-----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, FE6HEOQar2pMnzSINEPK9HsNJEH4BpPsfrbZV5Fzkixz5iDcfcs1b2pQcIgU+Q2v hdzOpNzYq9NHB3H4diBKxA== 0001056114-99-000051.txt : 19991117 0001056114-99-000051.hdr.sgml : 19991117 ACCESSION NUMBER: 0001056114-99-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-84157 FILM NUMBER: 99752139 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 9/30/99 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, 1999. Commission File Number 0-27505. CTC COMMUNICATIONS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 04-3469590 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 220 Bear Hill Rd., Waltham, Massachusetts 02451 (Address of principal executive offices) (Zip Code) (781) 466-8080 (Registrant's telephone number including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of Common Stock, as of the latest practicable date: As of November 12, 1999, 14,554,804 shares of Common Stock were outstanding. CTC COMMUNICATIONS GROUP, INC. FORM 10-Q INDEX
Part I FINANCIAL STATEMENTS PAGE NO. Item 1. Financial Statements Condensed Unaudited Balance Sheets as of September 30 and March 31, 1999 3 Condensed Unaudited Statements of Operations Three Months Ended September 30, 1999 and 1998 4 Condensed Unaudited Statements of Operations Six Months Ended September 30, 1999 and 1998 5 Condensed Unaudited Statements of Cash Flows Six Months Ended September 30, 1999 and 1998 6 Notes to Condensed Unaudited Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II OTHER INFORMATION Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities 18 Item 3. Default Upon Senior Securities Inapplicable Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information Inapplicable Item 6. Exhibits and Reports on Form 8-K 19
2 CTC COMMUNICATIONS GROUP, INC. CONDENSED UNAUDITED BALANCE SHEETS
September 30, March 31, 1999 1999 (Restated) ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 44,571,938 $ 2,254,258 Accounts receivable, net 29,863,809 19,200,931 Prepaid expenses and other current assets 7,458,429 5,890,840 ------------- ------------ Total current assets 81,894,176 27,346,029 Furniture, fixtures and equipment 71,533,834 49,417,689 Less accumulated depreciation (16,372,075) (10,615,766) ------------- ------------- Total Furniture, Fixtures and Equipment 55,161,759 38,801,923 Deferred financing costs and other assets 2,171,563 3,333,950 ------------- ------------ Total Assets $139,227,498 $69,481,902 ============= ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 35,982,569 $27,439,488 Accrued salaries and related taxes 1,657,652 1,656,367 Current portion of obligations under capital leases 3,915,526 3,230,077 Current portion of note payable 1,695,148 1,705,141 ------------- ------------ Total Current Liabilities 43,250,895 34,031,073 Obligations under capital leases, net of current portion 7,970,140 8,004,366 Notes payable, net of current portion 75,268,856 51,918,492 ------------- ------------ Total Long-Term Debt $ 83,238,996 $59,922,858 Series A redeemable convertible preferred stock 13,361,181 12,671,797 Stockholders' deficit: Common stock 145,049 103,525 Additional paid in capital 72,895,200 8,386,816 Deferred compensation (159,410) (212,410) Retained deficit (73,492,433) (45,390,732) ------------- ------------- (611,594) (37,112,801) Amounts due from stockholders (11,980) (31,025) ------------- ------------- Total Stockholders' Deficit (623,574) (37,143,826) ------------- ------------ Total Liabilities and Stockholders' Deficit $139,227,498 $69,481,902 ============= ============
The accompanying notes are an integral part of these financial statements. 3 CTC COMMUNICATIONS GROUP, INC. CONDENSED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended September 30, September 30, 1999 1998 (Restated) -------------- ------------- Telecommunications revenues $35,109,155 $14,516,189 Costs and expenses Cost of telecommunications revenues excluding depreciation 27,398,259 12,383,433 Selling, general and administrative expenses 12,676,315 12,043,233 Depreciation 3,652,809 610,000 ------------ ------------- 43,727,383 25,036,666 ------------ ------------- Loss from operations (8,618,228) (10,520,477) Other income (expense) Interest income 473,780 38,437 Interest expense (4,221,052) (1,061,736) Other 71,996 3,149 ------------ ------------- (3,675,276) (1,020,150) ------------ ------------ Loss before income taxes (12,293,504) (11,540,627) Income tax benefit 0 808,000 ------------ ------------- Net loss ($12,293,504) ($10,732,627) ============= ============ Net loss per common share: Basic and diluted ($0.92) ($1.10) ============= ============= Weighted average number of common shares: Basic and diluted 13,756,533 10,002,370 ============= =============
The accompanying notes are an integral part of these financial statements. 4 CTC COMMUNICATIONS GROUP, INC. CONDENSED UNAUDITED STATEMENTS OF OPERATIONS
Six Months Ended September 30, September 30, 1999 1998 (Restated) -------------- ------------- Telecommunications revenues $66,156,006 $27,351,874 Costs and expenses Cost of telecommunications revenues excluding depreciation 53,487,443 23,996,901 Selling, general and administrative expenses 26,918,439 21,138,187 Depreciation 5,756,309 1,115,000 ------------- ------------- 86,162,191 46,250,088 ------------- ------------- Loss from operations (20,006,185) (18,898,214) Other income (expense) Interest income 474,121 170,832 Interest expense (7,991,767) (1,479,246) Other 111,514 33,001 ------------- ------------- (7,406,132) (1,275,413) ------------- ------------ Loss before income taxes (27,412,317) (20,173,627) Income tax benefit 0 1,412,000 ------------ ------------- Net loss ($27,412,317) ($18,761,627) ============== ============= Net loss per common share: Basic and diluted ($2.33) ($1.90) ============= ============= Weighted average number of common shares: Basic and diluted 12,041,250 9,993,281 ============= =============
The accompanying notes are an integral part of these financial statements. 5 CTC COMMUNICATIONS GROUP, INC. CONDENSED UNAUDITED STATEMENTS OF CASH FLOWS
Six Months Ended September 30, September 30, 1999 1998 (Restated) ------------- ------------ OPERATING ACTIVITIES Net loss $(27,412,317) $(18,761,627) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 5,756,309 1,115,000 Stock compensation expense 2,506,119 293,052 Interest related to warrants and certain fees 2,075,913 0 Changes in working capital items: Accounts receivable (10,662,878) (8,250,115) Prepaid expenses and other current assets (1,567,589) (2,044,714) Other assets (47,959) (2,646,220) Accounts payable 8,543,081 10,108,125 Accrued salaries and related taxes 1,285 1,410,027 ------------- ------------- Net cash used by operating activities (20,808,036) (18,776,472) INVESTING ACTIVITIES Additions to equipment (11,745,132) (5,865,043) ------------- ------------- Net cash used in investing activities (11,745,132) (5,865,043) FINANCING ACTIVITIES Proceeds from notes payable 42,098,357 21,850,000 Proceeds from the issuance of redeemable preferred stock 0 11,862,113 Repayments of note payable (26,839,164) (9,077,071) Repayments under capital leases (2,504,179) (82,844) Repayment of amount due from stockholders 19,045 0 Proceeds from the issuance of common stock 62,096,789 88,861 ------------- ------------- Net cash provided by financing activities 74,870,848 24,641,059 ------------- ------------- Increase (decrease) in cash and cash equivalents 42,317,680 (456) Cash at beginning of year 2,254,258 2,167,930 ------------- ------------- Cash and cash equivalents at end of period $44,571,938 $2,167,474 ============= ============= NONCASH INVESTING AND FINANCING ACTIVITIES Network and related equipment acquired under capital leases $3,155,402 0 Network and related equipment acquired under notes payable $7,215,611 0 Common stock purchase warrants issued in connection with notes payable and Series A Redeemable Convertible Preferred Stock 0 $2,436,623
The accompanying notes are an integral part of these financial statements. 6 CTC COMMUNICATIONS GROUP, INC. NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying condensed unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2000. These statements should be read in conjunction with the financial statements and related notes included in the our Annual Report on Form 10-K/A for the fiscal year ended March 31, 1999. Restatement of Financial Statements In our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, we reported a loss before taxes of $11,810,600 and recorded a tax benefit of $827,000 for a net loss of $10,983,600 or $1.13 per share. For the six months ended September 30, 1998, we reported a loss before taxes of $20,338,600 and recorded a tax benefit of $1,424,000 for a net loss of $18,914,600 or $1.92 per share. We subsequently determined, in connection with a public offering of common stock (see Note 4) that the legal costs accrued in fiscal year 1998 related to the Bell Atlantic litigation should have been recorded as incurred throughout fiscal year 1999. Accordingly, an adjustment was made to fiscal years 1999 and 1998. The depreciation method on certain assets was also adjusted for the fiscal year 1999. Accordingly, the effect of these adjustments on the quarter ended September 30, 1998 have been included in the September 30, 1998 statement of operations decreasing the net loss by $251,000 to $10,732,600 or $1.10 per share. The effect of these adjustments on the six months ended September 30, 1998 have been included in the accompanying September 30, 1998 statement of operations decreasing the net loss by $153,000 to $18,761,600 or $1.90 per share. The total related to the restatement adjustments resulted in an increase to the stockholders' equity of $2,345,500 as of March 31, 1999. NOTE 2: COMMITMENTS AND CONTINGENCIES We are a party to suits arising in the normal course of business which our management believes are not material individually or in the aggregate. 7 NOTE 3. NET INCOME PER SHARE The following tables set forth the computation of basic and diluted net loss per share:
Three Months Ended September 30, 1999 1998 ---------------------------- Numerator: Net loss $(12,293,504) $(10,732,627) Accretion to redemption value on redeemable preferred stock (362,380) (270,000) Numerator for basic net loss per share and diluted net ---------------------------- loss per share $(12,655,884) $(11,002,627) ============================ Denominator: Denominator for basic net loss per share-weighted average shares 13,756,533 10,002,370 Effect of dilutive securities: Employee stock options 0 0 Denominator for diluted net ---------------------------- loss per share-weighted-average shares 13,756,533 10,002,370 ============================ Basic and diluted net loss per share $(0.92) $(1.10) ============================ Six Months Ended September 30, 1999 1998 ---------------------------- Numerator: Net loss $(27,412,317) $(18,761,627) Accretion to redemption value on redeemable preferred stock (689,384) (270,000) Numerator for basic net loss per share and diluted net --------------------------- loss per share $(28,101,701) $(19,031,627) ============================ Denominator: Denominator for basic net loss per share-weighted average shares 12,041,250 9,993,281 Effect of dilutive securities: Employee stock options 0 0 Denominator for diluted net --------------------------- loss per share-weighted-average shares 12,041,250 9,993,281 ============================ Basic and diluted net loss per share $(2.33) (1.90) ============================
8 NOTE 4 COMMON STOCK ISSUANCE On July 20, 1999, we completed a public offering of 3,500,000 shares of our common stock at $17.25 per share. Of the total shares, 3,200,000 shares were sold for our own account and 300,000 shares were sold for the accounts of selling shareholders. On August 10, 1999, the underwriters exercised their over-allotment option to purchase an additional 525,000 shares of common stock. After underwriting discounts and estimated expenses related to the offering, we realized net proceeds from these transactions of $61,800,000. We used $6.2 million of the net proceeds to repay the principal and interest due under the $30 million credit facility provided by Toronto Dominion (Texas), Inc. The Toronto Dominion credit facility was terminated following repayment of the outstanding balance due. NOTE 5 REORGANIZATION On September 16, 1999, the shareholders of CTC Communications Corp. ("CTC Communications") at the 1999 Annual Meeting of Stockholders approved the reorganization of the Company into a Delaware holding company structure. The reorganization was implemented in accordance with Section 252 of the Delaware General Corporation Law and Section 79 of Chapter 156B of the Massachusetts General Corporation Law by the merger ("Merger") of CTC-Newco, Inc., a Delaware corporation and newly-formed subsidiary of CTC Communications Group, Inc., a Delaware corporation ("CTC Group" or the "Registrant"), with and into CTC Communications, the surviving corporation. As a result of the Merger, CTC Group is the sole shareholder of CTC Communications. In the Merger, which was consummated on September 30, 1999, each share of Common Stock, $.01 par value, and each share of Series A Convertible Preferred Stock, $1.00 par value, was converted into one share of Common Stock, $.01 par value and one share of Series A Convertible Preferred Stock, $1.00 par value, of CTC Group. All of the shares of common stock issuable under CTC Communications' employee benefit plans will be shares of common stock of CTC Group, not CTC Communications. In approving the Reorganization, the shareholders of CTC Communications approved the adoption of all of the employee benefit plans by CTC Group. At the effective date of the Merger, CTC Communications issued 100 shares of its common stock, to CTC Group, which pledged the shares to Goldman Sachs Credit Partners and Fleet National Bank under the terms of the three- year $75 million senior secured credit facility entered into by CTC Communications with the pledgees. 9 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this Report. OVERVIEW We are a rapidly growing single-source provider of voice and data telecommunications services, or integrated communications provider, with 15 years of marketing, sales and service experience. We target predominantly medium and larger-sized business customers who seek greater capacity for voice and data traffic, a single provider for their telecommunications requirements and improved levels of service. We have a large, experienced sales force consisting of 166 sales people supported by 108 network coordinators. Our sales force is located close to our customers in 28 sales branches primarily in New England and New York State. We are currently deploying our own state-of-the-art network facilities to carry telecommunications traffic. Our network uses packet-switching, a technology which transmits data in discrete packages. It also uses internet protocol, which is a method that allows computers with different architectures and operating systems to communicate over the internet, and asynchronous transfer mode, or ATM, architecture, which allows the network to transmit multiple types of media, such as voice, data and video. The first phase of our network includes 22 Cisco Systems, or Cisco, advanced data switches and two network operations centers. We are interconnecting our facilities with leased transmission capacity over fiber optic cable strands from Level 3 Communications and NorthEast Optic Network. Cisco has reviewed and approved our network design and has designated our network as a Cisco Powered Network. In May 1999, we began the testing of our network with some of our customers. During September, we began providing commercial service to a limited number of customers on our network. We became an integrated communications provider, or ICP, in January 1998. Prior to that, we were the largest independent sales agent for NYNEX Corp. (now Bell Atlantic), based on agency revenues. At the end of 1997, before leaving the Bell Atlantic agency program, we were managing relationships for approximately 7,000 customers, representing over 280,000 local access lines and over $200 million in annual local telecommunications spending. As of September 30, 1999, after only 21 months as an integrated communications provider, we were serving over 11,000 customers and had 226,379 access lines and equivalent circuits, or ALEs. ALEs are the total number of voice circuits and equivalent data circuits we have in service. Voice circuits are the actual number of voice circuits purchased by our customers, while equivalent data circuits represent the data transmission capacity purchased by our customers divided by 64 kilobits per second, which is the capacity necessary to carry one voice circuit. 10 Our Services We offer the following services: Local Telephone Services. We offer connections between customers' telecommunications equipment and the local telephone network, which we currently lease from incumbent local exchange carriers. For large customers or customers with specific requirements, we integrate their private systems with analog or digital connections. We also provide all associated call processing features as well as continuously connected private lines for both voice and data applications. Long Distance Telephone Services. We offer a full range of domestic and international long distance services, including "1+" outbound calling, inbound toll free service, standard and customized calling plans. We also offer related services such as calling cards, operator assistance and conference calling. High Speed Data Services. We offer a wide array of both continuously connected and switched high speed digital data services. Switched or high speed digital data services include ISDN, frame relay and ATM products. Internet Services. We offer high speed, continuously connected internet access and services through various digital connections. In addition, we offer switched digital access to the internet via ISDN. We provide the necessary communications hardware, configuration support and other support services on a 24-hour, 7-day a week basis. Wholesale Services to Internet Service Providers. We provide a full array of local services to internet service providers including telephone numbers and switched and continuously connected access to the internet. Future Service Offerings. Following deployment of the network, we may offer the following additional services: hosting of web-sites, electronic commerce over the internet, data security and storage services, systems integration, consulting and network monitoring services, customized private networks and other data, and voice and sophisticated network products. Prior to deploying the Integrated Communications Network, or ICN, we are building a base of installed access lines through reselling the network services of other telecommunications carriers to targeted customers who can later be transitioned to our network, or "on-net.". We bill our customers for local and long distance usage based on the type of local service utilized, the number, time and duration of calls, the geographic location of the terminating phone numbers and the applicable rate plan in effect at the time of the call. 11 During the period in which we resell the services of other telecommunications carriers prior to deploying our ICN, cost of services includes the cost of local and long distance services charged by carriers for recurring charges, per minute usage charges and feature charges, as well as the cost of fixed facilities for dedicated services and special regional calling plans. Following the deployment of the ICN, the cost of services for "on-net" customers will include the leasing costs associated with transmission, co-location and access facilities, depreciation charges and costs associated with our switching equipment. We have experienced significant growth in the past and, depending on the extent of our future growth, we may experience a significant strain on management, personnel and information systems. To accommodate this growth, we intend, subject to the availability of adequate financing, to continue to implement and improve operational, financial and management information systems. Since implementing our ICP strategy, we have expanded our staff to include two additional senior executives and 130 additional employees. We are also expanding our information systems to provide improved recordkeeping for customer information and management of uncollectible accounts and fraud control. RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998. Total revenues for the second fiscal quarter were $35,109,000, as compared to $14,516,000 for the same period of the preceding fiscal year, or an increase of 142%. Total revenues for the six months ended September 30, 1999 were $66,156,000, as compared to $27,352,000 for the same period of the preceding fiscal year. The September quarter revenues also represented an increase of 13% over the June 1999 quarter revenues of $31,047,000. Revenues for local, Internet access and data services increased a combined 19% on a sequential quarter basis due primarily to the addition of new customer relationships. A common basis for measurement of an ICP's progress is the growth in ALEs. During the quarter ended September 30, 1999, we provisioned 41,548 net access line equivalents, bringing the total lines in service to 226,379. Net lines provisioned during the quarter ended September 30, 1999 represented a 22% sequential increase over net lines provisioned during the quarter ended June 30, 1999. We experienced the strongest growth in data ALEs with an approximately 19% sequential increase from the quarter ended June 30, 1999, which brings data ALEs in service to 46,315, or 21% of total ALEs as of September 30, 1999. Costs of telecommunications revenues, excluding depreciation, for the quarter ended September 30, 1999 were $27,398,000, as compared to $12,383,000 for the same period of the preceding fiscal year, and for the six months ended September 30, 1999, were $53,487,000, as compared to $23,997,000 for the same period of the preceding fiscal year. As a percentage of telecommunications revenues, cost of telecommunications revenues was 78% for the quarter ended September 30,1999, as compared to 84% for the quarter ended June 30, 1999. The decrease in the percentage of the cost of the telecommunications revenues primarily reflects lower rates obtained from our major suppliers, Bell Atlantic and Frontier Communications. 12 Selling expense consists of the costs of providing sales and other support services for customers including salaries, commissions and bonuses to salesforce personnel. General and administrative expense consists of the costs of the billing and information systems and personnel required to support our operations and growth. For the quarter ended September 30, 1999, selling, general and administrative expenses (SG&A) increased 5% to $12,676,000 from $12,043,000 for the same period of the preceding fiscal year, and for the six months ended September 30, 1999 increased 27% to $26,918,000 from $21,138,000 for the same period of the preceding fiscal year. This increase was due to the opening of additional branch sales offices and the associated increased number of sales and service employees hired in connection with the transition to the ICP platform. As of September 30, 1999, we employed 436 people including 166 account executives and 108 network coordinators in 28 branch locations throughout New England and New York. In addition, SG&A expenses increased due to a $2.2 million non-cash compensation expense recognized in the first quarter in conjunction with the extension of certain stock options to a former employee. Depreciation and amortization expense increased to $3,653,000 in the quarter ended September 30, 1999 from $610,000 for the quarter ended September 30, 1998, and for the six months ended September 30, 1999, increased to $5,756,000 from $1,115,000 for the same period of the preceding fiscal year. These increases are attributable to the increases in capital expenditures primarily related to the ICN. Interest expense increased to $4,221,000 and $7,992,000 for the three and six months ended September 30, 1999, respectively. The increases are due to increased borrowings to fund our losses and the investment in the ICN, the fees associated with the credit facility and vendor financing facility, and the amortization of the interest expense associated with the warrants and financing fees issued to our lenders under the credit facility. As a result of the above factors, the net losses were $12,294,000 for the three months ended September 30, 1999 and $27,412,000 for the six months ended September 30, 1999. Liquidity and Capital Resources Working capital at September 30, 1999 was $38.6 million compared to a working capital deficit of $6.7 million at March 31, 1999, an increase of $45.3 million. Cash balances at September 30, 1999 and March 31, 1999 totaled $44,572,000 and $2,254,000, respectively. The increase in working capital is due primarily to the net proceeds realized as a result of the July 20, 1999 public offering in which we sold 3,726,000 shares, including 525,000 shares issued upon exercise of the underwriters' over-allotment option. After underwriting discounts and estimated expenses related to the offering, we realized net proceeds of $61,800,000, of which $6.2 million was used to repay the principal and interest due under the $30 million credit facility provided by Toronto Dominion (Texas), Inc. in March 1999. The Toronto Dominion credit facility was terminated following repayment of the outstanding balance. 13 We will continue to use the balance of the proceeds realized from the public offering for general corporate purposes including, capital expenditures, working capital and operating losses associated with the continued deployment of our network, further penetration of our existing region and our expansion into new markets throughout the Boston - Washington, D.C. corridor, as well as the reduction of the principal balance of our Goldman Sachs/Fleet Bank credit facility. Until utilized, the net proceeds from the offering are invested in short-term, interest- bearing instruments and other investment-grade securities. In April 1998, we received $12.0 million from a private placement of our Series A redeemable convertible preferred stock and warrants to Spectrum Equity Investors II, L.P. We also received a commitment on June 30, 1998 from Spectrum to purchase, at our option, an additional $5.0 million of preferred stock on the same terms and conditions as the Series A preferred stock. This option was not exercised and expired on June 30, 1999. In September 1998, we entered into a three-year $75 million senior secured credit facility with Goldman Sachs Credit Partners and Fleet National Bank. As of September 30, 1999, we had availability under the credit facility of $300,000 and had borrowed approximately $52.2 million. As of September 30, 1999, we were not in compliance with the minimum revenue financial covenant under the credit facility and have entered into an amendment to the loan and security agreement covering such credit facility under the terms of which the lenders waived non-compliance. We also agreed to reduce the outstanding balance of our loan by $15 million, pay an amendment fee of $187,500 to be charged against our loan account and enter into a security agreement to perfect the lenders' security interest in our depository accounts. We are working with Goldman Sachs Credit Partners and Fleet National Bank to further amend our loan and security agreement to better match our current business model. Since September 30, 1998, we have entered into various lease and vendor financing agreements which provide for the acquisition of up to approximately $18.7 million of equipment and software. As of September 30, 1999, the aggregate amount borrowed under these agreements was approximately $16.5 million. In October 1998, we obtained a $25 million vendor financing facility from Cisco Capital. As of September 30, 1999, we had borrowed $22.6 million. As we continue to deploy our network, further penetrate our existing region and expand into new markets throughout the Boston--Washington, D.C. corridor, we will need significant additional capital. We believe that the net proceeds of the public offering, together with cash on hand, the proceeds of our bank, lease and vendor financing arrangements and the amounts we expect to be available under our credit and vendor facilities will be sufficient to fund our capital requirements for at least the next 15 months. During this period we will seek to raise additional capital through the issuance of debt and possibly equity securities, the timing of which will depend on market conditions, and which could occur in the near future. We may also seek to raise additional capital through further vendor financings, equipment lease financings and bank loans. 14 We cannot assure you that additional financing will be available on terms acceptable to us when we need it. The agreements governing our existing indebtedness limit our ability to obtain debt financing. If we are unable to obtain financing when we need it, we may postpone or abandon our development and expansion plans. That could have a material adverse effect on our business, results of operations and financial condition. The actual timing and amount of our capital requirements may be materially affected by various factors, including the timing and actual cost of the network, the timing and cost of our expansion into new markets, the extent of competition and pricing of telecommunications services by others in our markets, the demand by customers for our services, technological change and potential acquisitions. Year 2000 Compliance Our State of Readiness We have evaluated the effect of the year 2000 problem on our information systems. We are implementing plans to permit our systems and applications to effectively process information in order to support ongoing operations in the year 2000 and beyond. We believe our information technology systems and non- information systems will be year 2000 compliant by the end of 1999. In connection with the deployment of our new network, we have designed a new database architecture for our computer systems which we expect will be year 2000 compliant. The installation of our network and related network control software was completed in the summer of 1999. We expect installation of phase one of our new information systems related to our new network to be completed in the fourth quarter of 1999 and the second phase to be completed by May 2000. We began testing our network, and these new systems when we first began installation, and we expect testing to continue. We are also upgrading our current information systems to be year 2000 compliant in the event we have not completed installing our new systems by the end of 1999. Approximately 99% of our existing information systems are now year 2000 compliant. We expect to complete Year 2000 verification and validation by December 1, 1999. While we expect that all significant information systems will be year 2000 compliant in the fourth quarter of 1999, we cannot assure you that all year 2000 problems in the new system will be identified or that the necessary corrective actions will be completed in a timely manner. We expect our non-information systems to be year 2000 compliant in the fourth quarter of 1999. We have requested certification from our significant vendors and suppliers demonstrating their year 2000 compliance. Approximately 99% of our vendors and suppliers have delivered certifications of year 2000 compliance. We will continue to seek certification from the other ventors. However, we cannot assure you that such certifications will be forthcoming. Generally these certifications state that our vendors and suppliers are year 2000 compliant but do not require any affirmative action if these certifications are inaccurate. We intend to continue to identify critical vendors and suppliers and communicate with them about their plans and progress in addressing year 15 2000 problems. We cannot assure you that the systems of these vendors and suppliers will be timely converted. We also cannot assure you that any failure of their systems to be year 2000 compliant will not adversely affect our operations. Our Costs of Year 2000 Remediation We have incurred approximately $670,000 in costs to date related specifically to year 2000 issues and expect to incur an additional approximately $230,000 through the end of 1999. However, we cannot assure you that the costs associated with year 2000 problems will not be greater than we anticipate. Our Year 2000 Risk Based on the efforts described above, we currently believe that our systems will be year 2000 compliant in a timely manner. We have completed the process of identifying year 2000 issues in our information systems and non-information systems and expect to complete any remediation efforts in the fourth quarter of 1999. We cannot assure you that our operations and financial results will not be affected by year 2000 problems. We may experience interruptions in service and not receive billing information in a timely manner if either our systems or those of our vendors or suppliers are not year 2000 compliant in a timely manner. It is possible that we could experience other serious year 2000 difficulties that we cannot presently predict. Our Contingency Plans We have begun upgrading our current information systems as part of our contingency plans in case our new systems are not installed before the end of 1999. In addition, we intend to seek to identify alternate service providers in case our current providers are unable to adequately deliver services in the year 2000. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to financial risk, including changes in interest rates, relates primarily to outstanding debt obligations. We utilize our senior secured credit facility to fund a substantial portion of our capital requirements. This facility bears interest at a variable interest rate, which is subject to market changes. We have not entered into any interest rate swap agreements, or other instruments to minimize our exposure to interest rate increases but will investigate such options should changes in market conditions occur. We have not had any derivative instruments in the past and do not plan to in the future, other than possibly to reduce our interest rate exposure as described above. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding debt obligations. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in interest rates on market sensitive instruments. We compare the market values for interest risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market interest rates in effect at September 30, 1999. We compared the market values resulting from these computations with the market values of these financial instruments September 30, 1999. The differences in the comparison are the hypothetical gains or losses associated with each type of risk. As a result of our analysis we determined at September 30, 1999 a 10% decrease in the levels of interest rates with all other variables held constant would result in an increase in the fair value of our fixed rate debt obligations by approximately $2.1 million. A 10% increase in the levels of interest rates with all other variables held constant would result in a decrease in the fair value of our outstanding fixed rate debt obligations by approximately $2.5 million. With respect to our variable rate debt obligations a 10% increase in interest rates would result in increased interest expense and cash expenditures for interest of approximately $162,000 in Q2 fiscal 2000. A 10% decrease in interest rates would result in reduced interest expense and cash expenditures of approximately $162,000 in Q2 fiscal 2000. 17 Part II Item 2. Changes in Securities (c) During the quarter ended September 30, 1999, we issued a total of 69,261 shares of common stock for an aggregate consideration of $84,446 pursuant to the exercise of stock options by 17 individuals. The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. The recipients of the securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were attached to the shares certificates and stop transfer orders given to our transfer agent. All recipients had adequate access to information regarding our company. Item 4 - Submission of Matters to a Vote of Security Holders (a) The 1999 Annual Meeting of Stockholders of the Company was held on September 16, 1999. (b) Not applicable. (c) Each nominee for Class II director received the following votes:**
Name Votes For Abstentions - ----------------------------------------------------------------- Richard J. Santagati 13,422,852 288,959 J. Richard Murphy 13,422,852 288,959 Katherine Dietze Courage 13,423,352 288,459 The following table sets forth the other matters voted upon and the respective number of votes cast for, against, number of abstentions and broker nonvotes. Matter Votes Votes Delivered Voted Upon For Against Abstentions Non Voted - --------------------------------------------------------------------------------- To approve the Amendment to** the 1998 Incentive Plan 8,510,699 66,332 2,036,827 3,117,852 To approve the 1999 Equity** Incentive Plan for Non-Employee Directors 8,605,327 27,578 1,980,954 3,117,852 To approve the plan of reorganization of the company into a Delaware holding company structure Common Stock votes 8,765,504 21,368 1,578,229 2,804,390 Preferred Stock votes 1,623,977 0 0 6,315 ---------- ------ --------- --------- Total votes 10,389,481 21,368 1,578,229 2,810,705 **The votes with respect to the nominees for directors, the Amendment to the 1998 Incentive Plan and the 1999 Equity Incentive Plan for Non-Employee Directors represent the common and preferred shares voting together as a single class. The reorganization proposal required an affirmative 2/3 vote of the common and preferred shares voting together as a single class and an affirmative 2/3 vote of the preferred shares voting separately.
(d) Not applicable. 18 Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 10.1 Amendment No. 1 to Loan and Security Agreement dated as of September 30, 1999 among CTC Communications Corp., Fleet National Bank and Goldman Sachs Credit Partners L.P 27 Financial Data Schedule 99.1 Risk Factors (b) Reports on Form 8-K CTC Communications Group, Inc. did not file any reports on Form 8-K during the quarter ended September 30, 1999. CTC Communications Corp. filed the following reports on Form 8-K during the quarter ended September 30, 1999: Date Items Reported ------- ----------------------------------------------------------- 1. July 9, 1999 Announcement of our resale agreement with Bell Atlantic. 2. July 19, 1999 Announcement of the implementation of an electronic data interchange with Bell Atlantic. 3. July 20, 1999 Announcement that our July 1999 public offering has been successfully completed. 4. August 10, 1999 Announcement that the over-allotment option granted in our July 1999 public offering had been exercised by the underwriters. 5. August 26, 1999 Announcement of our three year alliance agreement with Cisco Systems, Inc. 6. September 7, 1999 Announcement of our ability to provide converged voice, data and internet services. 7. September 29, 1999 Announcements of (1) our agreement with Accelerated Networks and (2) that our Cisco Powered Network (tm) is proceeding at a record pace. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. CTC COMMUNICATIONS GROUP, INC. Date: November 15, 1999 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: November 15, 1999 /S/ JOHN D. PITTENGER ----------------------------- John D. Pittenger Executive Vice President, and Chief Financial Officer EX-10.1 2 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT Exhibit 10.1 AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of September 30, 1999, by and among CTC COMMUNICATIONS CORP., a Massachusetts corporation ("Borrower"), the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), FLEET NATIONAL BANK, a national banking association, as agent for the Lenders ("Administrative Agent"), and GOLDMAN SACHS CREDIT PARTNERS L.P., a Bermuda limited partnership, as an arrangement, structuring, and syndication agent for the Lenders (in such capacity, "Arrangement, Structuring & Syndication Agent"; together with the Lenders and Administrative Agent, individually and collectively, the "Lender Group") with reference to the following facts: WHEREAS, Borrower and the Lender Group are parties to that certain Loan and Security Agreement, dated as of September 1, 1998 (as amended by that certain Amendment of Loan Documents, dated as of September 9, 1998, and as otherwise amended, restated, or modified from time to time, the "Agreement"); WHEREAS, Borrower has advised the Lender Group that Borrower will not be in compliance with the Minimum Revenues financial covenant contained in Section 7.20(a) of the Agreement and Borrower has requested that the Lender Group waive any Event of Default that may have been occasioned solely by Borrower's non-compliance with such financial covenant; WHEREAS, Borrower and the Lender Group desire to amend the Agreement, in accordance with the amendment provisions of Section 16 thereof, as set forth herein; and WHEREAS Capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Agreement, as amended hereby. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and the Lender Group hereby agree as follows: 1. Amendments to Agreement. a. Section 1.1 of the Agreement hereby is amended to modify or add, as the case may be, the following definitions: "First Amendment" means that certain Amendment Number One to Loan and Security Agreement, dated as of September 30, 1999, among Borrower and the Lender Group. "First Amendment Effective Date" means the date on which each of the conditions precedent set forth in Section 3 of the First Amendment have been satisfied. "Overadvance" has the meaning set forth in Section 2.7. b. Clause (y) of the definition of "Borrowing Base" set forth in Section 2.1(a) of the Agreement hereby is amended and restated in its entirety to read as follows: (y) (1) from and after the Closing Date to the First Amendment Effective Date, $15,000,000, (2) from and after the First Amendment Effective Date to the date on which Borrower delivers to Administrative Agent, pursuant to Section 6.3(a), Borrower's financial statements for December 1999 and the fiscal quarter ending December 31, 1999 and the certificate of Borrower's treasurer or chief financial officer relative thereto, $0, and (3) thereafter, (A) if no Default or Event of Default shall have occurred and be continuing as of December 31, 1999 and the date on which Borrower delivers such financial statements to Administrative Agent, $15,000,000, or (B) otherwise, $0, minus 2. Representations, Warranties, and Covenants. a. Borrower hereby represents and warrants to the Lender Group that: (i) the execution, delivery, and performance of this Amendment and of the Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (ii) this Amendment and the Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms, and (c) except as set forth herein, no Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof; and (iii) the representations and warranties in Agreement as amended by this Amendment, and the other Loan Documents are true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date). b. Borrower hereby covenants and agrees that: (i) Borrower shall, immediately upon the effectiveness of this Amendment, pay to Administrative Agent the amount of any Overadvance that will result upon the effectiveness of this Amendment. 3. Waiver of Event of Default. Subject to the satisfaction of the conditions set forth in Section 4, and anything in the Agreement or the other Loan Documents to the contrary notwithstanding, the Lender Group hereby waives any Event of Default that may have been occasioned solely by Borrower's non-compliance with Section 7.20(a) of the Agreement for Borrower's fiscal quarter ending as of September 30, 1999. 4. Conditions Precedent to Amendment. The satisfaction of each of the following, on or before November 15, 1999, unless waived or deferred by the Required Lenders in their sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment: a. Administrative Agent and Arrangement, Structuring & Syndication Agent shall have received this Amendment, duly executed by all parties hereto, and the same shall be in full force and effect. b. Borrower shall have paid to Administrative Agent for the ratable benefit of the Lender Group a fee (the "Amendment Fee") in the amount of $187,500, which Amendment Fee shall be charged against Borrower's Loan Account, and Borrower hereby directs Administrative Agent to so charge the Amendment Fee against Borrower's Loan Account; and c. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to each Lender. 5. Conditions Subsequent. As a condition subsequent to the effectiveness of this Amendment, Borrower shall perform the following (the failure by Borrower to so perform constituting an Event of Default): a. Within 15 days after the effectiveness of this Amendment, Borrower shall enter into a blocked account agreement with Administrative Agent and Fleet National Bank, a national banking association, in form and substance satisfactory to Agent and Arrangement, Structuring & Syndication Agent, relative to the depository account of Borrower into which the cash proceeds from the recently completed public offering of Borrower's common Stock has been deposited. 6. Further Assurances. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to each Lender, and take all actions as the Lender Group reasonably may request from time to time fully to consummate the transactions contemplated under this Amendment and the Agreement, as amended by this Amendment. 7. Effect on Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment of any right, power, or remedy of the Lender Group or Administrative Agent on behalf thereof under the Agreement, as in effect prior to the date hereof. 8. Choice of Law and Venue; Jury Trial Waiver. THE VALIDITY OF THIS AMENDMENT, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE PARTIES HERETO EACH AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AMENDMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK. THE PARTIES HERETO EACH WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION. THE PARTIES HERETO EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AMENDMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. THE PARTIES HERETO EACH REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 9. Miscellaneous. a. Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. b. Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. c. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. [Remainder of page left intentionally blank.] IN WITNESS WHEREOF, the parties have caused this Amendment Number One to Loan and Security Agreement to be executed and delivered as of the date first written above. CTC COMMUNICATIONS CORP., a Massachusetts corporation By /s/ [Authorized Signatory] Title: [Authorized Signatory] FLEET NATIONAL BANK, a national banking association, as Administrative Agent, and as a Lender By /s/ [Authorized Signatory] Title: [Authorized Signatory] GOLDMAN SACHS CREDIT PARTNERS L.P., a Bermuda limited partnership, as Arrangement, Structuring & Syndication Agent and as a Lender By /s/ [Authorized Signatory] Title: Authorized Signatory EX-27 3 FDS FOR Q.E. 09/30/99
5 1,000 6-MOS MAR-31-2000 SEP-30-1999 44,572 0 32,264 2,400 0 81,894 71,534 16,372 139,227 43,250 0 0 13,361 145 (769) 139,227 66,156 66,267 53,487 86,162 0 0 7,992 (27,412) 0 (27,412) 0 0 0 (27,412) (2.33) (2.33)
EX-99.1 4 RISK FACTORS EXHIBIT 99.1 RISK FACTORS From time to time we have made, 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 terminated our 13-year agency relationship with Bell Atlantic in December 1998 and we no longer receive agency revenues. We only began offering local services under our own brand name in January 1998 and have only begun testing our network online with customers in May of 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 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. We have engaged a network services integrator to design, engineer and manage the build out of our network in our existing markets. If the network integrator is not able to perform these functions, we may experience delays or additional costs in providing services and building the network. 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. We are still deploying the initial phase of our network. 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, once the network is deployed, we may encounter unanticipated difficulties in operating and maintaining it. If we do not implement our network on time and in an 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, 1999, we had approximately $88.8 million of total indebtedness outstanding. We expect to seek substantial additional 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 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 WILL NEED TO REFINANCE OUR EXISTING INDEBTEDNESS WHEN DUE, AND WE MAY BE UNABLE TO DO SO. We do not expect to generate sufficient cash flow from operations to repay our existing credit and vendor facilities. We will need to refinance this indebtedness when it comes due. We cannot assure you that we will be able to refinance any of our indebtedness on reasonable terms, or at all. If we are unable to refinance all or some of our indebtedness, we may need to sell assets, delay capital expenditures or sell additional capital stock. We cannot assure you that we will be able to do so. 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 fund our business plan. We have satisfied part of this need by our recent public offering of common stock and plan to seek additional financing as soon as practicable. 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 development and 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 almost entirely 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. These services are subject to 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 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. OUR SYSTEMS AND NETWORK, AND THE SYSTEMS OF OUR SUPPLIERS, MAY NOT PROPERLY PROCESS DATE INFORMATION AFTER DECEMBER 31, 1999, WHICH COULD INCREASE OUR COSTS, DISRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR RELATIONS WITH OUR CUSTOMERS. As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance," failure of our systems and network to adequately process year 2000 information could cause miscalculations or system failures that could affect our operations. We cannot assure you that we have successfully identified all Year 2000 problems with our information systems and network. We also cannot assure you that we will be able to implement any necessary corrective actions in a timely manner. If we or the companies that provide us services or with whom our systems interconnect fail to successfully identify and remediate Year 2000 problems, our service and operations may be disrupted. These problems could increase our costs and adversely affect our relations with our customers and business. 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 36% of the voting power of our outstanding capital stock. Robert J. Fabbricatore, our Chairman and Chief Executive Officer, controls approximately 18% of our voting power. Therefore, the officers and directors are able to significantly influence any matter requiring shareholder approval. In addition, Mr. Fabbricatore and some of his affiliates have agreed to vote shares they control to elect to our board up to two persons designated by the holders of a majority of our Series A preferred stock. 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-----