeds from notes payable 125,000,000 145,883,518 Repayment of notes payable (1,358,658) (117,768,700) Repayments under capital lease obligations (18,295,418) (5,359,844) ------------- ------------- Net cash provided by financing activities 107,432,384 219,907,763 Increase in cash and cash equivalents 20,620,149 105,349,942 Cash and cash equivalents at beginning of year 80,029,442 15,522,224 ------------- ------------- Cash and cash equivalents at end of period $100,649,591 $120,872,166 ============= ============= NONCASH INVESTING AND FINANCING ACTIVITIES: Network and related equipment acquired under capital leases $30,265,634 $55,459,368 Network and related equipment acquired under notes payable - $3,762,998 Accretion of preferred stock $14,534,288 $7,376,398 The accompanying notes are an integral part of these condensed consolidated financial statements.
6 CTC COMMUNICATIONS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying condensed consolidated unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2001, as noted below. These statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the nine month transition period ended December 31, 2000. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Telecommunication revenues primarily relate to customer usage of services and recurring monthly fees to customers for certain other services. Revenues related to usage are recognized as usage accrues. Retroactive to April 1, 2000, the Company revised its revenue recognition policy for certain recurring monthly fees to be consistent with applicable provisions of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Previously, monthly recurring fees for the next month's service were recognized at the time all of the Company's significant performance obligations had been fulfilled and the related monthly service fee became nonrefundable based on the terms of the Company's contract with its customers. The new method of accounting defers recognition of monthly recurring service fees to the period in which the service is available to the customer. The Company's condensed consolidated unaudited statements of operations for the three months ended September 30, 2000 have been restated to reflect the adoption of SAB 101. The Company's condensed consolidated unaudited statements of operations for the nine months ended September 30, 2000 reflects the three months ended March 31, 2000 under the Company's revenue recognition policy prior to the adoption of SAB 101 and the restated six months ended September 30, 2000 for the adoption of SAB 101 on April 1, 2000. For comparative purposes, the accompanying financial statements include a pro forma condensed consolidated unaudited statement of operations for the nine month period ended September 30, 2000 prepared under the applicable provisions of SAB 101. 7 Derivatives and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities, and its Amendments, FASB Statements Nos. 137 and 138, in June 1999 and June 2000, respectively (collectively, FAS 133). FAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings (fair value hedge), or, for the effective portion of the hedge, recorded in other comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company adopted FAS 133 on January 1, 2001. The adoption of this statement resulted in a cumulative effect adjustment to other comprehensive income (loss) of $(716,504), (see Note 8). Cash Flow Hedging Strategy As required by the Company's credit facility with TD Securities (US) Inc. (the TD Credit Facility), the Company maintains an interest rate collar and an interest rate swap. These instruments hedge the variable rate of interest due on the TD Credit Facility. The interest rate collar effectively locks $33 million of the TD Credit Facility borrowings between 12.25% and 9.67%. The interest rate swap effectively caps $17 million of the TD Credit Facility borrowings at 10.75%. Both the collar and the swap mature on September 22, 2003 and have been entered into for non-trading purposes. During the nine months ended September 30,2001, the Company recorded a loss of $(716,504) in other comprehensive income (loss) as a cumulative effect adjustment in connection with the adoption of FAS 133, effective January 1, 2001. During the three months and nine months ended September 30, 2001, the Company recorded a loss of $(1,161,190) and $(1,989,324), respectively in other comprehensive income (loss) for the change in fair value of the collar and swap. Furthermore, during the three months and nine months ended September 30, 2001, the Company reclassified out of other comprehensive income (loss) to interest expense a gain of $176,940 and $123,998, respectively related to the ineffective portion of the collar and the swap and gains of $111,056 and $233,922 for the same periods related to the time value deterioration on the collar. For the period from January 1, 2001 to December 31, 2001, the Company expects to reclassify approximately $(900,000) of losses on the collar and the swap from accumulated other comprehensive income (loss) to interest expense due to the payment of variable interest associated with the TD Credit Facility. 8 NOTE 3: COMMITMENTS AND CONTINGENCIES We are a party to a small number of suits arising in the normal course of business which our management believes are not material individually or in the aggregate. NOTE 4: NET LOSS PER COMMON SHARE The following tables set forth the computation of basic and diluted net loss per share:
Three Months Ended September 30, ----------------------------- 2001 2000 restated * ----------------------------- Numerator: Net loss $(30,226,603) $(21,901,440) Less preferred stock dividends and accretion to redemption value of preferred stock (4,935,531) (4,539,531) Equals: numerator for basic and diluted ----------------------------- net loss per share $(35,162,134) $(26,440,971) ============================= Denominator for basic and diluted net loss per share-weighted-average shares 27,035,449 26,267,495 ============================ Basic and diluted net loss per share $(1.30) $(1.01) ============================= 9 Nine Months Ended September 30, ------------------------------------------ 2001 2000 2000 Pro forma * ------------------------------------------ Numerator: Loss before extraordinary item and cumulative effect of change in accounting principle $(86,789,008) $(55,522,373) $(56,363,476) Extraordinary item-early extinguishment of debt - (2,430,456) (2,430,456) -------------------------------------------- Loss before cumulative effect of change in accounting principle $(86,789,008) $(57,952,829) $(58,793,932) Cumulative effect of change in accounting principle - (2,878,949) (2,878,949) -------------------------------------------- Net loss $(86,789,008) $(60,831,778) $(61,672,881) Less preferred stock dividends and accretion to redemption value of preferred stock (14,534,288) (7,376,398) (7,376,398) Equals: numerator for basic and diluted -------------------------------------------- net loss per share $(101,323,296) $(68,208,176) $(69,049,279) ============================================ Denominator for basic and diluted net loss per share-weighted-average shares 26,837,277 25,142,455 25,142,455 ========================================== Basic and diluted loss per common share- before extraordinary item and cumulative effect of accounting change $(3.78) $(2.50) $(2.54) =========================================== Basic and diluted loss per common share- extraordinary item $ - $(0.10) $(0.10) =========================================== Basic and diluted loss per common share- cumulative effect of change in accounting principle $ - $(0.12) $(0.12) =========================================== Basic and diluted net loss per share $(3.78) $(2.71) $(2.75) ===========================================
* See Note 2 for explanation of restated and pro forma amounts NOTE 5: RELATED PARTY TRANSACTIONS As of December 31,2000, the Company had advanced funds to certain stockholders, who are executives and officers, amounting to $6,375,135 evidenced by fully secured promissory notes. These notes bear interest at 10.75%. During the quarter ended March 31, 2001, $5,414,676 was repaid together with interest due. As of September 30, 2001 an additional $90,000 was advanced to an executive under a fully secured promissory note, bearing interest at 10.75%. At September 30, 2001, $1,189,187 of these loans remains outstanding. 10 NOTE 6: FINANCING ARRANGEMENTS In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior secured credit facility ("TD Credit Facility") to fund the Company's base plan for expansion of its branch sales offices and its Integrated Communications Network. The proceeds were used to retire the $43 million balance of an existing credit facility of the $75 million Goldman Sachs/Fleet Credit Facility and to repay in full the $25 million Cisco vendor financing facility. The TD Credit Facility includes a $50 million senior secured 7-1/2 year revolving credit facility, a $100 million senior secured 7-1/2 year delayed draw term loan and a $75 million senior secured 8 year term loan. As of November 2001, we entered into an amendment to the TD Credit Facility to modify certain provisions of the agreement. As of September 30, 2001, we are in compliance with all of the covenants and $225 million of the TD Credit Facility was outstanding. The Company has classified the revolving line of credit as long term debt as it expects the revolving line of credit amount to be outstanding for the full commitment period under the TD credit facility. The Company has entered into an equipment lease financing arrangement which restricts $7.5 million of cash as security for this arrangement. NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB Opinion No. 25." The Company has adopted the Interpretation July 1, 2000. The Interpretation requires, among other things, that stock options that have been modified to reduce the exercise price be accounted for as variable. No option grants have been modified by a reduction of the exercise prices, therefore, the adoption of the Interpretation has not had an impact on the Company's consolidated financial statements. In July, 2001, the FASB issued SFAS No. 141, "Business Combinations" (FAS 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt FAS 142 in their fiscal year beginning after December 15, 2001. For the intangible assets acquired on or before June 30, the intangibles will be amortized during this transition period until adoption of FAS 142. The Company is not expecting any material impact from the adoption FAS 142 on its financial position and results of operations. NOTE 8: COMPREHENSIVE INCOME (LOSS) The Company reports comprehensive income (loss) as required by Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income," (FAS 130). FAS 130 requires that changes in fair value of the Company's derivative instruments designated as cash flow hedges, as well as other certain changes in stockholders' equity, be included in comprehensive 11 income (loss). For the three months ended September 30, 2001 and 2000, comprehensive income (loss) was $(31,675,789) and $(21,901,440) respectively, and for the nine months ended September 30, 2001 and 2000, comprehensive income (loss) was $(89,852,756) and $(60,831,778) respectively, as follows:
Three Months Ended September 30, 2001 2000 ----------------------------- - ------ Comprehensive income (loss): Net loss $(30,226,603) $(21,901,440) Additions to comprehensive loss for changes in fair value of cash flow hedges (1,161,190) - Reclassification of gain from comprehensive loss line as offset to interest expense for ineffective portion and time value of cash flow hedges (287,996) - ------------------------- - ---- Comprehensive income (loss) $(31,675,789) $(21,901,440) =================================== Nine Months Ended September 30, 2001 2000 ------------------------------ - ----- Comprehensive income (loss): Net loss $(86,789,008) $(60,831,778) Cumulative effect of change in accounting principle (716,504) - Additions to comprehensive loss for changes in fair value of cash flow hedges (1,989,324) - - Reclassification of gain from comprehensive loss line as offset to interest expense for ineffective portion and time value of cash flow hedges (357,920) - - -------------------------- - --- Comprehensive income (loss) $(89,852,756) $(60,831,778) ===================================
12 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this Report. OVERVIEW We are a rapidly growing single-source provider of voice, data and Internet communications services, or integrated communications carrier, with 17 years of marketing, sales and service experience. We target predominantly medium and larger-sized business customers who seek greater capacity for voice and data traffic, a single provider for their telecommunications requirements and improved levels of service. We have a large, experienced sales force consisting of 186 account executives supported by 163 network coordinators as of September 30, 2001. Our sales force is located close to our customers in 27 sales branches primarily in the Northeast and Mid-Atlantic states. We are currently operating our own state-of-the-art network facilities to carry telecommunications traffic. Our PowerPath(sm) Network uses packet-switching, a technology that transmits data in discrete packages. It uses Internet protocol (IP), which is a method that allows computers with different architectures and operating systems to communicate over the Internet, and asynchronous transfer mode, or ATM, architecture, which permits the network to transmit multiple types of media, such as voice, data and video with various levels of Quality of Service, or QOS. The first phase of our network, which became operational for full production mode in January 2000, included 22 Cisco Systems, or Cisco, advanced data switches and two network operations centers. We are interconnecting our facilities with leased transmission capacity over fiber optic cable strands from Level 3 Communications and NorthEast Optic Network. These leased transmission services are gradually being replaced by fiber links, which we own following our investment in fiber strands through Williams Communications and other regional and metro fiber carriers. We have selected Cisco to provide the Wavelength Digital Multiplexing (WDM) and SONET technology to activate or light up the fiber and complete a highly competitive, scalable and secure fiber transport infrastructure. Cisco has reviewed and certified our network design and has designated our network as a Cisco Powered Network. We currently have a combination of leased and owned fiber facilities. In May 1999, we began testing our network with some of our customers and in September 1999, we initiated commercial service. As of September 30, 2001 we were servicing more than 4,200 customer locations with PowerPath(sm) access across the Northeast and Mid-Atlantic states. In December 2000, we announced completion of a successful Class-4/5 pilot phase using a softswitch from Telcordia Technologies. The softswitch technology integrated with our PowerPath(sm) Network allows us to deliver both local and long distance voice services using a Voice over IP (VoIP) packet based network. We currently have 350 customer locations with these voice services on a daily basis as of September 30, 2001. 13 We became an integrated communications provider, or ICP, in January 1998. Prior to that, based on agency revenues, we were the largest independent sales agent for NYNEX Corp. and then Bell Atlantic (now Verizon). At the end of 1997, before withdrawing from the Verizon agency program, we were managing relationships for approximately 7,000 customers, representing over 280,000 local access lines and over $200 million in annual local telecommunications spending. As of September 30, 2001, after only 45 months as an integrated communications provider, we were serving over 15,000 customers and had 565,800 access lines and equivalent circuits, or ALEs. ALEs are the total number of voice circuits and equivalent data circuits we have in service. Voice circuits are the actual number of voice circuits purchased by our customers. Equivalent data circuits represent the data transmission capacity purchased by our customers divided by 64 kilobits per second, which is the capacity necessary to carry one voice circuit. Our Services We offer the following services: Local Telephone Services. We offer connections between customers' telecommunications equipment and the local telephone network, the majority of which we lease from incumbent local exchange carriers (ILECs). For large customers or customers with specific requirements, we integrate their private systems with analog or digital connections. We also provide all associated call processing features as well as continuously connected private lines for both voice and data applications. We are in the process of turning up local telephone services using the Company's PowerPath(sm) Network through the use of the softswitch provided by Telcordia Technologies. Long Distance Telephone Services. We offer a full range of domestic and international long distance services, including "1+" outbound calling, inbound toll free service, standard and customized calling plans. We also offer related services such as calling cards, operator assistance and conference calling. High Speed Data Services. We offer a wide array of high speed data services. Our portfolio includes point to point as well as frame relay solutions from 56kbps to 45mbps. Internet Services. We have built an extensive IP network infrastructure for our PowerPath(sm) Network. We became registered as an official Internet Service Provider, or ISP, in 2000, which enables us to deliver Internet access to our customers as part of our PowerPath(sm) Network converged services offering. We launched our iMail web based email product during the summer of 2000 and plan to further expand this offering to include unified messaging services in the latter half of 2001. We provide the necessary configuration support and other network support services on a 24-hour,7-day a week basis. We offer Internet access from 56k to 45mbps to our business customers. 14 Hosting Services. We opened our Springfield Data Center and began providing web hosting services in early 2001. We now have the ability to offer our customers shared and dedicated web hosting services as well as hardware collocation services. We are planning to extend our entry into the Applications Services Provider (ASP) market by adding a suite of value added services in the fourth quarter of 2001, such as backup and restoral services, managed storage and unified messaging. The Information Technology (IT) infrastructure has been designed to support our strategic direction of introducing content based services in conjunction with a rapidly developing communications market-place. We have opened a second data center in our newly constructed 50,000 square foot Advanced Technology Center in Waltham, Massachusetts during the second quarter of 2001. We are reviewing and developing services such as electronic commerce over the Internet, managed security and storage services, managed firewall services, consulting and network monitoring services and other data, voice and sophisticated network products that will be based in this data center. RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 2000. Adoption of Staff Accounting Bulletin 101. Retroactive to April 1, 2000, the Company has revised its revenue recognition policy for certain recurring monthly fees to be consistent with applicable provisions of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Previously, monthly recurring fees for the next month's service were recognized at the time all of the Company's significant performance obligations had been fulfilled and the related monthly service fee became nonrefundable based on the terms of the Company's contract with its customers which require 60 days notice for cancellation. Since SAB 101 now indicates that nonrefundability of revenues and fulfillment of all significant performance obligations are not a basis for revenue recognition, the Company has determined that deferral of the monthly recurring service fees to the period in which the service is available to the customer is a preferable method of accounting. The Company's condensed consolidated unaudited statements of operations for the three months ended September 30, 2000 have been restated to reflect the adoption of SAB 101. The Company's condensed consolidated unaudited statements of operations for the nine months ended September 30, 2000 reflects the three months ended March 31, 2000 of the Company's revenue recognition policy prior to the adoption of SAB 101 and the restated six months ended September 30, 2000 for the adoption of SAB 101 on April 1, 2000. For comparative purposes, the accompanying financial statements include a pro forma condensed consolidated unaudited statement of operations for the three month period ended March 31, 2000 prepared under the applicable provisions of SAB 101 and the restated six months ended September 30, 2000 for the adoption of SAB 101 on April 1, 2000. Comparisons for the nine month period made to the prior year for the purposes of this discussion have been made to the pro forma presentation of the results of operations for the nine months ended September 30, 2000. 15 Total revenues for the quarter ended September 30, 2001 ("2001 Quarter") were $78,166,000, as compared to $56,994,000 for restated quarter ended September 30, 2000 ("2000 restated Quarter"), or an increase of 37%. Total revenues for the nine months ended September 30, 2001 ("2001 Nine Months") were $220,300,000 as compared to $152,973,000 for pro forma nine months ended September 30, 2000 ("2000 pro forma Nine Months) or an increase of 44%. The 2001 Quarter revenues also represented an increase of 5% over the revenues of $74,512,000 for the quarter ended June 30, 2001. We have added approximately 159,000 ALE's since the quarter ended September 30, 2000 resulting in the increase in revenue due to the addition of ALE's for both new and existing customer relationships. A common basis for measurement of an ICP's progress is the growth in ALEs. During the 2001 Quarter, we provisioned 30,400 net ALEs, bringing the total lines in service to 565,800. Net lines provisioned through the 2001 Quarter represented a 6% sequential increase over net lines provisioned through the quarter ended June 30, 2001 and a 39% increase over the 2000 quarter. Costs of telecommunications revenues, excluding depreciation, for the 2001 Quarter were $61,990,000, as compared to $44,386,000 for the 2000 restated Quarter; and were $177,187,000 for the 2001 Nine Months as compared to $118,472,000 for the 2000 pro forma Nine Months. As a percentage of telecommunications revenues, cost of telecommunications revenues was 79% for the 2001 Quarter and 80% for the 2001 Nine Months, as compared to 78% for the 2000 restated Quarter and 77% for the 2000 pro forma Nine Months. The increase in the percentage of the cost of the telecommunications revenues primarily reflects the additional fixed expenses incurred as a result of the PowerPath(sm) broadband network expansion and additional expense incurred due to supplier delays in delivery of lower cost fiber facilities. Selling expense consists of the costs of providing sales and other support services for customers including salaries, commissions and bonuses to salesforce personnel. General and administrative expense consists of the costs of the billing and information systems and personnel required to support our operations and growth. For the 2001 Quarter, selling, general and administrative expenses (SG&A) remained at the same level of $20,400,000 from $20,434,000 for the 2000 restated Quarter; and for the 2001 Nine Months, increased 16% to $62,188,000 from $53,441,000 for the 2000 pro forma Nine Months. The SG&A expenses for the 2001 Quarter decreased 1% from $20,588,000 in the quarter ended June 30, 2001. The increase in SG&A from the 2000 pro forma Nine Months is due to an increase in engineering and service employees as a result of the transition to the ICP platform. The decrease from the June 30, 2001 quarter represents our continued effort to limit our expansion to control costs and therefore leverage our current branch infrastructure. For the 2001 Quarter and 2001 Nine Months, SG&A expenses were 26.1% and 28.2% respectively of total revenue as compared to 35.9% and 34.9% of total revenue for the 2000 restated quarter and 2000 pro forma Nine Months respectively. As of September 30, 2001, we employed 712 people including 186 account executives and 163 network coordinators in 27 branch locations throughout the Northeast and Mid-Atlantic states as compared to 757 employees at September 30, 2000. Depreciation and amortization expense increased to $20,302,000 in the 2001 Quarter from $11,976,000 for the 2000 restated Quarter; and for the 2001 16 Nine Months increased to $54,031,000 from $28,011,000 for the 2000 pro forma Nine Months. This increase was a result of additional expense associated with the equipment and software relating to the network deployment and the upgrade of our information systems. Network equipment and software is being depreciated over 3-5 years, reflecting the risk of rapid technological change. Other expense, net, increased to $5,701,000 for the 2001 Quarter from $2,100,000 for the 2000 restated Quarter and increased to $13,684,000 for the 2001 Nine Months from the 2000 pro forma Nine Months. Interest expense increased due to the increase in borrowings required in connection with the deployment of our network, working capital requirements and funding our operating losses. We incurred an extraordinary item of $2,430,000 relating to the early repayment of the senior secured Goldman Sachs/Fleet credit facility for the 2000 pro forma Nine Months. The cost reflects the unamortized balance of the warrants and closing costs of the credit facility, which was repaid in March 2000. As a result of the above factors, the net losses totaled to $30,227,000 and $86,789,000 for the 2001 Quarter and 2001 Nine Months, respectively. Liquidity and Capital Resources Working capital at September 30, 2001 was $64,039,000 million compared to $51,520,000 million at December 31, 2000, an increase of $12,519,000 million. The increase is the result of our additional draw down of the TD Credit Facility offset by our operating losses and payments for capital expenditures. Cash balances at September 30, 2001 and December 31, 2000 totaled $100,650,000 and $80,029,000, respectively. The Company has entered into an equipment lease financing arrangement which restricts $7.5 million of cash as security for this arrangement. In May 2000, the Company increased its working capital from the net proceeds realized from a $200 million preferred stock financing with Bain Capital Inc. ($75 million), Thomas H. Lee Partners, L.P. ($75 million) and CSFB Private Equity ($50 million). The investment consists of 8.25% Series B redeemable convertible preferred stock which converts into our common stock at $50 per share at any time of the option holder. The Company may require conversion of the preferred shares if the common stock of the Company reaches certain levels. The Company may elect to redeem the preferred shares on the fifth anniversary of the closing and all outstanding shares of preferred stock must be redeemed or converted by May 2010. The net proceeds from the sale of the Series B redeemable preferred stock are being used to fund strategic marketing and technology initiatives of our business plan which include the purchase of dark fiber and optronics, PowerPath(sm) Network expansion and new PowerPath(sm) Network product and applications development. In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior secured credit facility ("TD Credit Facility") to fund our base plan for expansion of our branch sales offices and our Integrated Communications Network. The proceeds were used to retire the $43 million balance of an existing credit facility of the $75 million Goldman Sachs/Fleet Credit Facility and to repay in full the $25 million Cisco vendor financing facility. The TD Credit Facility includes a $50 million senior secured 7-1/2 year revolving credit facility, a $100 million senior secured 7-1/2 year delayed draw term loan and a $75 million senior secured 8 year term loan. As of November 2001, we entered into an amendment to the TD Credit 17 Facility to modify certain provisions of the agreement. Reference is made to the Third Amendment to Credit Agreement dated as of November 1, 2001 attached hereto as Exhibit 10.1 for all of the terms and conditions of the Amendment. As of September 30, 2001, we are in compliance with all of the covenants. As of September 30, 2001, $225 million of the TD Credit Facility was outstanding. Since September 30, 1998, we have entered into various lease and vendor financing agreements which provide for the acquisition of equipment and software. As of September 30, 2001, the aggregate amount borrowed under these agreements was approximately $129 million. We will continue to use the balance of the proceeds realized from the TD Credit Facility and Series B redeemable convertible preferred stock financing for general corporate purposes including, capital expenditures, working capital and operating losses associated with the continued deployment of our network, further penetration of our existing region and our expansion into new markets throughout the Northeast and Mid-Atlantic states. Until utilized, the net proceeds from the TD Credit Facility and Series B redeemable convertible preferred stock financing are being invested in short-term, interest- bearing instruments and other investment-grade securities. We believe that proceeds available from the Series B redeemable convertible preferred stock financing and the TD Credit Facility, cash on hand and the amounts expected to be available under our bank and lease financing arrangements will be sufficient to fund our planned capital expenditures, working capital and operating losses for at least the next 12 months. We also believe that the above noted sources fully fund our business plan. We cannot assure you that if we require funds in addition to the funds made available through the TD Credit Facility and the preferred stock financing, such financing will be available, or if available, on terms acceptable to us when needed. If we are unable to obtain such financing when needed, we may postpone or abandon our development and expansion plans which could have a material adverse effect on our business, results of operations and financial condition. The actual timing and amount of our capital requirements may be materially affected by various factors, including the timing and actual cost of the network, the timing and cost of our expansion into new markets, the extent of competition and pricing of telecommunications services by others in our markets, the demand by customers for our services, technological change and potential acquisitions. Reference is made to the Risk Factors attached hereto as Exhibit 99.1 for a discussion of the facts which could adversely affect our business, revenues, or results of operations. 18 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities, and its Amendments FASB Statements Nos. 137 and 138, in June 1999 and June 2000, respectively (collectively FAS 133). The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings (fair value hedges) or, for the effective portion of the hedge, recorded in other comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of FAS 133 on January 1, 2001, resulted in a charge for the cumulative effect of an accounting change of $(716,504) in other comprehensive income (loss). In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB Opinion No. 25." The Company has adopted the Interpretation on July 1, 2000. The Interpretation requires, among other things, that stock options that have been modified to reduce the exercise price be accounted for as variable. No other option grants have been modified by a reduction of the exercise prices, therefore, the adoption of the Interpretation has not had an impact on the Company's consolidated financial statements, unless modifications are made in the future. In July, 2001, the FASB issued SFAS No. 141, "Business Combinations" (FAS 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt FAS 142 in their fiscal year beginning after December 15, 2001. For the intangible assets acquired on or before June 30, the intangibles will be amortized during this transition period until adoption of FAS 142. The Company is not expecting any material impact from the adoption FAS 142 on its financial position and results of operations. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to financial risk, including changes in interest rates, relates primarily to outstanding debt obligations. We utilize our senior secured credit facility to fund a substantial portion of our capital requirements. This facility bears interest at a variable interest rate, which is subject to market changes. Our earnings are affected by changes in short-term interest rates as a result of our borrowings under the TD Credit Facility. The TD Credit Facility interest payments are determined by the outstanding indebtedness and the LIBOR rate at the beginning of the period in which interest is computed. As required under the TD Credit Facility, we utilize interest rate swap and collar agreements to hedge variable rate interest risk on 50% of the TD Credit Facility. All of our derivative financial instrument transactions are entered into for non-trading purposes. Notional amounts outstanding at September 30, 2001 subject to the interest rate collar is $33 million, with an expected maturity date in the year 2003. The interest rate collar effectively locks $33 million of our TD Credit Facility borrowings between 12.25% and 9.67%. Notional amount outstanding at September 30, 2001 subject to the interest rate swap is $17 million, with an expected maturity date in the year 2003. The interest rate swap effectively caps $17 million of our TD Credit Facility borrowings at 10.75%. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding debt obligations. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in interest rates on market sensitive instruments, considering the hedge agreements noted above. We compare the market values for interest risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market interest rates in effect at September 30, 2001. We compared the market values resulting from these computations with the market values of these financial instruments at September 30, 2001. The differences in the comparison are the hypothetical gains or losses associated with each type of risk. As a result of our analysis we determined at September 30, 2001, with respect to our variable rate debt obligations, a 10% increase in interest rates with all other variables held constant would result in increased interest expense and cash expenditures for interest of approximately $444,000 for the quarter ended September 30, 2001. A 10% decrease in interest rates would result in reduced interest expense and cash expenditures of approximately $233,000 for the same period taking into consideration the interest rate collar as noted. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding fixed rate redeemable convertible preferred stock. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in dividend rates on market sensitive instruments. We compare the market values for dividend risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market dividend rates in effect at September 30, 2001. We compared the market values resulting from these computations with the market values of these financial instruments at September 30, 2001. The differences in the 20 comparison are the hypothetical gains or losses associated with each type of risk. As a result of our analysis we determined at September 30, 2001, with respect to our fixed rate redeemable convertible preferred stock, a 10% increase in dividend rates with all other variables held constant would result in increased dividends of approximately $461,500 for the quarter ended September 30, 2001. A 10% decrease in dividend rates would result in reduced dividends of approximately $461,500 for the same period. > 21 Part II Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 10.1 Third Amendment to Credit Agreement dated as of 11/1/01. 99.1 Risk Factors (b) Reports on Form 8-K We filed the following reports on Form 8-K during the quarter ended September 30, 2001 Date Items Reported -------------- ----------------------------------------------------- - ----- 1. July 6, 2001 Announcement of preliminary estimates for quarter ended June 30, 2001. 2. July 11, 2001 Announcement that we have activated our fiber network in NH. 3. July 26, 2001 Announcement of revenue and operating results for the quarter ended June 30, 2001. 4. August 6, 2001 Announcement that we have completed the beta trial in western MA and that CTC packet dial tone and voice services now available to all MA customers. 5. August 8, 2001 Announcement that we have activated our fiber network in downtown Boston MA. 4. September 21, 2001 Announcement that CTC packet dial tone and voice services now available to all NH customers. 4. September 26, 2001 Announcement that 11 new fiber locations have been added in MA. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. CTC COMMUNICATIONS GROUP, INC. Date: November 14, 2001 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: November 14, 2001 /S/ JOHN D. PITTENGER ----------------------------- John D. Pittenger Executive Vice President, and Chief Financial Officer 23 EX-10 3 ex101.txt EXHIBIT 10.1 TO FORM 10-Q Exhibit 10.1 [EXECUTION COPY] THIRD AMENDMENT TO CREDIT AGREEMENT This THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of November 1, 2001 (this "Amendment"), to the Existing Credit Agreement (as defined below) is made by CTC COMMUNICATIONS CORP., a Massachusetts corporation (the "Borrower"), CTC COMMUNICATIONS GROUP, INC., a Delaware corporation (the "Parent"), and certain of the Lenders (such capitalized term and other capitalized terms used in this preamble and the recitals below to have the meanings set forth in, or are defined by reference in, Article I below). W I T N E S S E T H: WHEREAS, the Borrower, the Parent, the Lenders, Toronto Dominion (Texas), Inc., as the Administrative Agent, Lehman Brothers, as the Syndication Agent, Credit Suisse First Boston, as the Documentation Agent, and TD Securities (USA) Inc., as the Arranger, are all parties to the Amended and Restated Credit Agreement, dated as of August 15, 2000, as amended by the First Amendment to Credit Agreement, dated as of September 30, 2000, and the Second Amendment to Credit Agreement, dated as of November 14, 2000 (the "Existing Credit Agreement", and as amended by this Amendment and as the same may be further amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"); WHEREAS, the Borrower desires to modify certain provisions of the Existing Credit Agreement and the Lenders are willing to so modify the Existing Credit Agreement on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto hereby covenant and agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Definitions. The following terms when used in this Amendment shall have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Amendment" is defined in the preamble. "Borrower" is defined in the preamble. "Credit Agreement" is defined in the first recital. "Existing Credit Agreement" is defined in the first recital. "Parent" is defined in the preamble. "Third Amendment Effective Date" is defined in Article III. SECTION 1.2. Other Definitions. Terms for which meanings are provided in the Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used in this Amendment with such meanings. ARTICLE II AMENDMENTS TO CREDIT AGREEMENT Effective on (and subject to the occurrence of) the Third Amendment Effective Date, the provisions of the Existing Credit Agreement referred to below are hereby amended in accordance with this Article II. Except as expressly so amended, the Existing Credit Agreement shall continue in full force and effect in accordance with its terms. SECTION 2.1. Modification of Article I. Article I of the Existing Credit Agreement is hereby amended as follows: SECTION 2.1.1. Section 1.1 of the Existing Credit Agreement is hereby amended by inserting the following definition in such Section in the appropriate alphabetical sequence: "Amendment No. 3" means the Third Amendment to Credit Agreement, dated as of November 1, 2001, to this Agreement. SECTION 2.2. Modification of Article VII. Article VII of the Existing Credit Agreement is hereby amended as follows: SECTION 2.2.1. Section 7.2.2 of the Existing Credit Agreement is hereby amended by inserting a new clause (l) following clause (k) thereof as follows: (l) Indebtedness in respect of Capitalized Lease Liabilities incurred in connection with the leasing of T-1 lines; provided, that the aggregate amount of all Indebtedness outstanding pursuant to this clause shall not exceed $110,000,000 during any period after the Total Leverage Ratio set forth in the Compliance Certificate most recently delivered by the Borrower to the Administrative Agent pursuant to clause (d) of Section 7.1.1 (after giving pro forma effect to any such Capitalized Lease Liabilities) was greater than or equal to 5.00:1; SECTION 2.2.2. Clause (a)(i) of Section 7.2.4 of the Existing Credit Agreement is hereby amended by deleting the reference to "50%" appearing therein and inserting "60%" in replacement therefor. SECTION 2.2.3. Clause (a)(ii) of Section 7.2.4 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: (ii) Minimum ALEs Installed and Billed. Neither the Borrower nor the Parent will permit the aggregate number of ALEs installed and billed as of the last day of any Fiscal Quarter set forth below to be less than the amount set forth opposite such Fiscal Quarter: Fiscal Quarter ALEs March 31, 2000 260,000 June 30, 2000 300,000 September 30, 2000 350,000 December 31, 2000 390,000 March 31, 2001 430,000 June 30, 2001 470,000 September 30, 2001 530,000 December 31, 2001 530,000 March 31, 2002 570,000 SECTION 2.2.4. Clause (a)(iii) of Section 7.2.4 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: (iii) Minimum Revenue. Neither the Borrower nor the Parent will permit the revenue received by the Consolidated Group as of the last day of any Fiscal Quarter set forth below to be less than the amount set forth opposite such Fiscal Quarter: Fiscal Quarter Revenue March 31, 2000 $40,000,000 June 30, 2000 $47,500,000 September 30, 2000 $49,500,000 December 31, 2000 $53,100,000 March 31, 2001 $59,800,000 June 30, 2001 $67,700,000 September30, 2001 $76,900,000 December 31, 2001 $73,100,000 March 31, 2002 $81,500,000 SECTION 2.2.5. Clause (a)(iv) of Section 7.2.4 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: (iv) Minimum Consolidated EBITDA. Neither the Borrower nor the Parent will permit the Consolidated EBITDA as of the last day of any Fiscal Quarter set forth below to be less than the amount set forth opposite such Fiscal Quarter: Period Consolidated EBITDA March 31, 2000 ($5,400,000) June 30, 2000 ($5,700,000) September 30, 2000 ($9,500,000) December 31, 2000 ($11,800,000) March 31, 2001 ($10,300,000) June 30, 2001 ($6,500,000) September 30, 2001 ($4,400,000) December 31, 2001 $1,000,000 March 31, 2002 $7,000,000 SECTION 2.2.6. Clause (b)(i) of Section 7.2.4 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: (i) Maximum Total Leverage Ratio. Neither the Parent nor the Borrower will permit the Total Leverage Ratio as of the last day of any Fiscal Quarter occurring during any period set forth below to be greater than the ratio set forth opposite such period: Period Total Leverage Ratio 07/01/01 through (and including) 12/31/01 n/a 01/01/02 through (and including) 03/31/02 13.00:1 04/01/02 through (and including) 06/30/02 6.50:1 07/01/02 through (and including) 09/30/02 4.50:1 10/01/02 through (and including) 03/31/03 4.00:1 04/01/03 and thereafter 3.00:1 SECTION 2.2.7. Clause (b)(iii) of Section 7.2.4 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: (iii) Minimum Interest Coverage Ratio. Neither the Parent nor the Borrower will permit the Interest Coverage Ratio as of the last day of any Fiscal Quarter occurring during any period set forth below to be less than the ratio set forth opposite such period: Period Interest Coverage Ratio 07/01/01 through (and including) 09/30/01 n/a 10/01/01 through (and including) 12/31/01 n/a 01/01/02 through (and including) 03/31/02 1.00:1 04/01/02 through (and including) 06/30/02 1.25:1 07/01/02 through (and including) 09/30/02 1.50:1 10/01/02 through (and including) 12/31/02 2.00:1 01/01/03 through (and including) 03/31/03 2.50:1 04/01/03 and thereafter 3.00:1 SECTION 2.2.8. Clause (b) of Section 7.2.7 of the Existing Credit Agreement is hereby amended by deleting the grid appearing therein and inserting the following grid in replacement therefor: Fiscal Year Capital Expenditure Amount 2001 $175,000,000 2002 $200,000,000 2003 $250,000,000 2004 $250,000,000 2005 $220,000,000 2006 $200,000,000 2007 $200,000,000 2008 $200,000,000 ARTICLE III CONDITIONS TO EFFECTIVENESS This Amendment and the amendments contained herein shall become effective on the date (the "Third Amendment Effective Date") when each of the conditions set forth in this Article III shall have been fulfilled to the satisfaction of the Administrative Agent. SECTION 3.1. Counterparts. The Administrative Agent shall have received counterparts hereof executed on behalf of the Borrower, the Parent and the Required Lenders. SECTION 3.2. Amendment Fee. The Administrative Agent shall have received, for the account of each Lender executing this Amendment, an amendment fee in an amount equal to .25% of such Lender's portion of the Total Exposure Amount. SECTION 3.6. Legal Details, etc. All documents executed or submitted pursuant hereto shall be satisfactory in form and substance to the Administrative Agent and its counsel. The Administrative Agent and its counsel shall have received all information and such counterpart originals or such certified or other copies or such materials as the Administrative Agent or its counsel may reasonably request, and all legal matters incident to the transactions contemplated by this Amendment shall be satisfactory to the Administrative Agent and its counsel. ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce the Lenders to enter into this Amendment, the Borrower and the Parent hereby represent and warrant as follows: SECTION 4.1. Representations and Warranties. In order to induce the Lenders to execute and deliver this Amendment, the Borrower and the Parent represent and warrant to the Agents, the Lenders and the Issuer that, after giving effect to the terms of this Amendment, the following statements are true and correct: (a) the representations and warranties set forth in Article VI of the Existing Credit Agreement and in the other Loan Documents are true and correct on the Third Amendment Effective Date as if made on the Third Amendment Effective Date (unless stated to relate solely to an earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date); and (b) no Default has occurred and has been continuing. SECTION 4.2. Validity, etc. This Amendment constitutes the legal, valid and binding obligation of the Borrower and the Parent, enforceable in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. ARTICLE V MISCELLANEOUS SECTION 5.1. Cross References. References in this Amendment to any article or section are, unless otherwise specified, to such article or section of this Amendment. SECTION 5.2. Loan Document Pursuant to Credit Agreement. This Amendment is a Loan Document executed pursuant to the Existing Credit Agreement and shall be construed, administered and applied in accordance with all of the terms and provisions of the Existing Credit Agreement. SECTION 5.3. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. SECTION 5.4. Counterparts. This Amendment may be executed by the parties hereto in several counterparts, all of which shall be deemed to be an original and which shall constitute together but one and the same agreement. SECTION 5.5. Expenses. The Borrower hereby agrees to pay to or reimburse the Administrative Agent, upon demand, all of its reasonable expenses in connection with the development, negotiation, preparation, execution and closing of this Amendment, including all reasonable fees and other charges of Mayer, Brown & Platt in connection therewith. SECTION 5.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers hereunder duly authorized as of the date and year first above written. CTC COMMUNICATIONS CORP. By:_____________________________ Title: CTC COMMUNICATIONS GROUP, INC. By:_____________________________ Title: TORONTO DOMINION (TEXAS), INC., as Lender By:_____________________________ Title: CREDIT SUISSE FIRST BOSTON, as Lender By:_____________________________ Title: By:_____________________________ Title: LEHMAN BROTHERS INC., as Lender By:_____________________________ Title: LEHMAN COMMERCIAL PAPER INC., as Lender By:_____________________________ Title: SYNDICATED LOAN FUNDING TRUST, as Lender By:_____________________________ Title: ING (U.S.) CAPITAL LLC, as Lender By:_____________________________ Title: By:_____________________________ Title: CISCO SYSTEMS, INC., as Lender By:_____________________________ Title: RFC CAPITAL CORPORATION, as Lender By:_____________________________ Title: IBM CREDIT CORPORATION, as Lender By:_____________________________ Title: EX-99 4 exhibit.txt EXHIBIT 99.1 TO FORM 10-Q EXHIBIT 99 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. THE DECLINE IN THE NATIONAL ECONOMY AND THE EFFECT OF RECENT TERRORIST ATTACKS MAY NEGATIVELY AFFECT OUR OPERATIONS The continued decline in our national economy and the effect of the September 11, 2001 terrorist attacks in New York City and Washington D.C. could have an adverse effect on our revenues, results of operations, and financial condition. At the time of the attacks, the demand by businesses for communications services had been experiencing weakness. Economic and political uncertainly resulting from general economic conditions and these attacks could result in further declines. We do not know what effect the government's attempts to bolster the economy, or effects of the war on terrorism, could have on our business, revenues, or results of operations. If businesses decide to cut back, defer or cancel purchases of new communications services, our revenues could be adversely affected, which could have an adverse effect on our results or operations and could have an adverse effect on our financial condition. 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. EX-1 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 couple 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 and fiber 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, 2001, we had approximately $322 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, EX-2 . 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. EX-3 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. EX-4 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. EX-5 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 29.7% of the voting power of our outstanding capital stock. Robert J. Fabbricatore, our Chairman and Chief Executive Officer, controls approximately 9.8% 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. EX-6 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. EX-7 -----END PRIVACY-ENHANCED MESSAGE-----