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, 1997.
Commission File Number 0-13627.
CTC COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2731202
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
360 Second Avenue, Waltham, Massachusetts 02154
(Address of principal executive offices) (Zip Code)
(617) 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 October 29, 1997, 9,902,213 shares of Common Stock were
outstanding.
CTC COMMUNICATIONS CORP.
FORM 10-Q
INDEX
Part I FINANCIAL STATEMENTS PAGE NO.
Item 1. Financial Statements
Condensed Balance Sheets
as of September 30 and March 31, 1997 3
Condensed Statements of Income
Three Months Ended September 30, 1997 and 1996 4
Condensed Statements of Income
Six Months Ended September 30, 1997 and 1996 5
Condensed Statements of Cash Flows
Six Months Ended September 30, 1997 and 1996 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk Inapplicable
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 11
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
(10.28) Fleet Revolving and Term Loan Agreement
(11) Statements Regarding Computation
of Per Share Earnings
Three Months and Six Months ended
September 30, 1996 and 1995
The Company did not file any reports on Form 8-K during the
three months ended September 30, 1997.
2
CTC COMMUNICATIONS CORP.
CONDENSED BALANCE SHEETS
September 30, March 31,
1997 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,372,594 $ 6,405,670
Accounts receivable, net 13,321,418 10,904,820
Prepaid expenses and other current assets 984,261 493,553
------------- -------------
Total Current Assets 18,678,273 17,804,043
Furniture, Fixtures and Equipment 8,747,072 7,268,372
Less accumulated depreciation (5,967,650) (5,565,650)
------------- -------------
Total Equipment 2,779,422 1,702,722
Deferred tax asset 566,000 566,000
Other assets 111,285 113,685
------------- -------------
Total Assets $ 22,134,980 $ 20,186,450
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,944,980 $ 3,238,416
Accrued income taxes 0 225,948
Accrued salaries and related taxes 2,235,656 2,423,825
Deferred revenue 0 6,588
------------- -------------
Total Current Liabilities 5,180,636 5,894,777
Stockholders' equity:
Common Stock 98,946 96,294
Additional paid in capital 4,800,473 4,758,454
Retained earnings 12,190,750 9,572,750
------------- -------------
17,090,169 14,427,498
Amounts due from stockholders (135,825) (135,825)
------------- -------------
Total Stockholders' Equity 16,954,344 14,291,673
------------- -------------
Total Liabilities and
Stockholders' Equity $ 22,134,980 $ 20,186,450
============= =============
The accompanying notes are an integral part of these financial statements.
3
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF INCOME
Three Months Ended
September 30, September 30,
1997 1996
------------- -------------
Network service revenues:
Commissions $ 8,356,413 $ 6,827,449
Resale 3,488,684 2,789,619
------------- -------------
11,845,097 9,617,068
Costs and expenses
Cost of resale revenue 2,712,249 2,153,225
Selling, general and administrative expenses 7,053,701 5,719,936
------------- -------------
9,765,950 7,873,161
------------- -------------
Income from operations 2,079,147 1,743,907
Other
Interest income 39,352 43,878
Interest expense (5,772) (5,781)
Other 1,273 5,824
------------- -------------
34,853 43,921
------------- -------------
Income before income taxes 2,114,000 1,787,828
Provision for income taxes 870,000 739,000
------------- -------------
Net income $ 1,244,000 $ 1,048,828
============= =============
Net income per common share
Primary $ 0.12 $ 0.10
============= =============
Fully diluted $ 0.12 $ 0.10
============= =============
Weighted average number of common shares
Primary 10,757,798 10,821,505
============= =============
Fully diluted 10,757,798 10,867,983
============= =============
The accompanying notes are an integral part of
these financial statements.
4
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF INCOME
Six Months Ended
September 30, September 30,
1997 1996
------------- -------------
Network service revenues:
Commissions $ 16,961,264 $ 13,575,690
Resale 6,542,785 5,048,838
------------- -------------
23,504,049 18,624,528
Costs and expenses
Cost of resale revenue 5,156,085 3,832,413
Selling, general and administrative expenses 13,987,801 11,057,406
------------- -------------
19,143,886 14,889,819
------------- -------------
Income from operations 4,360,163 3,734,709
Other
Interest income 96,938 85,506
Interest expense (10,227) (6,406)
Other 5,127 8,405
------------- -------------
91,838 87,505
------------- -------------
Income before income taxes 4,452,001 3,822,214
Provision for income taxes 1,834,000 1,579,200
------------- -------------
Net income $ 2,618,001 $ 2,243,014
============= =============
Net income per common share
Primary $ 0.24 $ 0.21
============= =============
Fully diluted $ 0.24 $ 0.21
============= =============
Weighted average number of common shares
Primary 10,734,281 10,901,267
============= =============
Fully diluted 10,785,228 10,924,506
============= =============
The accompanying notes are an integral part of
these financial statements.
5
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30, September 30,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net Income $ 2,618,001 $ 2,243,014
Adjustments to reconcile net income to
net cash (used) by operating activities:
Depreciation and amortization 402,000 327,000
Changes in noncash working capital items:
Accounts receivable (2,416,599) (3,031,559)
Inventories 0 5,997
Other current assets (490,708) (225,104)
Other assets 2,400 2,650
Accounts payable (293,436) 399,579
Accrued liabilities (188,169) 252,774
Accrued taxes (225,948) 0
Deferred revenue (6,588) 4,193
------------- -------------
Net cash (used) by operating activities (599,047) (21,456)
INVESTING ACTIVITIES
Additions to equipment (1,478,700) (333,301)
------------- -------------
Net cash used in investing activities (1,478,700) (333,301)
FINANCING ACTIVITIES
Proceeds from the issuance of common stock 44,671 46,838
------------- -------------
Net cash provided by financing activities 44,671 46,838
(Decrease) in cash (2,033,076) (307,919)
Cash at beginning of year 6,405,670 3,941,876
------------- -------------
Cash and cash equivalents at end of period $ 4,372,594 $ 3,633,957
============= =============
The accompanying notes are an integral part of
these financial statements.
6
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed 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, 1997 are not necessarily indicative of the results
that may be expected for the year ending March 31, 1998. These
statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended March 31, 1997.
NOTE 2: CASH DIVIDENDS
The Company has not paid cash dividends during the period
presented.
NOTE 3: COMMITMENTS AND CONTINGENCIES
The Company is party to suits arising in the normal course of
business which either individually or in the aggregate are not
material.
NOTE 4. COMMON STOCK TRANSACTIONS SUBSEQUENT TO JUNE 30, 1997
On July 8, 1997, the CTC Communications Corp. Employee Stock
Purchase Plan purchased 5,438 shares of Common Stock from the
Company at $6.4813 per share for the purchase period ended June 30,
1997.
Through October 29, 1997, 7,600 shares of Common Stock were
issued as a result of employees exercising outstanding stock
options.
NOTE 5. NET INCOME PER SHARE
Net income per share is computed based on the weighted average
number of shares of common stock and, if dilutive, common stock
equivalent shares outstanding during the period. Common stock
equivalent shares result from the assumed exercise of common stock
options using the treasury stock method.
7
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.
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER
30, 1997 AS COMPARED TO THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 1996.
Total revenues for the second quarter of Fiscal 1998 increased 23% to
$11,845,000 from $9,617,000 for the same period of the preceding year
(Fiscal 1997). Network service commission income, which represents
fees earned by the Company in its capacity as an agent for various
local and long distance telephone companies, increased 22% to
$8,356,000 for the three months ended September 30, 1997, from
$6,827,000 for the second quarter of Fiscal 1997. Network service
resale income, which represents the gross billings to mid-sized
commercial accounts on the Company's long distance, Internet access,
and frame relay network services, increased 25% to $3,489,000 from
$2,790,000 for the same period of the preceding fiscal year.
Total revenues for the six month period ended September 30, 1997
increased 26% to $23,504,000 from $18,625,000 for the same period of
Fiscal 1997. Network service commission income increased 25% to
$16,961,000 from $13,576,000 for the same period of the preceding
fiscal year. For the six month period, the Company recognized network
service resale income of $6,543,000 as compared to $5,049,000 for the
same period of Fiscal 1997, an increase of 30%.
These increases in revenue can be attributed to the development of
additional customer relationships in the middle market commercial
segment, as well as increased sales to the Company's existing
customers. In the network service commission income category,
increased unit sales under the NYNEX (now Bell Atlantic) contract
accounted for the growth in revenues. In the network service resale
income category, the Company commenced offering frame relay data
services, which along with overall network growth, accounted for the
increase.
COST OF RESALE REVENUES
Cost of resale revenues increased to $2,712,000 and $5,156,000 for the
three and six months respectively ended September 30, 1997, an
increase of 26% and 35% over the corresponding periods of the
previous fiscal year. As a percentage of resale revenues, cost of
resale revenues were 78% and 79% for the three and six month periods
ended September 30, 1997, as compared to 77% and 76% for the same
periods of the preceding fiscal year. The increase in costs as a
percentage of revenues can be attributed to adding products to the
platform in the current fiscal year that have somewhat lower margins.
8
Selling, general, and administrative expenses increased 23% to
$7,054,000 for the second quarter of Fiscal 1998 from $5,720,000 for
the second quarter of Fiscal 1997. For the six month period ended
September 30, 1997, selling, general and administrative expenses
increased 27% to $13,988,000, from $11,057,000 for the same period of
the preceding fiscal year.
These increases are primarily attributable to the increases in the
variable sales commission and bonus expenses incurred in connection
with the substantial increase in revenues. The Company incurred
additional expenses in expanding its sales force from 125 account
executives at June 30, 1997 to 138 at September 30, 1997. The Company
expects to incur increased costs in subsequent quarters as it
continues to expand its sales offices and account executives in an
effort to more completely service its Northeast Footprint.
Net income for the second quarter of Fiscal 1998 increased to
$1,244,000 from $1,049,000 for the same period of Fiscal 1997. For
the six months ended September 30, 1997, net income increased to
$2,618,000 from $2,243,000 for the same six month period of Fiscal
1997. The Company estimates that it will utilize an effective tax
rate of approximately 41% for the balance of Fiscal 1998.
The Company continues to make strategic capital investments. In the
quarter ended September 30, 1997, the Company expanded its information
system to provide for additional enhancements to link the Company's
system with its suppliers. During the second quarter, the Company
initiated the operation of a tandem switch in New York City to permit
the expansion of margins on existing long distance traffic and make
competitive international calling rates available to the Company's
customer base.
The three month period ended September 30, 1997 marks the seventeenth
consecutive quarter of profits for the Company. Management believes
that its strategy of building long term relationships and offering
additional products to its customers, when combined with continuing
efforts to control costs, should result in continued profitability
throughout the balance of Fiscal 1998.
9
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1997 amounted to $13,498,000, as
compared to $11,909,000 at March 31, 1997, an increase of 13%. Cash
balances at September 30, 1997 totaled $4,373,000, a decrease of
$2,033,000 from March 31, 1997 but an increase of $964,000 from June
30, 1997. This decrease in cash from the beginning of the fiscal year
is a result of a substantial delay in payments from Bell Atlantic to
all agents, including the Company. According to Bell Atlantic, it has
committed resources to resolve its payment problems experienced by its
efforts to further automate its agent payment process. Although
slight progress has been made in resolving these problems, Bell
Atlantic is still unable to remedy its system to permit payment in
full of all amounts due to the Company. The Company has submitted
detailed documentation supporting its claims for payment.
On October 14, 1997, Fleet National Bank issued a commitment for a new
$25 million credit facility to the Company. The facility, which is
available under certain conditions, consists of a $15 million
revolving line of credit to be utilized for working capital support
and standby letters of credit and a $10 million line of credit to be
utilized for acquisitions, fixed asset investments and permanent
working capital needs.
The Company presently has no bank debt (other than $300,000
outstanding as of September 30, 1997 under the Fleet line of credit to
finance certain Letters of Credit) and expects that the credit
facility, together with cash flows from operations, will be sufficient
to meet the cash requirements of the Company for the next twelve
months under its current operating plan. However, any substantial
increase in reselling operations and related asset investment may
require additional financing.
The foregoing statements in Part I Item 2 regarding the Company's
intent to further leverage its customer relationships, its intent to
expand its sales force, its expectation of continued profitability
throughout the remainder of Fiscal 1998, that Bell Atlantic will
resolve its payment process problems and pay past due amounts, and its
ability to meet its cash requirements for the next 12 months are
forward looking statements made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of
1995. There are several factors that could cause actual results to
differ materially from those contained in such forward looking
statements, including the Company's inability to hire and retain
experienced account executives, further unforeseen delays in receiving
Bell Atlantic commissions on a timely basis, unfavorable changes in
the commission rates payable to the Company under the Bell Atlantic
Sales Agency Agreement, and increased competitive pressures from
current and additional suppliers of local and long-distance telephone
services and other telecommunication services.
10
PART II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The 1997 Annual Meeting of Stockholders of the Company was held
on October 20, 1997.
(b) Not applicable.
(c) Each nominee for director received the following votes:
Withhold
Name For Authority
- ---------------------------------------------------------------
Robert J. Fabbricatore 9,119,329 275,468
Richard J. Santagati 9,118,365 276,432
J. Richard Murphy 9,119,965 274,832
Henry Hermann 9,119,965 274,832
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 No Vote
- ---------------------------------------------------------------------------------
Amendment to 1996 Stock
Option Plan to increase to
1,750,000 the number of
shares issuable thereunder 5,224,908 652,705 20,919 3,496,265
To approve selection of
Ernst & Young as
accountants for the
Company for the fiscal
year ending 3/31/98 9,372,022 15,661 7,114 0
(d) Not applicable.
11
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 CORP.
Date: November 12, 1997 /S/ ROBERT FABBRICATORE
-------------------------
Robert Fabbricatore
Chief Executive
Officer
Date: November 12, 1997 /S/ JOHN D. PITTENGER
-----------------------
John D. Pittenger
Chief Financial
Officer
12