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 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.
<PAGE>
CTC COMMUNICATIONS CORP.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Part I FINANCIAL STATEMENTS PAGE NO.
Item 1. Financial Statements
Condensed Balance Sheets
as of June 30 and March 31, 1998 3
Condensed Statements of Income
Three Months Ended June 30, 1998 and 1997 4
Condensed Statements of Cash Flows
Three Months Ended June 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Inapplicable
Disclosures About Market Risk
Part II OTHER INFORMATION
Item 1. Legal Proceedings 16-17
Item 2. Changes in Securities 17
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 18-19
</TABLE>
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 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 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.
<PAGE>
CTC COMMUNICATIONS CORP.
CONDENSED BALANCE SHEETS
June 30, March 31,
1998 1998
--------------- ---------------
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 5,573,806 3,029,069
------------- -------------
Total Current Assets 33,586,382 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 $ 42,630,850 $ 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 1,060,305 6,688,300
------------- -------------
6,123,244 11,715,400
Amounts due from stockholders (135,825) (135,825)
------------- -------------
Total Stockholders' Equity 5,987,419 11,579,575
------------- -------------
Total Liabilities and
Stockholders' Equity $ 42,630,850 $ 30,967,354
============= =============
The accompanying notes are an integral part of these financial statements.
3
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CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1998 1997
------------- -------------
<S> <C> <C>
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 2,900,000 964,000
------------- -------------
Net income (loss) $ (5,628,000) $ 1,374,000
============= =============
Net income (loss) per common share:
Basic $ (0.56) $ 0.14
============= =============
Diluted $ (0.56) $ 0.13
============= =============
Weighted average number of common shares:
Basic 9,984,192 9,756,682
============= =============
Diluted 9,984,192 10,698,913
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1998 1997
------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (5,628,000) $ 1,374,000
Adjustments to reconcile net income (loss)to
net cash used by operating activities:
Depreciation and amortization 555,000 186,000
Stock compensation expense 26,500 0
Interest on redeemable preferred stock 240,052 0
Changes in noncash working capital items:
Accounts receivable (5,348,324) (3,165,685)
Other current assets (2,544,737) (15,135)
Other assets (102,200) 1,200
Accounts payable 4,521,886 (430,757)
Accrued liabilities 819,319 (66,107)
Capital leases 14,580 0
Accrued taxes 0 (225,948)
Deferred revenue 0 (6,588)
------------- -------------
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
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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.
NOTE 2: CASH DIVIDENDS
The Company has not paid cash dividends during the period
presented.
NOTE 3: COMMITMENTS AND CONTINGENCIES
In December 1997, the Company filed a Complaint and Jury Trial
Demand ("Complaint")against Bell Atlantic Corporation ("Bell
Atlantic") in the United States District Court for the District
of Maine (Civil Action No. 97-CV-395-P-H) alleging breach by Bell
Atlantic (as successor to the NYNEX Company) of the Agreement for
Sale of Services and Account Management effective as of February
1, 1996 between NYNEX and the Company (the "Agency Agreement") by
reason of failure to pay approximately $14.0 million in
commission payments due and owing under the Agency Agreement
among other breaches. Subsequent to filing the suit, Bell
Atlantic paid the Company 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
6
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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
7
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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.
8
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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 5. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share".
Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
net income per share:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
Numerator:
<S> <C> <C>
Net income (loss) (5,628,000) 1,374,000
Numerator for basic net income (loss)
per share and diluted net income ------------------------
(loss) per share (5,628,000) 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 (0.56) 0.14
==========================
Diluted net income (loss) per share (0.56) 0.13
==========================
</TABLE>
9
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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 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
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
10
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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.
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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.
12
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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
$2,900,000, for a net loss of $5,628,000, or $0.56 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 net loss.
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Liquidity and Capital Resources
Working capital at June 30, 1998 amounted to $17,088,000 as compared
to $11,342,000 at March 31, 1998, an increase of 51%. 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
14
<PAGE>
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.
15
<PAGE>
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.
Part II
Item 1. Legal Proceedings
The information required under this item with respect to the actions
entitled (1) "CTC Communications Corp. v. Bell Atlantic
Corporation," U.S. District Court for the District of Maine, Civil
Action No. 97-CV-395-P-H and (2) "Bell Atlantic Corporation v. CTC
Communications Corp. and Computer Telephone Company," U.S. District
Court for the Southern District of New York, Case No. 98 CIV 0048,
has been previously reported (as defined in Rule 12b-2) in the
registrant's Current Reports on Form 8-K dated February 3, 1998 and
August 4, 1998 and in the registrant'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 3 to the Company's
Unaudited Financial Statements contained herein.
16
<PAGE>
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.
Item 2. Changes in Securities
(c) During the quarter ended June 30, 1998, the Company issued a
total of 7,837 shares of common stock for an aggregate consideration
of $9,337 pursuant to the exercise of employee incentive stock
options by three employees of the registrant. The shares were
issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. The
recipients of the securities represented their intention to acquire
the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate
legends were attached to the shares certificates and stop transfer
orders given to the registrant's transfer agent. All recipients had
adequate access to information regarding the registrant.
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 of even date 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. 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.
On July 16, 1998, the Company issued to 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. The Spectrum commitment was made 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.
17
<PAGE>
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)
27 Financial Data Schedule(8)
99.1 Risk Factors(8)
(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 the Registrant's Current Report on Form
8-K dated May 15, 1998 filed with the Commission on 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) Filed herewith.
18
<PAGE>
(b) Reports on Form 8-K
On May 15, 1998, the Registrant filed a report on Form 8-K
disclosing under Item 5 that (i) it had issued for investment
666,666 shares of Series A Convertible Preferred Stock for $12
million and had issued warrants to the investors in connection with
the transaction, (ii) its Bylaws had been Amended and Restated and
(iii) a Certificate of Designation for the Series A Convertible
Preferred Stock had been filed.
19
<PAGE>
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: August 14, 1998 /S/ ROBERT FABBRICATORE
----------------------------
Robert Fabbricatore
Chairman and CEO
Date: August 14, 1998 /S/ STEVEN JONES
-----------------------------
Steven Jones
Executive Vice President,
and Chief Financial Officer
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Exhibit 99.1
Limited History as an ICP; Risks Relating to Implementation of
New Strategy
Although the Company has sold integrated telecommunications
services for over 14 years, it sold local telephone services as
an agent for Bell Atlantic Corp. (''Bell Atlantic'') until
December 1997 and only began offering such services as an
integrated communications provider (''ICP'') under its own
brand name after that time. As a result of the Company
terminating its agency relationship with Bell Atlantic, agency
revenues, which accounted for approximately 71% of the
Company's revenues for the nine month period ended December 31,
1997 are no longer material. For the first quarter ended June
30, 1998, agency revenues decreased from approximately $8.6
million to approximately $400,000 and total revenues increased
from approximately $11.6 million to approximately $12.8
million. There can be no assurance that the Company's prior
experience in the sale of telecommunications services as a
sales agent will result in the Company generating sufficient
cash flow to service its debt obligations or to compete
successfully under its new strategy.
The Company plans to deploy its own Integrated
Communications Network (''ICN''). The Company has no experience
in deploying, operating and maintaining a telecommunications
network. The Company's ability to successfully deploy its ICN
will require the negotiation of interconnection agreements with
incumbent local exchange carriers (''ILECs''), which can take
considerable time, effort and expense and which are subject to
federal, state and local regulation. There can be no assurance
that the Company will be able to successfully negotiate such
agreements or to effectively deploy, operate or maintain its
facilities or increase or maintain its cash flow from
operations by deploying a network. Further, there can be no
assurance that the packet-switched design of the network will
provide the expected functionality in serving its target market
or that customers will be willing to migrate the provision of
their services onto the Company's network. The Company has
engaged a network services integrator to design, engineer and
manage the buildout of the ICN in the Company's existing
markets. Any failure or inability by the network integrator to
perform these functions could cause delays or additional costs
in providing services to customers and building out the
Company's ICN in specific markets. Any such failure could
materially and adversely affect the Company's business and
results of operations.
If the Company fails to effectively transition to an ICP
platform, fails to obtain or retain a significant number of
customers or is unable to effectively deploy, operate or
maintain its network, such failure could have an adverse effect
on the Company's business, results of operations and financial
condition. In addition, the implementation of its new strategy
and the deployment of its network has increased and will
continue to increase the Company's expenses significantly.
Accordingly, the Company expects to incur significant negative
cash flow during the next several years as it implements its
business strategy, penetrates its existing markets as an ICP,
enters new markets, deploys its ICN and expands its service
offerings. There can be no assurance that the Company will
achieve and sustain profitability or positive net cash flow.
Capital Requirements
The Company has obtained a commitment for an interim credit
facility (the ''Interim Facility'') from its current lender.
The Interim Facility, which would mature 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. The
commitment, which is subject to certain conditions, extends to
September 30, 1998. To satisfy one of those conditions, the
Company has received a commitment from Spectrum to purchase $5
million of Preferred Stock which extends until June 30, 1999.
The Company believes that the Interim Facility and the Interim
Spectrum Financing, if required, together with cash on hand
would be sufficient to refinance the Company's existing credit
facility and fund the Company's existing operations for at
least the next 12 months. However, CTC would be required to
delay its proposed geographic expansion and deployment of
facilities or to obtain additional financing within the next 6
months.
To meet its projected capital requirements, on August 5, 1998,
the Company obtained a commitment from Goldman Sachs Credit
Partners, L.P. 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 in all of the
Company's assets provided, however, that the Company will have
the ability to exclude assets acquired through vendor
financing. Although the New Credit Facility is scheduled to
close on or before August 31, 1998, there can be no assurance
that the transaction with close, or if so, upon terms
satisfactory to the Company.
The timing and amount of the Company's actual capital
requirements may be materially affected by many factors,
including the timing and closing of its financing commitments,
the timing and actual cost of expansion into new markets and
deployment of the ICN, the extent of competition and pricing of
telecommunications services in its markets, acceptance of the
Company's services, technological change and potential
acquisitions. Additional sources of funding the Company's
capital requirements may include public offerings or private
placements of equity or debt securities, vendor financing and
bank loans. There can be no assurance that future financing
will be available to the Company or, if available, that it can
be obtained on a timely basis and on terms acceptable to the
Company. Failure to obtain financing when required could result
in the delay or abandonment of the Company's business plans
which could intern have a material adverse effect on the
Company.
High Leverage; Possible Inability to Service Indebtedness
If the proposed New Credit Facility is consummated, the Company
may become highly leveraged. The degree to which the Company is
leveraged could have important consequences to the Company's
future prospects, including the following: (i) limiting the
ability of the Company to obtain any necessary financing in the
future for working capital, capital expenditures, debt service
requirements or other purposes; (ii) limiting the flexibility
of the Company in planning for, or reacting to, changes in its
business; (iii) leveraging the Company more highly than some of
its competitors, which may place it at a competitive
disadvantage; (iv) increasing its vulnerability in the event of
a downturn in its business or the economy generally; and (v)
requiring that a substantial portion of the Company's cash flow
from operations be dedicated to the payment of principal and
interest on its debt and not be available for other purposes.
The Company's ability to make scheduled payments of
principal of, or to pay the interest on, or to refinance, its
indebtedness, or to fund planned capital expenditures will
depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its
control. There can be no assurance that the Company's business
will generate sufficient cash flow from operations or that
anticipated revenue growth and operating improvements will be
realized or will be sufficient to enable the Company to service
its indebtedness, or to fund its other liquidity needs. There
can be no assurance that the Company will be able to refinance
all or a portion of its indebtedness on commercially reasonable
terms or at all. If the Company does not generate sufficient
cash flow to meet its debt service and working capital
requirements, the Company may need to examine alternative
strategies that may include actions such as reducing or
delaying capital expenditures, restructuring or refinancing its
indebtedness, the sale of assets or seeking additional equity
and/or debt financing. There can be no assurance that any of
these strategies could be effected on satisfactory terms, if at
all.
Dependence on In-House Billing and Information System
The accurate and prompt billing of the Company's customers
is essential to the Company's operations and future
profitability. The Company's expected growth and deployment of
its ICN could give rise to additional demands on the CTC
Information System, and there can be no assurance that it will
perform as expected. The failure of the Company to adequately
identify all of its information and processing needs (including
Year 2000 compliance), the failure of the CTC Information
System or the failure of the Company to upgrade the CTC
Information System as necessary could have a material adverse
effect on the Company and its results of operations.
Dependence on Supplier Provided Timely and Accurate Call Data
Records; Billing and Invoice Disputes
In its reseller business, the Company is dependent upon the
timely receipt and accuracy of call data records provided to it
by its suppliers. There can be no assurance that accurate
information will consistently be provided by suppliers or that
such information will be provided on a timely basis. Failure by
suppliers to provide timely and accurate detail would increase
the length of the Company's billing and collection cycles and
adversely effect its operating results. The Company pays its
suppliers according to the Company's calculation of the charges
applicable to the Company based on supplier invoices and
computer tape records of all such calls provided by suppliers
which may not always reflect current rates and volumes.
Accordingly, a supplier may consider the Company to be in
arrears in its payments until the amount in dispute is
resolved. There can be no assurance that disputes with
suppliers will not arise or that such disputes will be resolved
in a manner favorable to the Company. In addition, the Company
is required to maintain sophisticated billing and reporting
systems to service the large volume of services placed over its
networks. As resale volumes increase, there can be no assurance
that the Company's billing and management systems will be
sufficient to provide the Company with accurate and efficient
billing and order processing capabilities.
Dependence on Network Infrastructure and Products and Services
of Others
The Company does not currently own any part of a local
exchange or long distance network and depends entirely on
facilities-based carriers for the transmission of customer
traffic. After the deployment of the ICN, it will still rely,
at least initially, on others for circuit switching of local
voice calls and on fiber optic backbone transmission
facilities. There can be no assurance that such switching or
transmission facilities will be available to the Company on a
timely basis or on terms acceptable to the Company. The
Company's success in marketing its services requires that the
Company provide superior reliability, capacity and service.
Although the Company can exercise direct control of the
customer care and support it provides, most of the services
that it currently offers are provided by others. Such services
are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by
computer virus, break-ins or otherwise) and other factors,
certain of which have caused, and will continue to cause,
interruptions in service or reduced capacity for the Company's
customers. Such problems, although not the result of failures
by the Company, can result in dissatisfaction among its
customers.
In addition, the Company's ability to provide complete
telecommunications services to its customers will be dependent
to a large extent upon the availability of telecommunications
services from others on terms and conditions that are
acceptable to the Company and its customers. There can be no
assurance that government regulations will continue to mandate
the availability of some or all of such services or that the
quality or terms on which such services are available will be
acceptable to the Company or its customers.
Customer Attrition
The Company's operating results may be significantly
affected by its customer attrition rates. There can be no
assurance that customers will continue to purchase long
distance or other services through the Company in the future or
that the Company will not be subject to increased customer
attrition rates. The Company believes that the high level of
customer attrition in the industry is primarily a result of
national advertising campaigns, telemarketing programs and
customer incentives provided by major competitors. There can be
no assurance that customer attrition rates will not increase in
the future, which could have a material adverse effect on the
Company's operating results.
Ability to Manage Growth; Rapid Expansion of Operations
The Company is pursuing a new business plan that, if
successfully implemented, will result in rapid growth and
expansion of its operations, which will place significant
additional demands upon the Company's current management. If
this growth is achieved, the Company's success will depend, in
part, on its ability to manage this growth and enhance its
information, management, operational and financial systems.
There can be no assurance that the Company will be able to
manage expanding its operations. The Company's failure to
manage growth effectively could have a material adverse effect
on the Company's business, operating results and financial
condition.
Potential Impact of the Bell Atlantic Litigation
In December 1997, the Company filed suit against Bell Atlantic
for breaches of its agency contract, including the failure of
Bell Atlantic's retail division to pay $14 million in agency
commissions (approximately $11.5 million as of July 10, 1998)
owed to the Company. The Company intends to pursue this suit
vigorously. Although the Company believes the collection of the
agency commissions sought in the suit is probable, there can be
no assurance that the Company will be successful in collecting
these commissions. If the Company fails to collect any of the
amounts sought or if their 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
sought may adversely affect the Company.
In addition, the Company must use Bell Atlantic infrastructure
for nearly all of the local telephony services that it
currently provides and, although Bell Atlantic is prohibited by
federal law from discriminating against the Company, there can
be no assurance that the litigation with Bell Atlantic will not
negatively affect the Company's relationships with Bell
Atlantic's wholesale division.
Dependence on Key Personnel
The Company believes that its continued success will depend
to a significant extent upon the abilities and continued
efforts of its management, particularly members of its senior
management team. The loss of the services of any of such
individuals could have a material adverse effect on the
Company's results of operations. The success of the Company
will also depend, in part, upon the Company's ability to
identify, hire and retain additional key management as well as
highly skilled and qualified sales, service and technical
personnel. Competition for qualified personnel in the
telecommunications industry is intense, and there can be no
assurance that the Company will be able to attract and retain
additional employees and retain its current key employees. The
inability to hire and retain such personnel could have a
material adverse effect on the Company's business.
Competition
The Company operates in a highly competitive environment and
has no significant market share in any market in which it
operates. The Company expects that it will face substantial and
growing competition from a variety of data transport, data
networking and telephony service providers due to regulatory
changes, including the continued implementation of the
Telecommunications Act of 1996 (the ''Telecommunications
Act''), and the increase in the size, resources and number of
such participants as well as a continuing trend toward business
combinations and alliances in the industry. The Company faces
competition for the provision of integrated telecommunications
services as well as competition in each of the individual
market segments that comprise the Company's integrated
approach. In each of these market segments, the Company faces
competition from larger, better capitalized incumbent
providers, which have long standing relationships with their
customers and greater name recognition than the Company.
Regulation
The Company's local and long distance telephony service, and
to a lesser extent its data services, are subject to federal,
state, and, to some extent, local regulation.
The Federal Communications Commission (the ''FCC'')
exercises jurisdiction over all telecommunications common
carriers, including the Company, to the extent that they
provide interstate or international communications. Each state
regulatory commission retains jurisdiction over the same
carriers with respect to the provision of intrastate
communications. Local governments sometimes impose franchise or
licensing requirements on telecommunications carriers and
regulate construction activities involving public right-of-way.
Changes to the regulations imposed by any of these regulators
could affect the Company.
While the Company believes that the current trend toward
relaxed regulatory oversight and competition will benefit the
Company, the Company cannot predict the manner in which all
aspects of the Telecommunications Act will be implemented by
the FCC and by state regulators or the impact that such
regulation will have on its business. The Company is subject to
FCC and state proceedings, rulemakings, and regulations, and
judicial appeal of such proceedings, rulemaking and
regulations, which address, among other things, access charges,
fees for universal service contributions, ILEC resale
obligations, wholesale rates, and prices and terms of
interconnection and unbundling. The outcome of these
rulemakings, judicial appeals, and subsequent FCC or state
actions may make it more difficult or expensive for the Company
or its competitors to do business. Such developments could have
a material effect on the Company. The Company also cannot
predict whether other regulatory decisions and changes will
enhance or lessen the competitiveness of the Company relative
to other providers of the products and services offered by the
Company. In addition, the Company cannot predict what other
costs or requirements might be imposed on the Company by state
or local governmental authorities and whether or not any
additional costs or requirements will have a material adverse
effect on the Company.
Risks Associated With Possible Acquisitions
As it expands, the Company may pursue strategic
acquisitions. Acquisitions commonly involve certain risks,
including, among others: difficulties in assimilating the
acquired operations and personnel; potential disruption of the
Company's ongoing business and diversion of resources and
management time; possible inability of management to maintain
uniform standards, controls, procedures and policies; entering
markets or businesses in which the Company has little or no
direct prior experience; and potential impairment of
relationships with employees or customers as a result of
changes in management. There can be no assurance that any
acquisition will be made, that the Company will be able to
obtain any additional financing needed to finance such
acquisitions and, if any acquisitions are so made, that the
acquired business will be successfully integrated into the
Company's operations or that the acquired business will perform
as expected. The Company has no definitive agreement with
respect to any acquisition, although from time to time it has
discussions with other companies and assesses opportunities on
an ongoing basis.
Year 2000 Compliance
The Company has assessed its systems and expects all of them
to be year 2000 compliant by the end of 1998. However, there
can be no assurance that all systems will function adequately
until the occurrence of year 2000. In addition, if the systems
of other companies on whose services the Company depends or
with whom the Company's systems interface are not year 2000
compliant, there could be a material adverse effect on the
Company.
Control By Principal Shareholders; Voting Agreement
As of July 10, 1998, the officers and directors and parties
affiliated with or related to such officers and directors
controlled approximately 48.5% of the outstanding voting power
of the Common Stock. Robert J. Fabbricatore, the Chairman and
Chief Executive Officer of the Company, beneficially owns
approximately 27.5% of the outstanding shares of Common Stock.
Consequently, the officers and directors will have the ability
to exert significant influence over the election of all the
members of the Company's Board, and the outcome of all
corporate actions requiring stockholder approval. In addition,
Mr. Fabbricatore has agreed to vote the shares beneficially
owned by him in favor of the election to the Company's Board of
Directors of up to two persons designated by the holders of a
majority of the Series A Convertible Preferred Stock.
Impact Of Technological Change
The telecommunications industry has been characterized by
rapid technological change, frequent new service introductions
and evolving industry standards. The Company believes that its
long-term success will increasingly depend on its ability to
offer integrated telecommunications services that exploit
advanced technologies and anticipate or adapt to evolving
industry standards. There can be no assurance that (i) the
Company will be able to offer new services required by its
customers, (ii) the Company's services will not be economically
or technically outmoded by current or future competitive
technologies, (iii) the Company will have sufficient resources
to develop or acquire new technologies or introduce new
services capable of competing with future technologies or
service offerings (iv) all or part of the ICN or the CTC
Information System will not be rendered obsolete, (v) the cost
of the ICN will decline as rapidly as that of competitive
alternatives, or (vi) lower retail rates for telecommunications
services will not result from technological change. In
addition, increases in technological capabilities or
efficiencies could create an incentive for more entities to
become facilities-based ICPs. Although the effect of
technological change on the future business of the Company
cannot be predicted, it could have a material adverse effect on
the Company's business, results of operations and financial
condition.
Possible Volatility Of Stock Price
The stock market historically has experienced volatility
which has affected the market price of securities of many
companies and which has sometimes been unrelated to the
operating performance of such companies. In addition, factors
such as announcements of developments related to the Company's
business, or that of its competitors, its industry group or its
customers, fluctuations in the Company's results of operations,
a shortfall in results of operations compared to analysts'
expectations and changes in analysts' recommendations or
projections, sales of substantial amounts of securities of the
Company into the marketplace, regulatory developments affecting
the telecommunications industry or data services or general
conditions in the telecommunications industry or the worldwide
economy, could cause the market price of the Common Stock to
fluctuate substantially.
Absence Of Dividends
The Company has not paid and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future.
The Company intends to retain its earnings, if any, for use in
the Company's growth and ongoing operations. In addition, the
terms of the Series A Convertible Preferred Stock restrict, and
the terms of future debt financings are expected to restrict,
the ability of the Company to pay dividends on the Common
Stock.
Potential Effect Of Anti-takeover Provisions And Issuances Of
Preferred Stock
Certain provisions of the Company's Articles of Organization
and Bylaws and the Massachusetts Business Corporation Law may
have the effect of delaying, deterring or preventing a change
in control of the Company or preventing the removal of
incumbent directors. The existence of these provisions may have
a negative impact on the price of the Common Stock and may
discourage third party bidders from making a bid for the
Company or may reduce any premiums paid to stockholders for
their Common Stock. In addition, the Company's Board of
Directors has the authority without action by the Company's
stockholders to issue shares of the Company's Preferred Stock
and to fix the rights, privileges and preferences of such
stock, which may have the effect of delaying, deterring or
preventing a change in control. Certain provisions of the
Company's outstanding Series A Convertible Preferred Stock
which provide for payment of the liquidation preference in cash
upon the consummation of certain transactions may have the
effect of discouraging third parties from entering into such
transactions.
