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 September 30, 1998.
Commission File Number 0-13627.
CTC COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2731202
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
360 Second Avenue, Waltham, Massachusetts 02451
(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.
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Purpose of the Amendment:
This Amendment adds a section entitled "Year 2000 Compliance" to the
the Part I Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which was filed as part of the
Company's Form 10-Q for the Quarter Ended September 30, 1998.
Otherwise, Part I Item 2 is unchanged.
Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and Notes set forth elsewhere in this Report.
OVERVIEW
CTC Communications Corp. (the "Company"), a Massachusetts
corporation, is a rapidly growing integrated communications provider
("ICP") with 14 years of local telecommunications marketing, sales
and service experience. The Company offers local, long distance,
Internet access, Frame Relay and other data services on a single
integrated bill. CTC currently serves small to medium-sized
business customers in seven Northeastern states through its
experienced 197-member direct sales force and 85 customer care
representatives located in 25 branch offices throughout the region.
Prior to becoming an ICP in January 1998, the Company was the oldest
and largest independent sales agent for Bell Atlantic Corp. ("Bell
Atlantic"), selling local telecommunications services as an agent
since 1984. The Company has also offered long distance and data
services under its own brand name since 1994. As an agent, during
the 1997 calendar year, the Company managed relationships with
approximately 5,600 franchise customers who purchased approximately
$200 million of annual local telecommunications services,
representing an estimated 280,000 local access lines at year end.
In late 1997, the Company became certified as a Competitive Local
Exchange Carrier ("CLEC") in New York and the six New England states
in order to embark upon its ICP strategy and take advantage of
market opportunities created by deregulation. In December 1997, the
Company terminated its agency agreement with Bell Atlantic and began
ICP operations in January 1998. As an ICP, the Company is utilizing
its well-developed infrastructure and the same relationship-centered
sales approach that it employed as an agent without the limitations
on potential customers, services and pricing that were imposed upon
it as an agent.
Over the next three years, the Company plans to expand within its
existing markets and into six additional states in the Boston-
Washington, D.C. corridor and add network facilities.
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Beginning in the first calendar quarter of 1999, the Company intends
to deploy a state-of-the-art, data centric, packet-switched
Integrated Communications Network ("ICN"). Installation initially
will take place in the Company's existing markets and in new markets
as customer demand and concentrations warrant. The ICN when
completed will consist of an advanced Asynchronous Transfer Mode
(ATM)-based network, using Cisco Systems, Inc. BPX(r) 8600 series
and MGX(tm) 8800 series IP+ATM wide-area switches, that will deliver
enhanced access services such as traditional dedicated services,
frame relay, IP, video, and circuit emulation transport services.
Cisco's solutions should enable CTC to deliver all of these services
and voice services across a single multiservice dedicated connection
that should lower customers' telecommunications costs.
The ICN will be interconnected by leased transmission and access
facilities. Initially, the Company will offer dedicated long
distance and data services over the ICN. The Company intends to
continue to lease local dialtone capabilities until these services
can be cost effectively integrated into a packet switched network
architecture. The Company expects that the ICN will be able to take
advantage of the growing customer demand for dedicated long distance
and data transmission capabilities and the economic benefits that
can be achieved by utilizing a combination of Company-owned
switching facilities and leased network elements. Once deployed,
the Company believes that the ICN will enable the Company to improve
margins, enhance customer control and broaden service offerings.
Prior to deploying the ICN, the Company is building its base of
installed access lines through reselling the network services of
other Telecommunications carriers.
Although management believes that its current strategy will have a
positive effect on the Company's results of operations over the
long-term, through an increase in its customer base and product
offerings, this strategy is expected to have a negative effect on
the Company's results of operations over the short-term. The
Company's operations are subject to certain material risks, as set
forth in Exhibit 99.1 to this Quarterly Report, and to certain other
factors discussed further in this Quarterly Report under "Liquidity
and Capital Resources." The Company anticipates losses and negative
cash flow in the near term, attributable in part to significant
investments in operating, sales, marketing, management information
systems and general and administrative expenses as well as
investments in the ICN.
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Historically, the Company's network service revenues have consisted
of commissions earned as an agent of Bell Atlantic and other RBOCs
and since 1994, revenues from the resale of long distance, frame
relay, Internet access and other communications services. For the
fiscal year ended March 31, 1998, agency commissions accounted for
approximately 60% of network service revenues with resale revenues
accounting for 40% of such revenues. As a result of the transition
to an ICP strategy in December 1997, agency commissions earned in
the future will not be material.
The Company bills its customers for local and long distance usage
based on the type of local service utilized, the number, time and
duration of calls, the geographic location of the terminating phone
numbers and the applicable rate plan in effect at the time of the
call.
During the period in which the Company resells the services of other
telecommunications carriers prior to deploying its ICN, cost of
services includes the cost of local and long distance services
charged by carriers for recurring charges, per minute usage charges
and feature charges, as well as the cost of fixed facilities for
dedicated services and special regional calling plans.
Selling expense consists of the costs of providing sales and other
support services for customers including salaries, commissions and
bonuses to salesforce personnel. General and administrative expense
consists of the costs of the billing and information systems and
personnel required to support the Company's operations and growth as
well as all amortization expenses. Depreciation is allocated
throughout sales, marketing, general and administrative expense
based on asset ownership.
The Company has experienced significant growth in the past and,
depending on the extent of its future growth, may experience
significant strain on its management, personnel and information
systems. To accommodate this growth, the Company intends, subject
to the availability of adequate financing, to continue to implement
and improve operational, financial and management information
systems. Since implementing its ICP strategy, the Company has
expanded its staff to include three additional senior executives and
over 85 additional employees. The Company is also expanding its
information systems to provide improved recordkeeping for customer
information and management of uncollectible accounts and fraud
control.
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RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30,
1998 AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30,
1997.
The results for the quarter ended September 30, 1998 reflect the
Company's operations as an Integrated Communications Provider
("ICP"). In its capacity as an independent agent for the Regional
Bell Operating Companies (RBOCs), the Company recorded revenues
which represented the fees and commissions earned by the Company for
sales of products and services to business customers. As an ICP, the
Company purchases local services from the RBOCs at a discount to the
retail rate, and resells and bills these services to business
customers. The Company also resells other services including long
distance, Internet access, and various data services in order to
provide a total integrated telecommunications solution to its
customers. The Company will continue reselling telecommunications
services until the deployment of its Integrated Communications
Network ("ICN") and begins migrating customers onto its own network.
Total revenues for the second fiscal quarter were $14,516,000, as
compared to $11,845,000 for the same period of the preceding Fiscal
year, or an increase of 23%. Total revenues for the six months
ended September 30, 1998 were $27,352,000, as compared to
$23,504,000, or an increase of 16%. The September quarter revenues
also represented an increase of 13% over the June 1998 quarter
revenues of $12,836,000. Revenues for local, Internet access and
data services increased a combined 63% on a sequential quarter basis
due primarily to the addition of new customer relationships. Long
distance revenue experienced a 24% decrease on a sequential quarter
basis as a result of the Company's strategic decision to stop
offering long distance to outbound call center customers. These
customers tend to be high volume, low margin businesses where the
relationship is short-term. It is the Company's policy to focus on
long-term relationships with customers that purchase the full
complement of services.
A common basis for measurement of an ICP's progress is the growth in
access line equivalents. During the quarter ended September 30,
1998, the Company sold 33,183 access line equivalents and
provisioned 25,553, bringing the total lines in service to 64,394
for the Company's first nine months as an ICP. New lines sold
represented a 26% sequential increase over lines sold during the
quarter ended June 30, 1998.
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Costs of telecommunications revenues for the quarter ended September
30, 1998 were $12,383,000, as compared to $2,712,000 for the same
period of the preceding Fiscal year. For the six months ended
September 30, 1998 costs of telecommunications revenues were
$23,997,000, as compared to $5,156,000 for the same period of the
preceding Fiscal year. Since substantially all revenues since
January 1, 1998 have resulted from operations as ICP, comparative
numbers on a year to year basis are not relevant. As a percentage
of telecommunications revenues, cost of telecommunications revenues
was 85% for the second quarter of Fiscal 1999, as compared to 90%
for the first quarter of Fiscal 1999 and 95% for fourth quarter of
Fiscal 1998, the first quarter of transition from agency status to
ICP status. The gross margin improvement over the first nine months
as an ICP is primarily attributable to the implementation of the
lower long distance wholesale costs previously renegotiated with the
Company's principal long distance supplier, significant improvements
made in local service gross margins, and the elimination of the
lower margin call center business from long distance gross margins.
For the quarter ended September 30, 1998, Selling, general and
administrative expenses (SG & A) increased 84% to $13,001,000 from
$7,054,000 for the same period of the preceding fiscal year. For
the six months ended September 30 1998, SG & A expenses were
$22,496,000, as compared to $13,988,000, or an increase of 61%.
These increases were due primarily to the opening of five new branch
sales offices during the six months ended September 30, 1998 and the
associated increased number of sales and service employees hired in
connection with the transition to the ICP platform. As of September
30, 1998, CTC employed 392 people including 197 Account Executives
and 85 Network Coordinators in 25 branch locations throughout New
England and New York. In addition, SG & A expenses increased due to
operating expenses associated with the network build out, as well as
an additional $500,000 of increased depreciation expense in the
second fiscal quarter associated with the investments in the
Integrated Communications Network. The final component of the
increase is related to legal and regulatory activities. Legal
expenses in prosecuting both the anti-trust action against Bell
Atlantic now pending in the federal courts and the state regulatory
proceedings instituted in each of the New England States against
Bell Atlantic for discriminatory practices regarding the Bell
Atlantic policy of imposing contract termination fees on its
customers as well as the regulatory expenses incurred in obtaining
certification as a reseller in additional states, were $1,913,000
and $2,632,000 respectively, for the three and six months ended
September 30, 1998.
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For the quarter ended September 30, 1998 the Company reported a loss
before taxes of $11,811,000. For the quarter ended June 30, 1998
the Company reported a net loss before taxes of $8,528,000, and
recorded a tax benefit of $2,900,000, for a net loss of $5,628,000,
or $0.56 per share. Initially, the Company recognized the benefit
of the tax loss carry-back at the Federal tax rate of 34%. The
Company has determined that the benefit should be applied ratably as
a percentage of the Company's estimated pre-tax loss over each of
the four quarters of the fiscal year. The effective rate of the
benefit may vary with changes in management's estimates. While
applying the tax benefit ratably over each of the four quarters will
not change the year end result, an adjustment was made for the first
quarter reducing the tax benefit to $597,000 compared to the
previously recorded tax benefit of $2,900,000. Based on the
foregoing, the net loss for the first quarter will increase from the
previously reported $5,628,000, or $0.56 per share, to $7,931,000,
or $0.79 per share. An Amendment to the Form 10-Q for the quarter
ended June 30, 1998 is being filed to reflect this change.
Liquidity and Capital Resources
Working capital at September 30, 1998 amounted to $11,627,000 as
compared to $11,342,000 at March 31, 1998, an increase of 3%. Cash
balances at September 30, 1998 and March 31, 1998 totaled
approximately $2,167,000.
Historically, the Company funded its working capital and operating
expenditures primarily from cash flow from operations. As a result
of Bell Atlantic's failure to pay approximately $14 million in
agency commissions (currently approximately $11.5 million) that the
Company believes it is owed under its agency contract, the losses
incurred following transition to an ICP strategy, and the investment
required to implement the Integrated Communications Network, the
Company has been required to raise additional capital. Although the
Company has sued Bell Atlantic and believes the collection of the
agency commissions is probable, there is no assurance that the
Company will be successful in its collection efforts were that such
collections will not be delayed. If the Company fails to collect
any of the agency commissions or if their collection becomes less
than probable, the Company would be required to write off the
uncollected amounts reflected in its financial statements or amounts
for which collection becomes less than probable. Delay in the
collection or write-off of agency commissions may adversely affect
the Company.
In April 1998, the Company completed a $12 million private placement
of Series A Convertible Preferred Stock and Warrants to Spectrum
Equity Investors II, L.P.
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On September 1, 1998, the Company as Borrower, entered into a Loan
and Security Agreement ("Loan and Security Agreement") with Goldman
Sachs Credit Partners L.P. and Fleet National Bank as Lenders.
Under the terms of the Loan and Security Agreement, the Lenders have
provided a three-year senior secured credit facility to the Company
consisting of revolving loans in the aggregate amount of up to $75
million (the "Credit Facility"). Advances under the facility bear
interest at 1.75% over the prime rate and are secured by a first
priority perfected security interest on all of the Company's assets,
provided, however, that the Company has the ability to exclude
assets acquired through purchase money financing. In addition, the
Company is required to pay a commitment fee of 0.5% per annum on any
unused amounts under the facility as well as a monthly line fee of
$150,000 per month. The Company may borrow $15 million
unconditionally and $60 million based on trailing 120 days accounts
receivable collections (reducing to the trailing 90 days of
collections by March 31, 2000). The Company paid a one-time up
front fee of $2,531,250, representing 3 3/8% of the facility. In
the event that the Company wishes to prepay the loan, the agreement
provides for a prepayment penalty of 2% during the first 18 months
of the term of the loan. Warrants to purchase an aggregate of
974,412 shares of the Company's common stock at an purchase price of
$6.75 per share were issued to the Lenders in connection with the
transaction. The Company has valued the Warrants at $1.3 million
which is being amortized and included in interest expense over the
three-year term of the Loan and Security Agreement. As of October
31, 1998, the Company had borrowed $24,500,000 under the Credit
Facility.
On November 2, 1998, the Company obtained three-year vendor
financing facility for up to $25 million from Cisco Capital Corp.
Under the terms of the agreement, the Company has agreed to a three
year, $25 million volume purchase commitment of Cisco Systems
equipment and services and Cisco Capital Corp has agreed to advance
funds as these purchases occur. In addition, a portion of the Cisco
facility can be utilized for working capital costs associated with
the integration and operation of Cisco Systems solutions and related
peripherals.
Pursuant to the terms of the Cisco Vendor Financing Agreement dated
as of October 14, 1998, the Company has agreed to give the Lender a
senior security interest in all Cisco products purchased with the
proceeds of the first $15 million advanced under the facility and a
subordinate security interest in all other assets of the Company.
Under the terms of the Cisco facility, the Company is required to
pay interest on funds advanced under the facility at an annual rate
of 12.5%. In addition, the Company is required to pay a commitment
fee of .50% per annum on any unused amounts under the facility as
well as a monthly line fee of $15,000 per month. The Company paid a
closing fee of 1% of the total credit facility.
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The Company expects to utilize the proceeds of the Cisco financing
to deploy the first phase of its data-centric Integrated
Communications Network in 22 network hub and node sites within the
New York and New England regions.
The implementation of the Company's current business plan to further
penetrate its existing markets, deploy the ICN in its existing
markets and enhance and expand the CTC information systems will
require significant capital. The Company may require additional
capital if it experiences demand for its products and services in
excess of that which is currently planned, accelerates the rate of
expansion of its sales presence from that which is currently
anticipated or accelerates the deployment of the ICN in its
existing markets. Additional capital will be required to expand the
Company's sales presence into the New York-Washington D.C. corridor
and deploy its ICN into this region or any other new markets. The
Company also expects to seek additional lease financing to fund the
acquisition of equipment and software related to the enhancements
and expansion of the CTC information systems and the deployment of
its network operating centers. The Company's actual capital
requirements also may be materially affected by many factors,
including the timing and actual cost of expansion into new markets,
the extent of competition and pricing of telecommunications services
in its markets, acceptance of the Company's services, technological
change and potential acquisitions.
While the Company believes that under its current business plan the
proceeds from the Goldman Sachs/Fleet credit facility combined with
the Cisco facility and other anticipated lease financing will be
sufficient to fund operations at least through December 1999,
several factors could influence the timing of the Company's need for
additional capital. These factors include, but are not limited to:
(a) the need to finance larger amounts of working capital if the
Company experiences demand for its services in excess of that which
is planned, (b) the Company expands its sales presence faster than
currently anticipated, (c) the enhancements and expansion of the CTC
information systems turn out to be more capital intensive than
originally planned, or (d) the Company fails to collect or is
delayed in collecting the approximately $11.5 million which it
believes is due from Bell Atlantic under its former Agency
arrangement or is delayed in collecting such amounts. The Company
may seek opportunistic financing activities prior to December 1999
depending on market conditions.
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YEAR 2000 COMPLIANCE
Currently, many computer systems and software products are
coded to accept only two digit, rather than four digit, entries in
the date code field. Date-sensitive software or hardware coded in
this manner may not be able to distinguish a year that begins with a
"20" instead of a "19," and programs that perform arithmetic
operations, make comparisons or sort date fields may not yield
correct results with the input of a Year 2000 date. This Year 2000
problem could cause miscalculations or system failures that would
affect the Company's operations.
The Company's State of Readiness
The Company has evaluated the effect of the Year 2000 problem
on its information systems and is implementing plans to ensure its
systems and applications will effectively process information
necessary to support ongoing operations of the Company in the year
2000 and beyond. The Company believes its information technology
("IT") and non-IT systems will be Year 2000 compliant by the end of
1999.
In connection with the deployment of the Company's new
Integrated Communications Network ("ICN"), the Company has designed
a new database architecture for its computer systems which will
comply with "Year 2000" requirements. Installation of the ICN and
related software is expected to be completed in June 1999 and
testing of the system, including its Year 2000 compliance, is
expected to commence in May 1999. While the Company expects that
all significant IT-related systems will be Year 2000 compliant by
mid-1999, there can be no assurance that all Year 2000 problems in
the new system will be identified or that the necessary corrective
actions will be completed in a timely manner.
The Company has requested certification from its significant
vendors and suppliers demonstrating their Year 2000 compliance. To
date, approximately 60% of vendors and suppliers have delivered such
certifications and the Company anticipates that it will receive the
additional certifications requested. The Company intends to
continuously identify critical vendors and suppliers and communicate
with them about their plans and progress in addressing Year 2000
problems. There can be no assurance that the systems of these
vendors and suppliers will be timely converted or that the failure
to so comply will not have an adverse effect on the Company's
operations.
The Company's Costs of Year 2000 Remediation
The Company has not incurred material costs related
specifically to Year 2000 issues and does not expect to in the
future. However, there can be no assurance that the costs
associated with Year 2000 problems will not be greater than
anticipated.
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The Company's Year 2000 Risk
Based on the efforts described above, the Company currently
believes that its systems will be Year 2000 compliant in a timely
manner. The Company has completed the process of identifying Year
2000 issues in its IT and non-IT systems and expects to complete any
remediation efforts by mid-1999. However, there can be no assurance
that all Year 2000 problems will be successfully identified, or that
the necessary corrective actions will be completed in a timely
manner. Failure to successfully identify and remediate Year 2000
problems in critical systems in a timely manner could have a
material adverse effect on the Company's results of operations,
financial position or cash flow.
In addition, the Company believes that there is risk relating
to significant vendors' and suppliers' failure to remediate their
Year 2000 issues in a timely manner. Although the Company is
communicating with its vendors and suppliers regarding the Year 2000
problem, the Company does not know whether these vendors' or
suppliers' systems will be Year 2000 compliant in a timely manner.
If one or more significant vendors or suppliers are not Year 2000
compliant, this could have a material adverse effect on the
Company's results of operations, financial position or cash flow.
The Company's Contingency Plans
The Company plans by mid-year 1999 to develop contingency plans
to be implemented in the event planned solutions prove ineffective
in solving Year 2000 compliance. If it were to become necessary for
the Company to implement a contingency plan, it is uncertain whether
such plan would succeed in avoiding a Year 2000 issue which may
otherwise have a material adverse effect on the Company's results of
operations, financial position or cash flow.
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FORM 10-Q/A FOR THE QUARTER ENDED SEPTEMBER 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: January 19, 1999 /S/ ROBERT J. FABBRICATORE
----------------------------
Robert J. Fabbricatore
Chairman and CEO
Date: January 19, 1999 /S/ STEVEN C. JONES
-----------------------------
Steven C. Jones
Executive Vice President,
and Chief Financial Officer
