-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MYFdhFZYQoIW3jo1JF6nP9mqVFGuuMmQk8DE/5OPh3Csw1a7XV25kn1mnrA39ybU ODAJ58avRGjGu2TCydQQOw== 0001056114-98-000023.txt : 19981214 0001056114-98-000023.hdr.sgml : 19981214 ACCESSION NUMBER: 0001056114-98-000023 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000764841 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 042731202 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-13627 FILM NUMBER: 98768257 BUSINESS ADDRESS: STREET 1: 360 SECOND AVE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 7814668080 MAIL ADDRESS: STREET 1: 360 SECOND AVENUE CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER TELEPHONE CORP DATE OF NAME CHANGE: 19920703 10-Q/A 1 AMENDMENT NO. 1 TO 6/30/98 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A AMENDMENT NO. 1 TO FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter ended June 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 August 5, 1998, 9,998,535 shares of Common Stock were outstanding. In addition to historical information, this Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 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 Company's business plan, future profitability, expansion, 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 the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 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. 2 CTC COMMUNICATIONS CORP. FORM 10-Q/A INDEX PAGE NO. Part I FINANCIAL STATEMENTS Item 1. Financial Statements Condensed Balance Sheets as of June 30, 1998 (Restated) and March 31, 1998 4 Condensed Statements of Operations Three Months Ended June 30, 1998 (Restated) and June 30, 1997 5 Condensed Statements of Cash Flows Three Months Ended June 30, 1998 (Restated) and June 30, 1997 6 Notes to Condensed Financial Statements (Restated) 7-11 Item 2. Management's Discussion and Analysis of 12-19 Financial Condition and Results of Operations, as amended Signatures 20 3 CTC COMMUNICATIONS CORP. CONDENSED BALANCE SHEETS June 30, March 31, 1998 1998 (Restated) --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 5,376,067 $ 2,167,930 Accounts receivable, net 22,636,509 17,288,183 Prepaid expenses and other current assets 3,270,806 3,029,069 ------------- ------------- Total Current Assets 31,283,382 22,485,182 Furniture, Fixtures and Equipment 14,392,066 13,376,970 Less accumulated depreciation (7,392,683) (6,837,683) ------------- ------------- Total Equipment 6,999,383 6,539,287 Deferred income taxes 1,834,000 1,834,000 Other assets 211,085 108,885 ------------- ------------- Total Assets $ 40,327,850 $ 30,967,354 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 13,480,359 $ 8,958,476 Accrued salaries and related taxes 1,575,478 756,159 Current portion of obligations under capital leases 246,376 231,796 Current portion of note payable to bank 1,196,400 1,196,400 ------------- ------------- Total Current Liabilities 16,498,613 11,142,831 Obligations under capital leases, net of current portion 1,071,874 1,114,277 Note payable to bank, net of current portion 6,831,571 7,130,671 Series A redeemable convertible preferred stock 12,241,373 0 Stockholders' equity: Common Stock 99,885 99,806 Additional paid in capital 5,254,964 5,245,704 Deferred compensation (291,910) (318,410) Retained earnings (deficit) (1,242,695) 6,688,300 ------------- ------------- 3,820,244 11,715,400 Amounts due from stockholders (135,825) (135,825) ------------- ------------- Total Stockholders' Equity 3,684,419 11,579,575 ------------- ------------- Total Liabilities and Stockholders' Equity $ 40,327,850 $ 30,967,354 ============= ============= The accompanying notes are an integral part of these financial statements. 4 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended June 30, June 30, 1998 1997 (Restated) ------------- ------------- Telecommunications revenues $ 12,835,685 $ 11,658,954 Costs and expenses Cost of telecommunications revenues 11,613,468 2,442,836 Selling, general and administrative expenses 9,494,954 6,935,100 ------------- ------------- 21,108,422 9,377,936 ------------- ------------- Income (loss) from operations (8,272,737) 2,281,018 Other Interest income 132,395 57,586 Interest expense (417,510) (4,455) Other 29,852 3,851 ------------- ------------- (255,263) 56,982 ------------- ------------- Income (loss) before income taxes (8,528,000) 2,338,000 Provision (benefit) for income taxes 597,000 964,000 ------------- ------------- Net income (loss) $ (7,931,000) $ 1,374,000 ============= ============= Net income (loss) per common share: Basic $ (0.79) $ 0.14 ============= ============= Diluted $ (0.79) $ 0.13 ============= ============= Weighted average number of common shares: Basic 9,984,192 9,756,682 ============= ============= Diluted 9,984,192 10,698,913 ============= =============
The accompanying notes are an integral part of these financial statements. 5 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, June 30, 1998 1997 (Restated) ------------- --------------- Net cash used by operating activities (7,445,924) (2,349,020) INVESTING ACTIVITIES Additions to equipment (1,015,096) (656,591) ------------- ------------- Net cash used in investing activities (1,015,096) (656,591) FINANCING ACTIVITIES Proceeds from issuance of redeemable preferred stock 12,001,321 0 Proceeds from the issuance of common stock 9,339 9,426 Repayment of obligations under capital leases (42,403) 0 Repayment of note payable to bank (299,100) 0 ------------- ------------- Net cash provided by financing activities 11,669,157 9,426 Increase (decrease) in cash 3,208,137 (2,996,185) Cash at beginning of year 2,167,930 6,405,670 ------------- ------------- Cash and cash equivalents at end of period $ 5,376,067 $ 3,409,485 ============= =============
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 months ended June 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. RESTATEMENT OF FINANCIAL STATEMENTS CTC Communications Corp. (the "Company") in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, reported a 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. In the June 30, 1998 Form 10-Q, the Company recognized the benefit of the loss before income taxes 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 and amount of the benefit may vary with changes in management's estimates over the remaining quarterly periods in the fiscal year ending March 31, 1999. Accordingly, an adjustment was made for the quarter ended June 30, 1998, 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 quarter ended June 30, 1998 has increased from the previously reported $5,628,000, or $0.56 per share, to $7,931,000, or $0.79 per share. This adjustment resulted in a decrease to working capital and stockholders' equity of $2,303,000 as of June 30, 1998. This Amendment No. 1 to the Company's Form 10-Q for the quarter ended June 30, 1998 contains the revised disclosure as a result of this change. NOTE 2: CASH DIVIDENDS The Company has not paid cash dividends during the period presented. 7 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 approximately $2.0 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 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 8 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 has 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 trial is scheduled for November 1998. 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. 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 9 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 has also filed petitions for repeal of the Bell Atlantic customer termination fee requirement in the States of New Hampshire, Maine, Vermont, Rhode Island and New York. On July 16, 1998, the New Hampshire Public Utilities Commission held a hearing on Bell Atlantic's recent policy of imposing contract termination fees on its customers who choose a competitive Bell Atlantic reseller as their local provider. To date, no decision has been rendered. 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. 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 Registrant 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 Current Report on Form 8-K and exhibits thereto dated and filed on May 15, 1998 for a complete description of the transaction. 10 NOTE 5. TRANSACTIONS SUBSEQUENT TO JUNE 30, 1998 On July 16, 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 commitment by Spectrum that, at any time prior to June 30, 1999, Spectrum will, 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 purchased by Spectrum on April 10, 1998. The Spectrum commitment was made in conjunction with a $20 million interim financing commitment by Fleet National Bank to meet the bank's short-term liquidity requirements. On July 30, 1998, the CTC Communications Corp. Employee Stock Purchase Plan purchased 6,737 shares of Common Stock from the Company at $6.6938 for the purchase period ended June 30, 1998. Through August 5, 1998, 11,137 shares of Common Stock were issued as a result of employees exercising outstanding stock options. 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 June 30, 1998 1997 (Restated) Numerator: Net income (loss) (7,931,000) 1,374,000 Numerator for basic net income (loss) per share and diluted net income ------------------------ (loss) per share (7,931,000) 1,374,000 ======================== Denominator: Denominator for basic net income (loss) per share-weighted average shares 9,984,192 9,756,682 Effect of dilutive securities: Employee stock options 0 942,231 Denominator for diluted net income ------------------------- (loss) per share-weighted-average shares 9,984,192 10,698,913 ========================== Basic net income (loss) per share (0.79) 0.14 ========================== Diluted net income (loss) per share (0.79) 0.13 ==========================
11 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTATEMENT OF FINANCIAL STATEMENTS CTC Communications Corp. (the "Company") in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, reported a 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. In the June 30, 1998 Form 10-Q, the Company recognized the benefit of the loss before income taxes 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 and amount of the benefit may vary with changes in management's estimates over the remaining quarterly periods in the fiscal year ending March 31, 1999. Accordingly, an adjustment was made for the quarter ended June 30, 1998, 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 quarter ended June 30, 1998 has increased from the previously reported $5,628,000, or $0.56 per share, to $7,931,000, or $0.79 per share. This adjustment resulted in a decrease to working capital and stockholders' equity of $2,303,000 as of June 30, 1998. This Amendment No. 1 to the Company's Form 10-Q for the quarter ended June 30, 1998 contains the revised disclosure as a result of this change. 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 181-member direct sales force and 85 customer care representatives located in 20 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 5,000 customers who purchased in excess of $200 12 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 geographically and add network facilities. The Company intends to expand within its existing markets and into six additional states in the Boston-Washington, D.C. corridor, plans to open more than 20 new branch offices and hire more than 200 additional sales personnel. Beginning in the first quarter of 1999, the Company intends to deploy a state-of-the-art, data centric, packet-switched Integrated Communications Network ("ICN"), initially in the Company's existing markets and in new markets as customer demand and concentrations warrant. The ICN will utilize long distance and data switches capable of handling ATM, IP, Ethernet and Frame Relay protocols 13 interconnected by leased transmission facilities. 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 data transmission capabilities and the economic benefits that can be achieved by utilizing a combination of Company-owned facilities and leased network elements. Once deployed, the Company believes that the ICN will enable the Company to improve margins, enhance customer controls and broaden service offerings. 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 under "Liquidity and Capital Resources" in this Quarterly 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 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. For the three months ended June 30, 1998, agency commissions accounted for approximately 3% of network service revenues with resale revenues accounting for 97% 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 that the Company is reselling 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. 14 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 ENDED JUNE 30, 1998 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997. The results for the quarter ended June 30, 1998 reflect the Company's decision to terminate its agency relationship with Bell Atlantic in December 1997 and commence operation as an ICP. As an agent, 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 is initially purchasing local services from the Regional Bell Operating Companies (RBOCs) at a discount to the retail rate and is reselling these services on its own bill to 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 plans to continue reselling telecommunications services until such time as the Company deploys its ICN and begins migrating customers onto its own network. Total revenues for the first fiscal quarter were $12,836,000 as compared to $11,659,000 for the same period of the preceding Fiscal year, or an increase of 10%. The June quarter revenues also represented an increase of 104% over the March 1998 quarter revenues of $6,287,000, the initial quarter of the transition from agent to an ICP. One method of measuring performance is the addition of access line equivalents. During the quarter ended June 30, 1998, the Company sold 26,440 access line equivalents, for a total of 48,053 and provisioned 23,730 access line equivalents during the first fiscal quarter, for a six month total of 41,837. 15 Costs of telecommunications revenues for the quarter ended June 30, 1998 were $11,614,000, as compared to $2,443,000 for the same period of the preceding Fiscal year. Since almost all revenues for the period commencing January 1, 1998 have been recorded as an ICP, comparative numbers on a year to year basis are not relevant. As a percentage of telecommunication revenues, cost of telecommunications revenues was 90% for the first quarter of Fiscal 1999 as compared to 95% for fourth quarter of Fiscal 1998, the first quarter of the ICP transition. As they relate to resold services only, cost of telecommunication services were 93.5% and 97.6% respectively, for the three months ended June 30, 1998 and March 31, 1998. Although the Company experienced gross margin improvement on a sequential quarter basis, overall margins were adversely affected due to the fixed costs associated with the sale of local telecommunication services, lower long distance rates extended to customers in advance of anticipated decreases in the wholesale costs charged by the Company's long distance supplier, and increased costs associated with adding new customers and services. The Company believes that gross margins for the first quarter of Fiscal 1999 are not representative and expects gross margins to improve in future quarters as revenue volumes increase, revenue assurance programs are implemented and operating controls are strengthened. Selling, general and administrative expenses increased 37% to $9,495,000 in the first quarter of Fiscal 1999 as compared to $6,935,000 for the same period of the preceding fiscal year. This increase was due primarily to the increased number of sales and service employees hired in connection with the Company's strategy shift to the ICP platform with the associated increases in salaries and benefits, recruiting, and training. In addition, the Company incurred additional administrative expenses associated with the opening of new branches and the expansion of some existing branch locations, as well as other costs associated with its transition to an ICP. The Company made significant capital expenditures in late Fiscal 1998 in its information systems, including the enhancement of its core system, deployment of laptop computers to all field sales personnel, and upgrading of the local area networks at all the branch offices. These investments resulted in a significantly increased depreciation expense in the first quarter of Fiscal 1999 versus the comparable quarter in Fiscal 1998. On a sequential quarter basis, selling, general and administrative expense actually decreased $627,000, or 7%, primarily due to a $1,200,000 charge in the fourth quarter of Fiscal 1998 that was accrued for estimated costs to be incurred in the collection of the past due receivable from Bell Atlantic. For the quarter ended June 30, 1998 the Company reported a loss before taxes of $8,528,000, and recorded a tax benefit of $597,000, for a net loss of $7,931,000, or $0.79 per share. Due to the transition from agency status to an ICP platform, comparative numbers on a year to year basis have no relevance. On a sequential quarter basis, the Company experienced a doubling of revenues, improvements in gross margins, reductions in operating expenses, and a reduced loss before income taxes. 16 Liquidity and Capital Resources Working capital at June 30, 1998 amounted to $14,784,000 as compared to $11,342,000 at March 31, 1998, an increase of 30%. Cash balances at June 30, 1998 totaled $5,376,000, an increase of $3,208,000 from March 31, 1998. Historically, the Company funded its working capital and operating expenditures primarily from cash flow from operations. Primarily as a result of Bell Atlantic's failure to pay approximately $14.0 million in agency commissions (currently approximately $11.5 million) that the Company believes it is owed under its agency contract and the costs incurred following the transition to an ICP strategy, the Company has been required to raise additional capital. As of July 31, 1998, the Company had borrowed $7,955,000 under its existing Fleet Credit Facility. In April 1998, the Company completed a $12 million private placement of Series A Convertible Preferred Stock and Warrants. 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 collecting those commissions. If the Company fails to collect any of the agency commissions due from Bell Atlantic or if collection becomes less than probable, the Company would be required to write off the amounts reflected in its financial statements that it is unable to collect or for which collection becomes less than probable. Delay in the collection or write-off of the agency commissions may adversely affect the Company. The implementation of the Company's business plan to further penetrate its existing markets, deploy the Integrated Communications Network in its existing markets, expand its sales presence into six additional states in the Boston-Washington D.C. corridor and enhance the CTC Information System requires significant capital. The Company may require additional capital if it accelerates the rate of deployment of the ICN. Additional capital may also be required after that time to finance the deployment of the Company's ICN in new markets. An increase in the rate at which the Company deploys its network would accelerate its need for additional capital. 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. The Company has obtained a commitment for an interim credit facility (the "Interim Facility") from Fleet National Bank. The Interim Facility, which matures on June 30, 1999, would provide secured revolving loans of up to $20 million to refinance the Credit Facility, to fund capital expenditures and operating losses and for general corporate purposes. Borrowing for capital expenditures in excess of $1 million would be limited to the extent of collection of 17 the Bell Atlantic agency commissions under dispute and by financial covenants. The Interim Facility, which is subject to certain conditions, extends to September 30, 1998. The Company also agreed to reduce availability under the Credit Facility to $9 million, and the lender has extended its waiver of existing covenant defaults through September 30, 1998. The Company paid fees in connection with obtaining this commitment and waiver of $500,000 and an additional fee of $300,000 would be payable if the Company draws on the Interim Facility. If the Interim Facility is outstanding at various dates from October 31, 1998 through June 30, 1999, the Company has agreed to issue to the lender warrants to purchase in the aggregate up to 5% of the Company's outstanding Common Stock on a fully diluted basis at exercise prices equal to the market value on the respective dates of issuance. To satisfy a condition of the Interim Facility, the Company has obtained a commitment from Spectrum Equity Investors II L.P. ("Spectrum") which provides that if at any time prior to June 30, 1999, Spectrum will upon the request of the Company, purchase an additional $5 million in Preferred Stock, which would have the same terms as the Series A Convertible Preferred Stock (the "Interim Spectrum Financing"). In consideration of this commitment, the Company has agreed to issue to Spectrum five-year warrants to purchase 55,555 shares of Common Stock, exercisable at $9 per share. To meet its projected capital requirements, on August 5, 1998, the Company obtained a commitment from Goldman Sachs Credit Partners, L.P. ("Goldman Sachs") and Fleet National Bank (collectively, the "Lenders") under the terms of which the Lenders will provide a three-year senior secured credit facility to the Company consisting of revolving loans in the aggregate amount of up to $75 million (the "New Credit Facility"). The loans will bear interest at 1.75% over the prime rate and will be secured by a first priority perfected security interest on all of the Company's assets provided, however, that the Company will have the ability to exclude assets acquired through vendor financing. Under the terms of the commitment, the Company is obligated to issue five-year warrants to the Lenders to purchase, at $6.75 per share, Common Stock of the Company representing 7.5% of the Company's fully-diluted equity. The Lenders will receive registration rights covering the future sale of the Common Stock issuable upon exercise of the warrants. The Company has also agreed to give Goldman Sachs the right to nominate a Goldman Sachs designee to the Company's Board of Directors. The financing, which is subject to the execution of loan documents and other customary conditions, is scheduled to close on or before August 31, 1998. From the proceeds of the loan, the Company intends to repay the existing Fleet Credit Facility of approximately $8 million and utilize the balance for general working capital purposes including the funding of the Company's expansion and the deployment of the Company's Integrated Communications Network. It is the Company's intention, upon the closing of the New Credit Facility, not to draw down any funds from the Interim Credit Facility. 18 The Company believes that the proceeds from the New Credit Facility will be sufficient to fund its current business plan for at least 18 months. There can be no assurance that the loan agreement covering the New Credit Facility will be finalized. 19 FORM 10-Q/A FOR THE QUARTER ENDED JUNE 30, 1998 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: December 11, 1998 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: December 11, 1998 /S/ STEVEN C. JONES ----------------------------- Steven C. Jones Executive Vice President, and Chief Financial Officer 20 EX-27 2 FDS FOR Q.E. 6/30/98
5 1,000 3-MOS MAR-31-1999 JUN-30-1998 5,376 0 23,704 1,067 0 31,283 14,392 7,393 40,328 16,499 0 0 12,241 100 3,585 40,328 12,836 12,998 11,613 21,108 0 0 418 (8,528) (597) (7,931) 0 0 0 (7,931) (0.79) (0.79)
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