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, 1998.
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 November 9, 1998, 10,275,299 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, 1998 3
Condensed Statements of Operations
Three Months Ended September 30, 1998 and 1997 4
Condensed Statements of Operations
Six Months Ended September 30, 1998 and 1997 5
Condensed Statements of Cash Flows
Six Months Ended September 30, 1998 and 1997 6
Notes to Condensed Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Inapplicable
Disclosures About Market Risk
Part II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Default Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a
Vote of Security Holders Inapplicable
Item 5. Other Information Inapplicable
Item 6. Exhibits and Reports on Form 8-K 22-23
2
In addition to historical information, this Quarterly Report on Form
10-Q contains forward-looking statements made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 including, but not limited
to, those statements regarding the successful implementation of the
Company's business plan, availability of additional financing if
required, the ability to improve operational, financial and
management information systems, future profitability, the timing and
success of the expansion and deployment of facilities, future
operations and availability of capital and other future plans, events
and performance and other statements located elsewhere herein. The
forward-looking statements contained herein are subject to certain
risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not
limited to, those outlined in Exhibit 99.1 filed with this Quarterly
Report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis as of
the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
CTC COMMUNICATIONS CORP.
CONDENSED BALANCE SHEETS
September 30, March 31,
1998 1998
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,167,474 $ 2,167,930
Accounts receivable, net 25,538,298 17,288,183
Prepaid expenses and other current assets 5,073,783 3,029,069
------------- -------------
Total Current Assets 32,779,555 22,485,182
Furniture, Fixtures and Equipment 19,242,013 13,376,970
Less accumulated depreciation (8,447,683) (6,837,683)
------------- -------------
Total Equipment 10,794,330 6,539,287
Deferred income taxes 1,834,000 1,834,000
Other assets 4,198,786 108,885
------------- -------------
Total Assets $ 49,606,671 $ 30,967,354
============= =============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 18,736,601 $ 8,958,476
Accrued salaries and related taxes 2,166,186 756,159
Current portion of obligations under
capital leases 249,661 231,796
Current portion of note payable to bank 0 1,196,400
------------- -------------
Total Current Liabilities 21,152,448 11,142,831
Obligations under capital leases,
net of current portion 1,013,568 1,114,277
Note payable to bank, net of current portion 21,100,000 7,130,671
Series A redeemable convertible
preferred stock 12,260,165 0
Stockholders' equity (deficit):
Common Stock 100,101 99,806
Additional paid in capital 6,905,946 5,245,704
Deferred compensation (265,410) (318,410)
Retained earnings (deficit) (12,524,322) 6,688,300
------------- -------------
(5,783,685) 11,715,400
Amounts due from stockholders (135,825) (135,825)
------------- -------------
Total Stockholders' Equity (Deficit) (5,919,910) 11,579,575
------------- -------------
Total Liabilities and
Stockholders' Equity (Deficit) $ 49,606,671 $ 30,967,354
============= =============
The accompanying notes are an integral part of these financial statements.
3
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
September 30, September 30,
1998 1997
------------- -------------
Telecommunications revenues $ 14,516,189 $ 3,488,684
Commission revenues 0 8,356,413
------------- -------------
Total revenues 14,516,189 11,845,097
Costs and expenses
Cost of telecommunications revenues 12,383,432 2,712,249
Selling, general and administrative expenses 13,001,503 7,053,701
------------- -------------
25,384,935 9,765,950
------------- -------------
Income (loss) from operations (10,868,746) 2,079,147
Other
Interest income 38,437 39,352
Interest expense (983,466) (5,772)
Other 3,149 1,273
------------- -------------
(941,880) 34,853
------------- -------------
Income (loss) before income taxes (11,810,626) 2,114,000
Provision (benefit) for income taxes (827,000) 870,000
------------- -------------
Net income (loss) $(10,983,626) $ 1,244,000
============= =============
Net income (loss) per share available
to common stockholders
Basic $ (1.13) $ 0.13
============= =============
Diluted $ (1.13) $ 0.12
============= =============
Shares used in computing net income (loss) per
share available to common stockholders
Basic 10,002,370 9,894,195
============= =============
Diluted 10,002,370 10,694,319
============= =============
The accompanying notes are an integral part of these financial statements.
4
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended
September 30, September 30,
1998 1997
------------- -------------
Telecommunications revenues $ 27,351,874 $ 6,542,785
Commission revenues 0 16,961,264
------------- -------------
Total revenues 27,351,874 23,504,049
Costs and expenses
Cost of telecommunications revenues 23,996,900 5,156,085
Selling, general and administrative expenses 22,496,457 13,987,801
------------- -------------
46,493,357 19,143,886
------------- -------------
Income (loss) from operations (19,141,483) 4,360,163
Other
Interest income 170,832 96,938
Interest expense (1,400,976) (10,227)
Other 33,001 5,127
------------- -------------
(1,197,143) 91,838
------------- -------------
Income (loss) before income taxes (20,338,626) 4,452,001
Provision (benefit) for income taxes (1,424,000) 1,834,000
------------- -------------
Net income (loss) $(18,914,626) $ 2,618,001
============= =============
Net income (loss) per share available
to common stockholders
Basic $ (1.92) $ 0.27
============= =============
Diluted $ (1.92) $ 0.24
============= =============
Shares used in computing net income (loss) per
share available to common stockholders
Basic 9,993,281 9,825,439
============= =============
Diluted 9,993,281 10,696,616
============= =============
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,
1998 1997
------------- ---------------
OPERATING ACTIVITIES
Net cash used in operating activities (18,776,472) (599,047)
INVESTING ACTIVITIES
Additions to equipment (5,865,043) (1,478,700)
------------- -------------
Net cash used in investing activities (5,865,043) (1,478,700)
FINANCING ACTIVITIES
Net proceeds from issuance of
redeemable preferred stock 11,862,113 0
Proceeds from the issuance of common stock 88,861 44,671
Net borrowings/(repayment) of
obligations under capital leases (82,844) 0
Net borrowings/(repayment) of
note payable to bank 12,772,929 0
------------- -------------
Net cash provided by financing activities 24,641,059 44,671
------------- -------------
(Decrease) in cash (456) (2,033,076)
Cash at beginning of period 2,167,930 6,405,670
------------- -------------
Cash and cash equivalents at end of period $ 2,167,474 $ 4,372,594
============= =============
The accompanying notes are an integral part of these financial statements.
6
CTC COMMUNICATIONS CORP.
NOTES TO CONDENSED 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, 1998 are not
necessarily indicative of the results that may be expected for
the fiscal year ending March 31, 1999. 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 fiscal year ended March 31, 1998.
NOTE 2: COMMITMENTS AND CONTINGENCIES
Federal Court Action
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 approximately $2.5 million 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.
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 sought an injunction to prevent the
Company from continuing to engage in certain activities
allegedly in violation of its post termination
non-competition, trademark usage and confidentiality
7
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.
The Company filed 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 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.
On July 2, 1998, the United States Court of Appeals for the
Second Circuit denied Bell Atlantic's appeal to compel
arbitration of the Company's claims against Bell Atlantic. The
denial of Bell Atlantic's appeal eliminates any obstacle to
permitting the Company's lawsuit in the United States District
Court in Maine to proceed against Bell Atlantic. The Company
believes that the trial will commence in February or March 1999.
On July 31, 1998, Judge Gene Carter of the United States District
Court in Portland, Maine, ordered the dissolution of the
temporary restraining order against the Company and denied Bell
Atlantic's motion for a permanent injunction. The court ruled
that the Company has an absolute right to solicit the customers
they had serviced while a Bell Atlantic agent.
State Regulatory Proceedings
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
8
impose unreasonable or discriminatory conditions or limitations
on, 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.
On July 2, 1998, the Massachusetts Department of
Telecommunications and Energy ruled that it is illegal for Bell
Atlantic to impose contract termination fees on its customers who
choose a competitive Bell Atlantic reseller as their local
provider. Bell Atlantic has appealed the decision on procedural
grounds. The Company anticipates that the DTE will issue a final
order on appeal prior to the end of 1998.
On September 14, 1998, the State of New York Public Service
Commission, and on October 7, 1998, the New Hampshire Public
Utilities Commission, also ruled in favor of the Company and
ordered Bell Atlantic to eliminate the customer termination fees.
Hearings have been held in both Vermont and Maine seeking to
reverse Bell Atlantic's policy of imposing contract termination
fees on its customers who choose a competitive Bell Atlantic
reseller as their local provider. To date, no decisions have
been rendered.
The Company has also filed a petition for repeal of the Bell
Atlantic customer termination fee requirement in the State of
Rhode Island.
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 3. PREFERRED STOCK
On April 10, 1998, the Company issued for investment to Spectrum
Equity Investors II, L.P. ("Spectrum") and certain other private
investors (together with Spectrum, the "Investors") an aggregate of
666,666 shares of Series A Convertible Preferred Stock (the "Preferred
Shares") for $12 million, pursuant to the terms and conditions of a
Securities Purchase Agreement among the Company and the Investors.
The Company also issued for investment to the Investors five-year
warrants to purchase an aggregate of 133,333 shares of its Common
Stock at an exercise price of $9.00 per share. Spectrum purchased
98.63% of the Preferred Shares and warrants in the private placement.
On the date of issuance, the Preferred Shares were convertible into
1,333,333 shares of the Company's Common Stock at $9.00 per share,
which conversion ratio is subject to certain adjustments. Reference
is made to the Company's Report on Form 8-K and exhibits thereto dated
and filed on May 15, 1998 for a complete description of the
transaction.
9
NOTE 4. TRANSACTIONS SUBSEQUENT TO SEPTEMBER 30, 1998
On November 2, 1998, the Company obtained three-year vendor financing
facility for up to $25 million with Cisco Capital Corp. Under the
terms of the agreement, the Company has agreed to a three year, $25
million volume purchase commitment of Cisco Systems equipment and
services and Cisco Capital Corp has agreed to advance funds as these
purchases occur. In addition, a portion of the Cisco facility can be
utilized for working capital costs associated with the integration and
operation of Cisco Systems solutions and related peripherals.
Pursuant to the terms of the Cisco Vendor Financing Agreement dated as
of October 14, 1998, the Company has agreed to give the Lender a
senior security interest in all Cisco products purchased with the
proceeds of the first $15 million advanced under the Credit Facility
and a subordinate security interest in all other assets of the
Company. Under the terms of the Credit Facility, the Company is
required to pay interest on funds advanced under the facility at an
annual rate of 12.5%. In addition, the Company is required to pay a
commitment fee of .50% per annum on any unused amounts under the
facility as well as a monthly line fee of $15,000 per month.
Reference is made to the Company's Current Report on Form 8-K and the
agreement filed as an exhibit thereto filed on October 14, 1998 for a
complete description of the transaction.
NOTE 5 GOLDMAN SACHS/FLEET FINANCING
On September 1, 1998, the Company as Borrower, entered into a Loan and
Security Agreement ("Loan and Security Agreement") with Goldman Sachs
Credit Partners L.P. and Fleet National Bank as Lenders. Under the
terms of the Loan and Security Agreement, the Lenders have provided a
three-year senior secured credit facility to the Company consisting of
revolving loans in the aggregate amount of up to $75 million (the
"Credit Facility"). Advances under the facility bear interest at
1.75% over the prime rate and are secured by a first priority
perfected security interest on all of the Company's assets, provided,
however, that the Company has the ability to exclude assets acquired
through purchase money financing. In addition, the Company is
required to pay a commitment fee of 0.5% per annum on any unused
amounts under the facility as well as a monthly line fee of $150,000
per month. The Company may borrow $15 million unconditionally and $60
million based on trailing 120 days accounts receivable collections
(reducing to the trailing 90 days of collections by March 31, 2000).
The Company paid a one-time up front fee of $2,531,250, representing 3
3/8% of the facility. In the event that the Company wishes to prepay
the loan, the agreement provides for a prepayment penalty of 2% during
the first 18 months of the term of the loan. Warrants to purchase an
aggregate of 974,412 shares of the Company's common stock at a
purchase price of $6.75 per share were issued to the Lenders in
connection with the transaction. The Company has valued the Warrants
at $1.3 million which is being amortized and included in interest
expense over the three-year term of the Loan and Security Agreement.
As of October 31, 1998, the Company had borrowed $24,500,000 under the
Credit Facility.
10
NOTE 6. 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.
The following table sets forth the computation of basic and diluted
net income per share:
Three Months Ended Six Months Ended
September 30, September 30
1998 1997 1998 1997
------------------------- --------------------------
Numerator:
Net income (loss) (10,983,626) 1,244,000 (18,914,626) 2,618,001
Accretion to redemption value on
redeemable preferred stock (270,000) 0 (270,000) 0
Numerator for basic net income (loss)
per share and diluted net income ------------------------ --------------------------
(loss) per share (11,253,626) 1,244,000 (19,184,626) 2,618,001
======================== ==========================
Denominator:
Denominator for basic net income (loss)
per share-weighted average shares 10,002,370 9,894,195 9,993,281 9,825,439
Effect of dilutive securities:
Employee stock options 0 800,124 0 871,177
Denominator for diluted net income ------------------------- --------------------------
(loss) per share-weighted-average shares 10,002,370 10,694,319 9,993,281 10,696,616
========================== ==========================
Basic net income (loss) per share (1.13) 0.13 (1.92) 0.27
========================== ==========================
Diluted net income (loss) per share (1.13) 0.12 (1.92) 0.24
========================== ==========================
NOTE 7 INCOME TAXES
The provision (benefit) for income taxes is less than the statutory
rate based upon management's assessment of the realizability of net
operating losses. The benefit is recognized ratably during the year
based on the relationship of amounts recoverable and management's
estimate of the total loss for the fiscal year ending March 31,
1999. The effective rate of the benefit may vary with changes in
management's estimates.
11
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
CTC Communications Corp. (the "Company"), a Massachusetts
corporation, is a rapidly growing integrated communications provider
("ICP") with 14 years of local telecommunications marketing, sales
and service experience. The Company offers local, long distance,
Internet access, Frame Relay and other data services on a single
integrated bill. CTC currently serves small to medium-sized
business customers in seven Northeastern states through its
experienced 197-member direct sales force and 85 customer care
representatives located in 25 branch offices throughout the region.
Prior to becoming an ICP in January 1998, the Company was the oldest
and largest independent sales agent for Bell Atlantic Corp. ("Bell
Atlantic"), selling local telecommunications services as an agent
since 1984. The Company has also offered long distance and data
services under its own brand name since 1994. As an agent, during
the 1997 calendar year, the Company managed relationships with
approximately 5,600 franchise customers who purchased approximately
$200 million of annual local telecommunications services,
representing an estimated 280,000 local access lines at year end.
In late 1997, the Company became certified as a Competitive Local
Exchange Carrier ("CLEC") in New York and the six New England states
in order to embark upon its ICP strategy and take advantage of
market opportunities created by deregulation. In December 1997, the
Company terminated its agency agreement with Bell Atlantic and began
ICP operations in January 1998. As an ICP, the Company is utilizing
its well-developed infrastructure and the same relationship-centered
sales approach that it employed as an agent without the limitations
on potential customers, services and pricing that were imposed upon
it as an agent.
Over the next three years, the Company plans to expand within its
existing markets and into six additional states in the Boston-
Washington, D.C. corridor and add network facilities.
12
Beginning in the first calendar quarter of 1999, the Company intends
to deploy a state-of-the-art, data centric, packet-switched
Integrated Communications Network ("ICN"). Installation initially
will take place in the Company's existing markets and in new markets
as customer demand and concentrations warrant. The ICN when
completed will consist of an advanced Asynchronous Transfer Mode
(ATM)-based network, using Cisco Systems, Inc. BPX(r) 8600 series
and MGX(tm) 8800 series IP+ATM wide-area switches, that will deliver
enhanced access services such as traditional dedicated services,
frame relay, IP, video, and circuit emulation transport services.
Cisco's solutions should enable CTC to deliver all of these services
and voice services across a single multiservice dedicated connection
that should lower customers' telecommunications costs.
The ICN will be interconnected by leased transmission and access
facilities. Initially, the Company will offer dedicated long
distance and data services over the ICN. The Company intends to
continue to lease local dialtone capabilities until these services
can be cost effectively integrated into a packet switched network
architecture. The Company expects that the ICN will be able to take
advantage of the growing customer demand for dedicated long distance
and data transmission capabilities and the economic benefits that
can be achieved by utilizing a combination of Company-owned
switching facilities and leased network elements. Once deployed,
the Company believes that the ICN will enable the Company to improve
margins, enhance customer control and broaden service offerings.
Prior to deploying the ICN, the Company is building its base of
installed access lines through reselling the network services of
other Telecommunications carriers.
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 in Exhibit 99.1 to this Quarterly Report, and to certain other
factors discussed further in this Quarterly Report under "Liquidity
and Capital Resources." 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 as well as
investments in the ICN.
13
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
fiscal year ended March 31, 1998, agency commissions accounted for
approximately 60% of network service revenues with resale revenues
accounting for 40% of such revenues. As a result of the transition
to an ICP strategy 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.
During the period in which the Company resells the services of other
telecommunications carriers prior to deploying its 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.
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. Since implementing its ICP strategy, the Company has
expanded its staff to include three additional senior executives and
over 85 additional employees. The Company is also expanding its
information systems to provide improved recordkeeping for customer
information and management of uncollectible accounts and fraud
control.
14
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30,
1998 AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30,
1997.
The results for the quarter ended September 30, 1998 reflect the
Company's operations as an Integrated Communications Provider
("ICP"). In its capacity as an independent agent for the Regional
Bell Operating Companies (RBOCs), the Company recorded revenues
which represented the fees and commissions earned by the Company for
sales of products and services to business customers. As an ICP, the
Company purchases local services from the RBOCs at a discount to the
retail rate, and resells and bills these services to business
customers. The Company also resells other services including long
distance, Internet access, and various data services in order to
provide a total integrated telecommunications solution to its
customers. The Company will continue reselling telecommunications
services until the deployment of its Integrated Communications
Network ("ICN") and begins migrating customers onto its own network.
Total revenues for the second fiscal quarter were $14,516,000, as
compared to $11,845,000 for the same period of the preceding Fiscal
year, or an increase of 23%. Total revenues for the six months
ended September 30, 1998 were $27,352,000, as compared to
$23,504,000, or an increase of 16%. The September quarter revenues
also represented an increase of 13% over the June 1998 quarter
revenues of $12,836,000. Revenues for local, Internet access and
data services increased a combined 63% on a sequential quarter basis
due primarily to the addition of new customer relationships. Long
distance revenue experienced a 24% decrease on a sequential quarter
basis as a result of the Company's strategic decision to stop
offering long distance to outbound call center customers. These
customers tend to be high volume, low margin businesses where the
relationship is short-term. It is the Company's policy to focus on
long-term relationships with customers that purchase the full
complement of services.
A common basis for measurement of an ICP's progress is the growth in
access line equivalents. During the quarter ended September 30,
1998, the Company sold 33,183 access line equivalents and
provisioned 25,553, bringing the total lines in service to 64,394
for the Company's first nine months as an ICP. New lines sold
represented a 26% sequential increase over lines sold during the
quarter ended June 30, 1998.
15
Costs of telecommunications revenues for the quarter ended September
30, 1998 were $12,383,000, as compared to $2,712,000 for the same
period of the preceding Fiscal year. For the six months ended
September 30, 1998 costs of telecommunications revenues were
$23,997,000, as compared to $5,156,000 for the same period of the
preceding Fiscal year. Since substantially all revenues since
January 1, 1998 have resulted from operations as ICP, comparative
numbers on a year to year basis are not relevant. As a percentage
of telecommunications revenues, cost of telecommunications revenues
was 85% for the second quarter of Fiscal 1999, as compared to 90%
for the first quarter of Fiscal 1999 and 95% for fourth quarter of
Fiscal 1998, the first quarter of transition from agency status to
ICP status. The gross margin improvement over the first nine months
as an ICP is primarily attributable to the implementation of the
lower long distance wholesale costs previously renegotiated with the
Company's principal long distance supplier, significant improvements
made in local service gross margins, and the elimination of the
lower margin call center business from long distance gross margins.
For the quarter ended September 30, 1998, Selling, general and
administrative expenses (SG & A) increased 84% to $13,001,000 from
$7,054,000 for the same period of the preceding fiscal year. For
the six months ended September 30 1998, SG & A expenses were
$22,496,000, as compared to $13,988,000, or an increase of 61%.
These increases were due primarily to the opening of five new branch
sales offices during the six months ended September 30, 1998 and the
associated increased number of sales and service employees hired in
connection with the transition to the ICP platform. As of September
30, 1998, CTC employed 392 people including 197 Account Executives
and 85 Network Coordinators in 25 branch locations throughout New
England and New York. In addition, SG & A expenses increased due to
operating expenses associated with the network build out, as well as
an additional $500,000 of increased depreciation expense in the
second fiscal quarter associated with the investments in the
Integrated Communications Network. The final component of the
increase is related to legal and regulatory activities. Legal
expenses in prosecuting both the anti-trust action against Bell
Atlantic now pending in the federal courts and the state regulatory
proceedings instituted in each of the New England States against
Bell Atlantic for discriminatory practices regarding the Bell
Atlantic policy of imposing contract termination fees on its
customers as well as the regulatory expenses incurred in obtaining
certification as a reseller in additional states, were $1,913,000
and $2,632,000 respectively, for the three and six months ended
September 30, 1998.
16
For the quarter ended September 30, 1998 the Company reported a loss
before taxes of $11,811,000. For the quarter ended June 30, 1998
the Company reported a net loss before taxes of $8,528,000, and
recorded a tax benefit of $2,900,000, for a net loss of $5,628,000,
or $0.56 per share. Initially, the Company recognized the benefit
of the tax loss carry-back at the Federal tax rate of 34%. The
Company has determined that the benefit should be applied ratably as
a percentage of the Company's estimated pre-tax loss over each of
the four quarters of the fiscal year. The effective rate of the
benefit may vary with changes in management's estimates. While
applying the tax benefit ratably over each of the four quarters will
not change the year end result, an adjustment was made for the first
quarter reducing the tax benefit to $597,000 compared to the
previously recorded tax benefit of $2,900,000. Based on the
foregoing, the net loss for the first quarter will increase from the
previously reported $5,628,000, or $0.56 per share, to $7,931,000,
or $0.79 per share. An Amendment to the Form 10-Q for the quarter
ended June 30, 1998 is being filed to reflect this change.
Liquidity and Capital Resources
Working capital at September 30, 1998 amounted to $11,627,000 as
compared to $11,342,000 at March 31, 1998, an increase of 3%. Cash
balances at September 30, 1998 and March 31, 1998 totaled
approximately $2,167,000.
Historically, the Company funded its working capital and operating
expenditures primarily from cash flow from operations. As a result
of Bell Atlantic's failure to pay approximately $14 million in
agency commissions (currently approximately $11.5 million) that the
Company believes it is owed under its agency contract, the losses
incurred following transition to an ICP strategy, and the investment
required to implement the Integrated Communications Network, the
Company has been required to raise additional capital. Although the
Company has sued Bell Atlantic and believes the collection of the
agency commissions is probable, there is no assurance that the
Company will be successful in its collection efforts were that such
collections will not be delayed. If the Company fails to collect
any of the agency commissions or if their collection becomes less
than probable, the Company would be required to write off the
uncollected amounts reflected in its financial statements or amounts
for which collection becomes less than probable. Delay in the
collection or write-off of agency commissions may adversely affect
the Company.
In April 1998, the Company completed a $12 million private placement
of Series A Convertible Preferred Stock and Warrants to Spectrum
Equity Investors II, L.P.
17
On September 1, 1998, the Company as Borrower, entered into a Loan
and Security Agreement ("Loan and Security Agreement") with Goldman
Sachs Credit Partners L.P. and Fleet National Bank as Lenders.
Under the terms of the Loan and Security Agreement, the Lenders have
provided a three-year senior secured credit facility to the Company
consisting of revolving loans in the aggregate amount of up to $75
million (the "Credit Facility"). Advances under the facility bear
interest at 1.75% over the prime rate and are secured by a first
priority perfected security interest on all of the Company's assets,
provided, however, that the Company has the ability to exclude
assets acquired through purchase money financing. In addition, the
Company is required to pay a commitment fee of 0.5% per annum on any
unused amounts under the facility as well as a monthly line fee of
$150,000 per month. The Company may borrow $15 million
unconditionally and $60 million based on trailing 120 days accounts
receivable collections (reducing to the trailing 90 days of
collections by March 31, 2000). The Company paid a one-time up
front fee of $2,531,250, representing 3 3/8% of the facility. In
the event that the Company wishes to prepay the loan, the agreement
provides for a prepayment penalty of 2% during the first 18 months
of the term of the loan. Warrants to purchase an aggregate of
974,412 shares of the Company's common stock at an purchase price of
$6.75 per share were issued to the Lenders in connection with the
transaction. The Company has valued the Warrants at $1.3 million
which is being amortized and included in interest expense over the
three-year term of the Loan and Security Agreement. As of October
31, 1998, the Company had borrowed $24,500,000 under the Credit
Facility.
On November 2, 1998, the Company obtained three-year vendor
financing facility for up to $25 million from Cisco Capital Corp.
Under the terms of the agreement, the Company has agreed to a three
year, $25 million volume purchase commitment of Cisco Systems
equipment and services and Cisco Capital Corp has agreed to advance
funds as these purchases occur. In addition, a portion of the Cisco
facility can be utilized for working capital costs associated with
the integration and operation of Cisco Systems solutions and related
peripherals.
Pursuant to the terms of the Cisco Vendor Financing Agreement dated
as of October 14, 1998, the Company has agreed to give the Lender a
senior security interest in all Cisco products purchased with the
proceeds of the first $15 million advanced under the facility and a
subordinate security interest in all other assets of the Company.
Under the terms of the Cisco facility, the Company is required to
pay interest on funds advanced under the facility at an annual rate
of 12.5%. In addition, the Company is required to pay a commitment
fee of .50% per annum on any unused amounts under the facility as
well as a monthly line fee of $15,000 per month. The Company paid a
closing fee of 1% of the total credit facility.
18
The Company expects to utilize the proceeds of the Cisco financing
to deploy the first phase of its data-centric Integrated
Communications Network in 22 network hub and node sites within the
New York and New England regions.
The implementation of the Company's current business plan to further
penetrate its existing markets, deploy the ICN in its existing
markets and enhance and expand the CTC information systems will
require significant capital. The Company may require additional
capital if it experiences demand for its products and services in
excess of that which is currently planned, accelerates the rate of
expansion of its sales presence from that which is currently
anticipated or accelerates the deployment of the ICN in its
existing markets. Additional capital will be required to expand the
Company's sales presence into the New York-Washington D.C. corridor
and deploy its ICN into this region or any other new markets. The
Company also expects to seek additional lease financing to fund the
acquisition of equipment and software related to the enhancements
and expansion of the CTC information systems and the deployment of
its network operating centers. The Company's actual capital
requirements also may be materially affected by many factors,
including the timing and actual cost of expansion into new markets,
the extent of competition and pricing of telecommunications services
in its markets, acceptance of the Company's services, technological
change and potential acquisitions.
While the Company believes that under its current business plan the
proceeds from the Goldman Sachs/Fleet credit facility combined with
the Cisco facility and other anticipated lease financing will be
sufficient to fund operations at least through December 1999,
several factors could influence the timing of the Company's need for
additional capital. These factors include, but are not limited to:
(a) the need to finance larger amounts of working capital if the
Company experiences demand for its services in excess of that which
is planned, (b) the Company expands its sales presence faster than
currently anticipated, (c) the enhancements and expansion of the CTC
information systems turn out to be more capital intensive than
originally planned, or (d) the Company fails to collect or is
delayed in collecting the approximately $11.5 million which it
believes is due from Bell Atlantic under its former Agency
arrangement or is delayed in collecting such amounts. The Company
may seek opportunistic financing activities prior to December 1999
depending on market conditions.
19
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 in the Company's Current Reports on
Form 8-K dated February 3, 1998 and August 4, 1998 and in the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1998.
In December 1997, the Company terminated its agency contract and
filed suit against Bell Atlantic for breaches of the contract,
including the failure of Bell Atlantic's retail division to pay $14
million in agency commissions (now approximately $11.5 million) owed
to the Company. The Company also asserted violations by Bell
Atlantic of antitrust laws and the Telecommunications Act. Bell
Atlantic filed counterclaims asserting that the Company breached a
provision of the agency contract prohibiting the Company from
selling non-Bell Atlantic local services to certain agency customers
for a one-year period following termination of the contract. Based
on that provision, Bell Atlantic obtained a temporary restraining
order ("TRO") that prohibits the Company from marketing certain
local telecommunications services to any Bell Atlantic customer for
whom the Company was responsible for account management, or to whom
the Company sold Bell Atlantic services, during 1997. On July 31,
1998, Judge Gene Carter of the United States District Court of
Portland, Maine ordered the dissolution of the TRO against the
Company and denied Bell Atlantic's motion for a permanent
injunction. The Court ruled that the Company has an absolute right
to solicit the customers they had serviced while a Bell Atlantic
Agent. The Company purchases Bell Atlantic telecommunications
services local products for resale and believes that the lawsuit has
not affected the Company's good relations with the Bell Atlantic
wholesale division. Moreover, Bell Atlantic is prohibited by
applicable federal law from discriminating against the Company in
the provision of wholesale services. See "Risk Factors-Potential
Impact of the Bell Atlantic Litigation" and Note 2 to the Company's
Unaudited Financial Statements contained herein.
The Company is otherwise party to suits arising in the normal course
of business which management believes are either individually or in
the aggregate not material.
20
Item 2. Changes in Securities
(c) During the quarter ended September 30, 1998, the Company issued
a total of 14,850 shares of Common Stock for an aggregate
consideration of $34,429 pursuant to the exercise of employee
incentive stock options by four employees of the Company. 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 Company's transfer agent. All recipients had
adequate access to information regarding the Company.
On July 15, 1998, the Company issued to Spectrum Equity Investors
II, L.P. ("Spectrum") five-year warrants to purchase up to 55,555
shares of Common Stock at a purchase price of $9.00 per share in
consideration for the Spectrum commitment that, at any time prior to
June 30, 1999, it would, upon the Company's request, purchase an
additional $5 million of Preferred Stock containing the same terms
and conditions as the Series A Convertible Preferred Stock. The
Spectrum commitment was given in conjunction with a $20 million
Interim Financing Commitment issued by Fleet National Bank to
satisfy the Company's short-term liquidity requirements of the bank.
The warrants 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.
On September 1, 1998, the Company issued to Goldman Sachs Credit
Partners, L.P. and Fleet National Bank (collectively, the
"Lenders"), in consideration of the Lenders providing a three-year
senior secured credit facility to the Company consisting of
revolving loans in the aggregate amount of up to $75 million, five-
year warrants to purchase an aggregate of 974,412 shares of Common
Stock at a purchase price of $6.75 per share. The warrants 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.
Reference is made to the Company's Current Report on Form 8-K and
exhibit thereto dated and filed on October 2, 1998 for a complete
description of the transaction.
21
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
3.1 Restated Articles of Organization, as amended(6)
3.2 Amended and Restated By-Laws of Registrant(6)
4.1 Form of Common Stock Certificate(5)
9.1 Voting Agreement dated April 10, 1998 among Robert
Fabbricatore and certain of his affiliates and Spectrum(7)
10.1 1996 Stock Option Plan(3)
10.2 1993 Stock Option Plan(5)
10.3 Employee Stock Purchase Plan(4)
10.4 Lease for premises at 360 Second Ave., Waltham MA(5)
10.5 Sublease for premises at 360 Second Ave., Waltham MA(5)
10.6 Lease for premises at 110 Hartwell Ave., Lexington MA(5)
10.7 Lease for premises at 120 Broadway, New York, NY(5)
10.8 Agreement dated February 1, 1996 between NYNEX and the Company(5)
10.9 Agreement dated May 1, 1997 between Pacific Bell and
the Company (5)
10.10 Agreement dated January 1, 1996 between SNET America,Inc.
and the Company(5)
10.11 Agreement dated June 23, 1995 between IXC Long Distance
Inc. and the Company, as amended(5)
10.12 Agreement dated August 19, 1996 between Innovative Telecom
Corp. and the Company(5)
10.13 Agreement dated October 20, 1994 between Frontier
Communications International, Inc. and the Company, as amended(5)
10.14 Agreement dated January 21, 1997 between Intermedia
Communications Inc. and the Company(5)
10.15 Employment Agreement between the Company and Steven Jones
dated February 27, 1998(7)
10.16 Securities Purchase Agreement dated April 10, 1998 among
the Company and the Purchasers named therein(6)
10.17 Registration Rights Agreement dated April 10, 1998 among
the Company and the Holders named therein(6)
10.18 Form of Warrant dated April 10, 1998(6)
10.19 Loan and Security Agreement dated as of September 1, 1998
by and between the Company, Goldman Sachs Credit Partners
L.P. and Fleet National Bank(8)
10.20 Agreement with Cisco Systems Capital Corp. dated as of
October 14, 1998 (9)
10.21 Warrant dated July 15, 1998 issued to Spectrum (10)
10.22 Lease for premises at 220 Bear Hill Rd., Waltham MA(10)
10.23 Warrant dated September 1, 1998 issued to Goldman Sachs & Co.(10)
10.24 Warrant dated September 1, 1998 issued to Fleet National Bank(10)
27 Financial Data Schedule(10)
99.1 Risk Factors(10)
- -----------------
(footnotes on next page)
22
(1) Incorporated by reference to an Exhibit filed as part of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996.
(2) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-18 (Reg. No. 2-96419-B)
(3) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-8 (File No. 333-17613)
(4) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-8 (File No. 33-44337)
(5) Incorporated by reference to an Exhibit filed as part of the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1997.
(6) Incorporated by reference to an Exhibit filed as part of the Registrant's
Current Report on Form 8-K dated May 15, 1998.
(7) Incorporated by reference to an Exhibit filed as part of the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1998.
(8) Incorporated by reference to an Exhibit filed as part of the Registrant's
Current Report on Form 8-K dated October 2, 1998.
(9) Incorporated by reference to an Exhibit filed as part of the Registrant's
Current Report on Form 8-K dated November 6, 1998.
(10) Filed herewith.
(b) Reports on Form 8-K
On August 4, 1998, the Registrant filed a report on Form 8-K
incorporating its August 3, 1998 press release which provided an
update on the status of the Bell Atlantic litigation and various
state regulatory actions.
23
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 13, 1998 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: November 13, 1998 /S/ STEVEN C. JONES
-----------------------------
Steven C. Jones
Executive Vice President,
and Chief Financial Officer
24