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 December 31, 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)
(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 February 1, 1998, 9,974,683 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 December 31 and March 31, 1997 3
Condensed Statements of Income
Three Months Ended December 31, 1997 and 1996 4
Condensed Statements of Income
Nine Months Ended December 31, 1997 and 1996 5
Condensed Statements of Cash Flows
Nine Months Ended December 31, 1997 and 1996 6
Notes to Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk Inapplicable
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17-18
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
The following exhibits are included herein:
(11) Statements Regarding Computation
of Per Share Earnings
Three Months and Nine Months ended
December 31, 1997 and 1996
(27) Financial Data Schedule
The Company did not file any reports on Form 8-K during the
three months ended December 31, 1997.
2
CTC COMMUNICATIONS CORP.
CONDENSED BALANCE SHEETS
December 31 , March 31,
1997 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,101,478 $ 6,405,670
Accounts receivable, net 17,380,683 10,904,820
Prepaid expenses and other current assets 845,931 493,553
------------- -------------
Total Current Assets 19,328,092 17,804,043
Furniture, Fixtures and Equipment 11,824,800 7,268,372
Less accumulated depreciation (6,315,650) (5,565,650)
------------- -------------
Total Equipment 5,509,150 1,702,722
Deferred tax asset 566,000 566,000
Other assets 110,085 113,685
------------- -------------
Total Assets $ 25,513,327 $ 20,186,450
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,247,249 $ 3,238,416
Accrued income taxes 1,430 225,948
Accrued salaries and related taxes 1,896,732 2,423,825
Deferred revenue 0 6,588
Current portion of notes payable 174,796 0
------------- -------------
Total Current Liabilities 6,320,207 5,894,777
Notes payable, net of current portion 1,671,277 0
Stockholders' Equity:
Common Stock 99,703 96,294
Additional paid in capital 4,861,215 4,758,454
Retained earnings 12,696,750 9,572,750
------------- -------------
17,657,668 14,427,498
Amounts due from stockholders (135,825) (135,825)
------------- -------------
Total Stockholders' Equity 17,521,843 14,291,673
------------- -------------
Total Liabilities and
Stockholders' Equity $ 25,513,327 $ 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
December 31, December 31,
1997 1996
------------- ------------
Network service revenues:
Commissions $ 7,620,106 $ 7,265,608
Resale 3,535,540 2,928,179
------------- -------------
11,155,646 10,193,787
Costs and expenses
Cost of resale revenue 2,940,001 2,261,625
Selling, general and administrative expenses 7,381,233 6,000,420
------------- -------------
10,321,234 8,262,045
------------- -------------
Income from operations 834,412 1,931,742
Other
Interest income 29,274 48,126
Interest expense (11,908) (3,237)
Other 9,222 2,369
------------ -------------
26,588 47,258
------------ -------------
Income before income taxes 861,000 1,979,000
Provision for income taxes 355,000 820,000
------------- -------------
Net income $ 506,000 $ 1,159,000
============= =============
Net income per common share:
Basic $ 0.05 $ 0.12
============= =============
Diluted $ 0.05 $ 0.11
============= =============
Weighted average number of common shares:
Basic 9,917,361 9,607,538
============= =============
Diluted 11,078,771 10,696,595
============= =============
The accompanying notes are an integral part of these financial statements.
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF INCOME
Nine Months Ended
December 31, December 31,
1997 1996
------------- -------------
Network service revenues:
Commissions $ 24,581,370 $ 20,841,300
Resale 10,078,325 7,977,015
------------- -------------
34,659,695 28,818,315
Costs and expenses
Cost of resale revenue 8,095,086 6,094,038
Selling, general and administrative expenses 21,370,033 17,057,826
------------ -------------
29,465,119 23,151,864
---------- -------------
Income from operations 5,194,576 5,666,451
Other
Interest income 126,212 133,632
Interest expense (22,135) (9,643)
Other 14,348 10,774
------------- -------------
118,425 134,763
------------- -------------
Income before income taxes 5,313,001 5,801,214
Provision for income taxes 2,189,000 2,399,200
------------- -------------
Net income $ 3,124,001 $ 3,402,014
============= =============
Net income per common share:
Basic $ 0.32 $ 0.35
============= =============
Diluted $ 0.29 $ 0.31
============= =============
Weighted average number of common shares:
Basic 9,856,079 9,595,174
============= =============
Diluted 10,824,001 10,812,910
============= =============
The accompanying notes are an integral part of these financial statements.
5
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31, December 31,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net Income $ 3,124,001 $ 3,402,014
Adjustments to reconcile net income to
net cash (used) by operating activities:
Depreciation and amortization 750,000 507,000
Changes in noncash working capital items:
Accounts receivable (6,475,864) (2,824,773)
Inventories 0 23,590
Other current assets (352,378) (327,086)
Other assets 3,600 3,850
Accounts payable 1,008,833 204,290
Accrued liabilities (527,093) 335,178
Accrued taxes (224,518) 0
Deferred revenue (6,588) (2,950)
------------- -------------
Net cash (used) by operating activities (2,700,007) 1,321,113
INVESTING ACTIVITIES
Additions to equipment (4,556,428) (660,494)
------------- -------------
Net cash used in investing activities (4,556,428) (660,494)
FINANCING ACTIVITIES
Proceeds from notes payable 1,846,073 0
Proceeds from the issuance of common stock 106,170 59,168
------------- -------------
Net cash provided by financing activities 1,952,243 59,168
(Decrease) in cash (5,304,192) 719,787
Cash at beginning of year 6,405,670 3,941,876
------------- -------------
Cash and cash equivalents at end of period $ 1,101,478 $ 4,661,663
============= =============
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 nine months ended
December 31, 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
In December 1997, the Company filed a Complaint and Jury Trial Demand
("Complaint")against Bell Atlantic Corporation ("Bell Atlantic") in the
United States District Court for the District of Maine (Civil Action
No. 97-CV-395-P-H) alleging breach by Bell Atlantic (as successor to
the NYNEX Company) of the Agreement for Sale of Services and Account
Management effective as of February 1, 1996 between NYNEX and the
Company (the "Agency Agreement") by reason of failure to pay
approximately $14.0 million in commission payments due and owing under
the Agency Agreement among other breaches. Subsequent to filing the
suit, Bell Atlantic paid the Company $2,025,000 in reduction of the
amount due to the Company. The Complaint also seeks monetary damages,
and certain injunctive relief, for alleged unlawful competition,
illegal tying arrangements in violation of the Sherman Antitrust Act
and violation of Section 251 of the Telecommunications Act of 1996 by
Bell Atlantic. Bell Atlantic has filed a motion in the Maine District
Court seeking an order transferring the action to the U.S. District
Court for the Southern District of new York (see below) and the Company
has opposed this motion. If the Company is unable to promptly recover
a substantial portion of the balance due from Bell Atlantic, it will be
required to obtain additional sources of capital. There is no
assurance that such additional financing will be available on favorable
terms, if at all.
7
In January 1998, Bell Atlantic instituted an action against the Company
in the U.S. District Court for the Southern District of New York (98
CIV 0048) denying that it had breached its obligations under the Agency
Agreement and requesting an order compelling the Company to arbitrate
its dispute with Bell Atlantic and enjoining the Company from
proceeding with the above-described litigation in the Maine federal
court. Bell Atlantic's complaint also seeks an order of injunctive
relief requiring the Company to cease and desist from continuing to
engage in certain activities allegedly in violation of its post
termination non-competition, trademark usage and confidentiality
obligations under the Agency Agreement. Subsequent to initiating the
action, Bell Atlantic filed a motion for a temporary restraining order
and preliminary injunction and an order compelling arbitration of the
entire dispute.
On January 30, 1998, the Court issued an order denying Bell Atlantic's
motion seeking to compel arbitration and granting its motion for a
temporary restraining order. Specifically, the order temporarily
enjoined the Company from selling or promoting the sale of any non-Bell
Atlantic IntraLATA (local) telecommunications products, including
IntraLATA products purchased wholesale from Bell Atlantic for resale to
the Company's customers, to any Bell Atlantic customer for whom the
Company was responsible for account management or to whom the Company
sold any such Bell Atlantic service during the 12 months preceding
December 30, 1997. The order also temporarily enjoined the Company
from any use of Bell Atlantic's trademarks and trade name in
promotional, advertising or marketing material without Bell Atlantic's
written permission and from any use of certain Bell Atlantic
confidential information disclosed to the Company in its capacity as
Bell Atlantic's sales agent. The order will remain in effect unless
either removed or modified by the court, or until final resolution of
the action, but in no event beyond December 30, 1998.
The Company intends to file an answer denying the material allegations
of the Bell Atlantic complaint. It believes that it has meritorious
defenses to the Bell Atlantic action and will vigorously defend the
action.
On February 6, 1998, the Company filed a Complaint and Request for
Emergency Relief ("Complaint") with the Commonwealth of Massachusetts,
Department of Telecommunications and Energy ("DTE") against New England
Telephone and Telegraph Company d/b/a Bell Atlantic - Massachusetts
("Bell Atlantic"). The Complaint alleges that Bell Atlantic has
recently rescinded its policy in the New England states of permitting
resellers, including the Company, to assume the service contracts of
retail customers under contract to Bell Atlantic. The Complaint
alleges that Bell Atlantic's actions violate the resale agreement
between the Company and Bell Atlantic, Section 251 of the
Telecommunications Act of 1996 (which provides, in relevant part, that
incumbent local exchange carriers have a duty not to prohibit, and not
to impose unreasonable or discriminatory conditions or limitations on,
8
the resale of telecommunications service that the carrier provides at
retail to subscribers who are not telecommunications carriers) and the
DTE's Order on Competition in Massachusetts. The Complaint seeks an
order directing Bell Atlantic to cease and desist from refusing to
permit the assignment of existing contracts and to continue its long-
standing practice of allowing resellers to assume these customer
agreements, without penalty, on a resold basis or, in the alternative,
an emergency, expedited investigation by the DTE into the dispute.
The Company is also a 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 SEPTEMBER 30, 1997
On January 13, 1998, the CTC Communications Corp. Employee Stock
Purchase Plan purchased 4,406 shares of Common Stock from the
Company at $8.2875 per share for the purchase period ended December 31,
1997.
Through February 1, 1998, 75,664 shares of Common Stock were
issued as a result of employees exercising outstanding stock
options.
NOTE 5. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share".
Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
9
The following table sets forth the computation of basic and diluted
net income per share:
Three Months Ended Nine Months Ended
December 31 December 31
1997 1996 1997 1996
Numerator:
Net income 506,000 1,159,000 3,124,001 3,402,014
Numerator for basic net income
per share and diluted net income -------------------------------------------------
per share 506,000 1,159,000 3,124,001 3,402,014
=================================================
Denominator:
Denominator for basic net income
per share-weighted average shares 9,917,361 9,607,538 9,856,079 9,595,174
Effect of dilutive securities:
Employee stock options 1,161,410 1,089,057 967,922 1,217,736
Denominator for diluted net income -------------------------------------------------
per share-weighted-average shares 11,078,771 10,696,595 10,824,001 10,812,910
=================================================
Basic net income per share 0.05 0.12 0.32 0.35
=================================================
Diluted net income per share 0.05 0.11 0.29 0.31
=================================================
10
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.
RISK FACTORS
This quarterly report includes certain forward-looking statements.
Like any company subject to a competitive business environment, the
Company cannot guarantee the results predicted in any of its forward-
looking statements. Important factors that could cause actual results
to differ materially from those in the forward-looking statements
include (but are not limited to) the following:
Need For Additional Financing
In December 1997, the Company sued Bell Atlantic Corp. for unpaid
commissions amounting to $14,000,000. Of this amount, $2,025,000 was
paid by Bell Atlantic to the Company subsequent to the filing of the
suit. If the Company is unable to promptly collect a substantial
portion of the balance due, it will require additional financing in
order to continue to operate its business. In addition, the Company
will require additional financing to support the expansion of its CLEC
business. Sources of funding for the Company's future financing
requirements may include public offerings or private placements of
equity and/or debt securities and additional bank loans. Although the
Company is actively negotiating for additional financing, there can be
no assurance that such additional financing will be available to the
Company or, if available, that it can be obtained on a timely basis and
on terms acceptable to the Company. Failure to obtain such additional
financing could have a material adverse effect on both the current
business operations of the Company and its ability to further expand
its CLEC business.
Anticipated Negative Cash Flow from Operations
Although its revenue has increased substantially in each of the last
three years, the Company has experienced significant increases in
expenses associated with the development and expansion of its customer
base and its ongoing transition from agency to reseller operations.
For the nine months ended December 31, 1997, approximately 71% of such
revenues were attributable to agency commissions and fees. Most of
this revenue source is no longer available due to the Company's
transition from agency to reseller status. As a reseller, the Company
expects to incur significant negative cash flow in the near term as it
implements its business strategy to expand its telecommunications
service offerings and enter new markets. There can be no assurance
11
that the Company will sustain the profitability or positive net cash
flow which it achieved as an agent. If the Company fails to achieve
profitability or positive net cash flow, it may not be able to meet its
working capital requirements, which would have a material adverse
effect on the Company.
Dependence Upon Implementation of Reseller Operations
An essential component of the Company's strategy is the implementation
of its reseller operations. For the nine months ended December 31,
1997, network service resale income constituted 29% of the Company's
total revenues. The success of the Company's reseller expansion plans
are subject to a number of risks including the availability of adequate
capital, the increasingly competitive nature of the telecommunications
industry, including the effect of the development and introduction of
new technologies and the ability to attract additional personnel,
adverse results in the pending Bell Atlantic litigation in New York and
Maine and proceedings before certain state regulatory commissions, and
the ultimate resolution of certain judicial decisions invalidating
certain FCC regulations and declaring unconstitutional certain sections
of the Telecommunications Act of 1996.
Dependence on Relationship with Third-Party Facilities-Based Providers
The Company depends entirely on facilities-based carriers for the
transmission of customer phone calls. For each local exchange market
in which the Company presently operates, there currently is a single
provider from whom the Company can purchase local exchange services on
a ubiquitous basis. Under the Telecommunications Act, the Company is
entitled to access to local exchange services in such markets. The
termination of any of the Company's contracts with its carriers or a
reduction in the quality or increase in cost of such carriers' services
could have a material adverse effect on the Company's results of
operations. In addition, the accurate and prompt billing of the
Company's customers is dependent upon the timeliness and accuracy of
call detail records provided by the carriers whose service the Company
resells. There can be no assurance that the current carriers will
continue to provide, or that new carriers, which may not have
significant experience handling large volumes of resold local exchange
traffic, will provide, accurate information on a timely basis, and any
failure to do so could have a material adverse effect on the Company's
results of operations.
Competition
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The
Company expects that competition will continue to intensify in the
future due to regulatory changes, including continued implementation of
the Telecommunications Act, and the increase in the size, resources and
number of market participants. In each of its markets, the Company
12
faces competition for local service from substantially larger and
better capitalized incumbent providers. Additionally, the long
distance market is already significantly more competitive than the
local exchange market because the incumbent local exchange carriers
("ILECs"), including the Regional Bell Operating Companies ("RBOCs"),
have historically enjoyed a monopoly position within the local exchange
market.
OVERVIEW
Initially, the Company entered the local telecommunications market in
the interconnect business, marketing, selling and servicing key systems
and PBX business telephone systems in the Northeast. In the mid-1980s,
the Company, in response to intensified competitive pressures, sold its
interconnect business and focused exclusively on marketing and selling
local telecommunications products under non-exclusive agency
agreements, first with NYNEX, and then with additional RBOCs. In 1994,
the Company began a planned transition to a resale platform in which it
purchases telecommunications services at wholesale rates from
facilities-based carriers for resale to its business customers. This
transition was completed in December 1997 when the Company terminated
its agency agreement with Bell Atlantic (formerly NYNEX) and commenced
resale operations in January 1998 as a CLEC in New England and New York
State.
Although management believes that its current strategy will have a
positive effect on the Company's results of operations over the long-
term, through an increase in its customer base and product offerings,
this strategy is expected to have a negative effect on the Company's
results of operations over the short-term. The Company's operations
are subject to certain material risks, as set forth above, and to
certain other factors discussed further under "Liquidity and Capital
Resources" in this Report. The Company anticipates losses and negative
cash flow in the near term, attributable in part to significant
investments in operating, sales, marketing, management information
systems and general and administrative expenses. To date, the
Company's growth, including capital expenditures, has been funded
primarily from revenues from operations.
Historically, the Company's network service revenues have consisted of
commissions earned as an agent of Bell Atlantic and other RBOCs and
since 1994, revenues from the resale of long distance, frame relay,
Internet access and other communications services. For the nine months
ended December 31, 1997, agency commissions accounted for approximately
71% of network service revenues with resale revenues accounting for 29%
of such revenues. As a result of the reseller transition in December
1997, agency commissions earned in the future will not be material.
The Company bills its 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.
13
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.
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 the Company's operations and growth as
well as all amortization expenses. Depreciation is allocated
throughout sales, marketing, general and administrative expense based
on asset ownership.
The Company has experienced significant growth in the past and,
depending on the extent of its future growth, may experience
significant strain on its management, personnel and information
systems. To accommodate this growth, the Company intends, subject to
the availability of adequate financing, to continue to implement and
improve operational, financial and management information systems. To
support its growth, the Company added three senior executives and over
90 additional employees in 1997. The Company is also expanding its
information systems to provide improved recordkeeping for customer
information and management of uncollectible accounts and fraud control.
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1997 AS COMPARED TO THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1996.
Total revenues for the third quarter of Fiscal 1998 increased 9% to
$11,156,000 from $10,194,000 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 5% to $7,620,000
for the three months ended December 31, 1997, from $7,226,000 for the
third 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 21% to $3,536,000 from $2,928,000 for the same
period of Fiscal 1997.
Total revenues for the nine month period ended December 31, 1997
increased 20% to $34,660,000 from $28,818,000 for the same period of
Fiscal 1997. Network service commission income increased 18% to
$24,581,000 from $20,841,000 for the same period of Fiscal 1997. For
the nine month period, the Company recognized network service resale
income of $10,078,000 as compared to $7,977,000 for the same period of
Fiscal 1997, an increase of 26%.
Overall, these increases in revenue can be attributed to the
development of additional customer relationships in the middle market
14
commercial segment, as well as increased sales to the Company's
existing customer base. In the network service commission income
category, increased unit sales under the Bell Atlantic contract
accounted for the growth in revenues. While revenues increased 18% on
a year-to-year comparison, commission revenues decreased 6% between the
quarter ended September 30, 1997 and the quarter ended December 31,
1997 due to the Company's increased focus on preparing for the
transition to the resale platform. In the network service resale
income category, the Company commenced offering frame relay data
services, which along with overall network growth in the long distance
resale revenues, accounted for the increase.
Cost of Resale Revenues
Cost of resale revenues increased to $2,940,000 and $8,095,000,
respectively, for the three months and nine months ended December 31,
1997, an increase of 30% and 33%, respectively, over the corresponding
periods of Fiscal 1997. As a percentage of resale revenues, cost of
resale revenues were 80% for the nine months ended December 31, 1997,
as compared to 76% for the same period of Fiscal 1997; and 83% for the
three months ended December 31, 1997, as compared to 77% for the
corresponding period of Fiscal 1997. The increase in costs as a
percentage of revenues can be attributed to adding products (e.g.,
frame relay) to the platform in the current fiscal year that have
somewhat lower margins, as well as administrative costs related to the
Company's new local billing platform including state and federal filing
expenses.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased 23% to
$7,381,000 for the third quarter of Fiscal 1998 from $6,000,000 for the
third quarter of Fiscal 1997. For the nine month period ended December
31, 1997, selling, general and administrative expenses increased 25% to
$21,370,000, from $17,058,000 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. During the quarter ended
December 31, 1997, the Company added an additional 38 account
executives (for a total of 172) and 35 network coordinators (for a
total of 96). The salaries, benefits, recruiting and training of these
new employees increased the selling, general and administrative
expenses for the quarter. The Company expects to hire additional sales
and service personnel, as well as additional administrative personnel,
in order to support the Company's planned growth and expansion.
Net income for the third quarter of Fiscal 1998 decreased to $506,000
from $1,159,000 for the same period of Fiscal 1997. For the nine
15
months ended December 31, 1997, net income decreased to $3,124,000 from
$3,402,000 for the same nine month period of Fiscal 1997. The decline
in net income was primarily due to the aforementioned increase in
selling, general and administrative expenses associated with the hiring
of additional personnel and the expenditures incurred in connection
with the transition from agent status to reseller of local services.
Liquidity and Capital Resources
Working capital at December 31, 1997 amounted to $13,008,000 as
compared to $11,909,000 at March 31, 1997, an increase of 9%. Cash
balances at December 31, 1997 totaled $1,101,000, a decrease of
$5,304,000 from March 31, 1997. This decrease in cash is primarily a
result of the continued refusal of Bell Atlantic to pay the Company
approximately $12,000,000 in commissions (originally $14,000,000) which
the Company claims are owed by Bell Atlantic, and, to a lesser extent,
the result of increased capital expenditures as described below. The
Company has filed an action in the United States District Court of
Maine against Bell Atlantic to recover the amounts due and in addition,
damages for alleged violations by Bell Atlantic of the antitrust laws
and the Telecommunications Act of 1996.
In November, 1997, the Company obtained $25 million credit facility
from Fleet Bank. 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's
ability to finance its receivables under this credit facility has been
severely limited by the failure of Bell Atlantic to pay the commissions
due to the Company on a timely basis.
The Company increased capital expenditures to prepare for the
transition to the resale platform. In the aggregate, the Company
invested approximately $3,078,000 in fixed assets in the quarter ended
December 31, 1997, primarily to enhance the Company's automation
capabilities including upgrading the AS400 hardware, equipping each
account executive with a laptop computer, upgrading the local area
networks at each branch office, and installing a frame relay data
network to allow each branch office to communicate more efficiently.
These additional investments increased depreciation by $130,000 for the
December quarter, to a total of $350,000 per quarter.
On January 30, 1998, the U.S. District Court for the Southern District
of New York issued an order in the case entitled "Bell Atlantic
Corporation v. CTC Communications Corp and Computer Telephone Company",
Case No. 98 Civ 0048, temporarily restraining the Company, for a period
of 12 months from December 30, 1997, from selling or promoting the sale
of any non-Bell Atlantic IntraLATA telecommunications products,
including IntraLATA products purchased wholesale from Bell Atlantic for
16
resale to the Company's customers, to any Bell Atlantic customer for
whom the Company was responsible for account management or to whom the
Company sold any such Bell Atlantic service during the 12 months
preceding December 30, 1997. The court order, if not overturned or
modified, could materially slow the Company's growth as a CLEC during
the next 12 months.
In addition, the Company has been advised by Bell Atlantic that it has
rescinded its policy in the New England states of permitting resellers,
including the Company, to assume the service contracts of retail
customers under contract to Bell Atlantic. The ability to assume these
contracts is material to the Company's growth and success as a CLEC and
the inability to assume these agreements will substantially diminish
the Company's ability to sell other intraLATA services to such
customers, which would have a material adverse effect on the Company's
results of operations. The Company has filed a complaint with the
Massachusetts Department of Telecommunications and Energy ("DTE")
seeking injunctive relief from this policy and an order requiring Bell
Atlantic to permit assumption of these contracts, or in the
alternative, an expedited investigation by the DTE of this dispute, and
intends to file similar complaints in other states in which it does
business,.
Due primarily to Bell Atlantic's refusal to pay commissions owed to the
Company under the former Agency Agreement, the effects of the temporary
restraining order issued by the New York Federal District Court and
Bell Atlantic's recently instituted non-assignment policy, the Company
will require additional financing during the quarter ending June 30,
1998 to continue to operate its business. The Company is engaged in
serious negotiations with potential investors and lenders. There can
be no assurance, however, that such additional financing will be
available to the Company or, if available, that it can be obtained on a
timely basis and on terms acceptable to the Company. Failure to obtain
such financing could result in a substantial reduction in the Company's
current business operations.
Part II
Item 1. Legal Proceedings
The information required under this item with respect to the actions
entitled (1) "CTC Communications Corp. v. Bell Atlantic Corporation,"
U.S. District Court for the District of Maine, Civil Action No. 97-CV-
395-P-H and (2) "Bell Atlantic Corporation v. CTC Communications Corp.
and Computer Telephone Company," U.S. District Court for the Southern
District of New York, Case No. 98 CIV 0048, has been previously
reported (as defined in Rule 12b-2) in the registrant's Current Report
on Form 8-K dated February 3, 1998.
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On February 6, 1998, the registrant filed a Complaint and Request for
Emergency Relief ("Complaint") with the Commonwealth of Massachusetts,
Department of Telecommunications and Energy ("DTE") against New England
Telephone and Telegraph Company d/b/a Bell Atlantic - Massachusetts
("Bell Atlantic"). The Complaint alleges that Bell Atlantic has
recently instituted a policy of rejecting all orders from the
registrant and other resellers of intraLATA services covering the
assumption of services to Bell Atlantic customers on a resold basis
(the "Anti-Flipping Policy"). The Complaint alleges that Bell
Atlantic's actions violate the resale agreement between the Company and
Bell Atlantic, Section 251 of the Telecommunications Act of 1996 (which
provides, in relevant part, that incumbent local exchange carriers have
a duty "not to prohibit, and not to impose unreasonable or
discriminatory conditions or limitations on, the resale of such
telecommunications service...") and the DTE's Order on Competition in
Massachusetts. The Complaint seeks an order directing Bell Atlantic to
cease and desist from the Anti-Flipping Policy and to continue its
long-standing practice of allowing resellers to assume these customer
agreements, without penalty, on a resold basis or, in the alternative,
an emergency, expedited investigation by the DTE into the dispute.
Item 2. Changes in Securities
(c) During the quarter ended December 31, 1997, the registrant issued
a total of 75,664 shares of common stock for an aggregate consideration
of $61,499 pursuant to the exercise of employee incentive stock options
by fourteen employees of the registrant. 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 the registrant's
transfer agent. All recipients had adequate access to information
regarding the registrant.
Item 4. Submission of Matters to a Vote of Security Holders
The information required under this item with respect to the
registrant's Annual Meeting of Stockholders on October 20, 1997 has
been previously reported (as defined in Rule 12b-2) in the registrant's
Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1997.
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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: February 17, 1998 /S/ ROBERT FABBRICATORE
-------------------------
Robert Fabbricatore
Chief Executive
Officer
Date: February 17, 1998 /S/ JOHN D. PITTENGER
-----------------------
John D. Pittenger
Chief Financial
Officer
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