-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/xYcUcFC/pj9vHBd2SXNRwClS0MDGvX8ePad81GbyZKGX630NpZk/aj6e+2aREb dvhEw+ITFdn2tlo/NOTk8g== 0001056114-02-000010.txt : 20020515 0001056114-02-000010.hdr.sgml : 20020515 20020515140538 ACCESSION NUMBER: 0001056114-02-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTC COMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001092319 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 043469590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27505 FILM NUMBER: 02650666 BUSINESS ADDRESS: STREET 1: 220 BEAR HILL RD CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 7814668080 MAIL ADDRESS: STREET 1: 220 BEAR HILL RD CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 qqq.txt 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 March 31, 2002 Commission File Number 0-27505. CTC COMMUNICATIONS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 04-3469590 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 220 Bear Hill Rd., 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 May 10, 2002, 27,206,681 shares of Common Stock were outstanding. CTC COMMUNICATIONS GROUP, INC. FORM 10-Q INDEX
Part I FINANCIAL STATEMENTS PAGE NO. Item 1. Financial Statements Condensed Consolidated Unaudited Balance Sheets as of March 31, 2002 and December 31, 2001 3 Condensed Consolidated Unaudited Statements of Operations for the Three Months Ended March 31, 2002 and 2001 4 Condensed Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Unaudited Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18-19 Part II OTHER INFORMATION Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities 19 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 19
CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
March 31, December 31, 2002 2001 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $49,578,554 $66,289,140 Restricted cash 375,000 550,000 Accounts receivable, net 45,113,664 47,059,065 Prepaid expenses and other current assets 6,582,426 4,762,692 ------------- -------------- Total current assets 101,649,644 118,660,897 Property and equipment: Property and equipment 380,286,130 366,087,446 Accumulated depreciation and amortization (159,762,149) (135,762,149) ------------- -------------- Total property and equipment, net 220,523,981 230,325,297 Deferred financing costs and other assets 13,990,081 11,502,131 Restricted cash 7,125,000 6,950,000 ------------- --------------- Total assets $343,288,706 $367,438,325 =============== =============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $69,431,845 $58,298,679 Accrued salaries and related taxes 3,286,033 2,995,383 Current portion of obligations under capital leases 26,481,444 33,036,325 Current portion of notes payables 2,998,013 3,354,399 ------------- ------------- Total current liabilities 102,197,335 97,684,786 Long term debt: Obligations under capital leases, net of current portion 61,388,676 60,324,538 Notes payable, net of current portion 225,000,000 225,000,000 Other 871,096 2,665,710 ------------- ------------- Total long term debt 287,259,772 287,990,248 Commitments and contingencies Series B redeemable convertible preferred stock, par Value $1.00 per share; authorized 10,000,000 shares, 200,000 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively (liquidation preference $255,546,343 at March 31,2002) 228,036,354 222,812,360 Stockholders' deficit: Common stock, par value $.01 per share: authorized 100,000,000 shares, 27,206,681 and 27,103,730 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively 272,067 271,037 Additional paid-in capital 97,278,264 95,528,040 Other accumulated comprehensive loss (1,381,640) (2,886,424) Retained deficit (370,373,446) (333,961,722) ------------- -------------- Total stockholders' deficit (274,204,755) (241,049,069) ------------- -------------- Total liabilities and stockholders' deficit $343,288,706 $367,438,325 ============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended ------------------------------------- March 31, 2002 March 31, 2001 ------------------ ------------------- > Telecommunications revenues $83,084,944 $67,621,144 Operating costs and expenses: Cost of telecommunications revenues (excluding depreciation and amortization) 63,410,727 55,344,185 Selling, general and administrative expenses 20,597,167 21,199,766 Depreciation and amortization 24,042,371 16,634,236 ---------------- --------------- Total operating costs and expenses 108,050,265 93,178,187 --------------- --------------- Loss from operations (24,965,321) (25,557,043) Other income (expense), net: Interest income 381,433 861,349 Interest expense (6,603,842) (4,252,959) ---------------- ---------------- Total other expense, net (6,222,409) (3,391,610) ---------------- ---------------- Net loss $(31,187,730) $(28,948,653) ================ ================ Net loss available to common stockholders $(36,411,724) $(33,703,262) ================ ================ Net loss per common share: Basic and Diluted $(1.34) $(1.26) ================ ================ Weighted average number of common shares: Basic and Diluted 27,187,334 26,660,889 ================ ================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CTC COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, ----------------------------------- 2002 2001 ----------------- ------------- OPERATING ACTIVITIES: Net loss $(31,187,730) $(28,948,653) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 24,042,372 16,634,236 Stock compensation expense - 26,910 Non-cash interest related to warrants 102,695 476,172 Changes in operating assets and liabilities: Accounts receivable 1,945,401 5,170,768 Prepaid expenses and other current assets (1,374,491) (410,426) Deferred financing costs and other assets (1,420,811) (485,330) Accounts payable and accrued expenses 11,133,166 (7,717,674) Accrued salaries and related taxes 290,650 982,637 ------------- ------------- Net cash provided by (used in) operating activities 3,531,252 (14,271,360) INVESTING ACTIVITY: Additions to property and equipment (11,875,396) (20,187,067) Notes receivable from stockholders (545,243) - Repayments of notes receivable from stockholders 100,000 5,414,676 ------------- ------------ Net cash used in investing activities (12,320,639) (14,772,391) FINANCING ACIVITIES: Proceeds from the issuance of common stock 249,217 667,126 Repayment of notes payable (356,385) (476,567) Repayments under capital lease obligations (7,814,031) (4,098,976) ------------- ------------- Net cash used in financing activities (7,921,199) (3,908,417) Decrease in cash and cash equivalents (16,710,586) (32,952,168) Cash and cash equivalents at beginning of year 66,289,140 80,029,442 ------------- ------------- Cash and cash equivalents at end of period $49,578,554 $47,077,274 ============= ============= NONCASH INVESTING AND FINANCING ACTIVITIES: Network and related equipment acquired under capital leases $2,323,288 $4,757,656 Network and related equipment acquired under notes payable - $238,263 Accretion of preferred stock $5,223,994 $4,754,609 Issuance of warrants $1,487,997 $ -
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 CTC COMMUNICATIONS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying condensed consolidated unaudited 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 accounting principles generally accepted in the United States 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 March 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002, as noted below. These statements should be read in conjunction with the financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Telecommunication revenues primarily relate to customer usage of services and recurring monthly fees to customers for certain other services. Revenues related to usage are recognized as usage accrues. Revenues related to recurring monthly fees are deferred and recognized in the period in which the service is available to the customer. Derivatives and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities, and its Amendments, FASB Statements Nos. 137 and 138, in June 1999 and June 2000, respectively (collectively, FAS 133). FAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings (fair value hedge), or, for the effective portion of the hedge, recorded in other comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company adopted FAS 133 on January 1, 2001. The adoption of this statement resulted in a cumulative effect adjustment to other comprehensive income (loss) of $(716,504), (see Note 7). 6 Cash Flow Hedging Strategy As required by the Company's credit facility with TD Securities (US) Inc. (the Senior Facility), the Company maintains an interest rate collar and an interest rate swap. These instruments hedge the variable rate of interest due on the Senior Facility. The interest rate collar effectively locks $33 million of the Senior Facility borrowings between 12.25% and 9.67%. The interest rate swap effectively caps $17 million of the Senior Facility borrowings at 10.75%. In December 2001 and January 2002, we entered into two additional interest rate cap agreements of 6.5% maturing in October 2003 and September 2003 on $12.5 million and $50 million of borrowings, respectively. During the three months ended March 31,2002 and 2001, the Company recorded a gain of $1,504,784 and a loss of $783,837 respectively in other comprehensive income (loss) for the change in fair value of the collar and swap. Furthermore, during these periods, the Company reclassified out of other comprehensive income (loss) to interest expense a gain of $293,092 and a loss of $54,157 respectively related to the ineffective portion of the collar and the swap and a loss of $3,262 and $172,491 respectively related to the collar and the swap excluded from the assessment of hedge effectiveness. For the period from January 1,2002 to December 31,2002, the Company expects to reclassify approximately $1,690,000 of losses on the collar and the swap from accumulated other comprehensive income (loss) to interest expense due to the payment of variable interest associated with the Senior Facility. NOTE 3: FINANCING ARRANGEMENTS In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior secured credit facility ("Senior Facility") to fund our base plan for expansion of our branch sales offices and our PowerPath(R) Network. The proceeds were used to retire the $43 million balance of a $75 million existing credit facility and to repay in full a $25 million vendor financing facility. The Senior Facility includes a $50 million senior secured 7-1/2 year revolving credit facility, a $100 million senior secured 7-1/2 year delayed draw term loan and a $75 million senior secured 8 year term loan. In March 2002, we amended the agreement covering our Senior Facility to include new covenant levels as well as an increase in the interest rate grids. The Senior Facility provides for certain financial and operational covenants, including but not limited to minimum access lines installed and billable, minimum quarterly revenue and operating cash flow, and maximum capital expenditures and other investments. As of March 31, 2002, the Company is in compliance with all amended covenants. In connection with the amendment, the bank syndicate will receive common stock warrants, which could total 3.25% of our outstanding shares of common stock if warrants to purchase common stock are issued in conjunction with the Company's Vendor Finance Facility, as discussed in the following paragraph. The issuance, terms and prices of the warrants are structured in the same manner as the warrants issuable under the Vendor Finance Facility. As of March 31, 2002, the full $225 million of the Senior Facility has been utilized. Reference is made to Exhibit 10.27 filed as part of our Annual Report on Form 10-K for the year ended December 31, 2001 for a complete description of the amended Senior Facility. 7 In March 2002, we entered into an agreement with a vendor("Vendor Finance Facility"), which an executive officer thereof is on the Board of Directors of the Company, which restructures approximately $48 million in outstanding capital leases. The leases have been restructured into 36 month leases beginning in February 2002. There will be no principle or interest payments for the first six months and the leases will then be amortized over the remaining 30 months. In addition, subject to meeting the conditions for the financing, we will also receive up to $40 million in capital lease financing from the finance subsidiary of this vendor for equipment purchases in 2002 available in four separate tranches of $10 million each. These are available quarterly on the first days of February, May, August and November 2002. For each new tranche of capital drawn, there are no payments required for the first six months, and then the leases will be amortized over the next 30 months. This additional capital is dependent upon our compliance with the conditions in the agreement, including compliance with financial and operating covenants. These covenants are virtually the same as those in the amended Senior Facility with an additional covenant relating to minimum unrestricted cash balance. Prior to each tranche period, we must elect to utilize the financing tranche for that period or decline it and the remaining tranches. If we elect to use a tranche, we will issue warrants before the beginning of the tranche period equal to 2% of our outstanding common stock for the first $10 million, 1% of the then outstanding common stock for each of tranches two and three, and 2.5% of the then outstanding common stock for the fourth tranche. The number of shares of common stock outstanding for the first tranche was determined as of January 1, 2002. The second through fourth tranches are determined as of the first day of the month immediately preceding the first day of the tranche period. The initial warrants will be issued at an exercise price of $4.10. Subsequent warrants, if issued, would be priced at the average of our stock price for the period from the 10th to the 14th trading days of the month during which such warrants are issued. On February 27,2002, the company elected to fully utilize the first $10 million tranche of the Vendor Financing Facility, resulting in the issuance of 542,075 warrants to the vendor and 271,038 warrants to the bank syndicate, at an exercise price of $4.10. At the date of issuance, these warrants were valued at approximately $1,488,000 and will be recorded as interest expense over the remaining term of the facility. On May 1, 2002, the Company elected to fully utilize the second $10 million tranche of the Vendor Finance Facility, resulting in the issuance of 272,067 warrants to the vendor and 136,034 to the bank syndicate, at an exercise price of $2.408. The aforementioned warrants are subject to ant-dilution adjustments for certain events. NOTE 4: SERIES B PREFFERED STOCK The conversion ratio for the Series B Preferred Stock is subject to ant- dilution adjustments for certain events. As a result of the warrants issued associated with the first tranche of the Vendor Financing Facility, the conversion ratio associated with the series B Preferred Stock converts into an additional 50,000 shares of common stock. The fair value associated with these additional shares, $2,500,000 (as determined at the commitment date), will be accreted as additional dividends to preferred stock from the date of issuance of the warrants to the redemption date of the Series B Preferred Stock. 8 NOTE 5: NET LOSS PER COMMON SHARE The following tables set forth the computation of basic and diluted net loss per share:
Three Months Ended March 31, ---------------------------- 2002 2001 ---------------------------- Numerator: Net loss $(31,187,730) $(28,948,653) Less preferred stock dividends and Accretion to redemption value of preferred stock (5,223,994) (4,754,609) Equals: numerator for basic and diluted ---------------------------- net loss per share $(36,411,724) $(33,703,262) ============================ Denominator for basic and diluted net loss per share-weighted-average shares 27,187,334 26,660,889 ============================ Basic and diluted loss per common share- before extraordinary item $(1.34) $(1.26) ============================
NOTE 6: RELATED PARTY TRANSACTIONS As of December 31,2001, the Company had advanced funds to certain stockholders, who are executives and officers, amounting to $1,217,281 evidenced by fully secured promissory notes. These notes bear interest at 10.75%. In February 2002, the Company advanced $545,243 to two executives that have been secured fully by promissory notes bearing interest at 10.75%. During the quarter ended March 31, 2002, $100,000 was repaid. In April and May 2002, an additional $190,064 was repaid. At March 31, 2002 $1,709,267 of these loans remains outstanding. NOTE 7: RECENT ACCOUNTING PRONOUNCEMENTS In July, 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" (FAS 141) and Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization 9 provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt FAS 142 in their fiscal year beginning after December 15, 2001. For the intangible assets acquired on or before June 30, 2001 the intangibles will be amortized during this transition period until adoption of FAS 142. The adoption of FAS 141 and FAS 142 on January 1, 2002 did not have a material impact on our financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses the financial accounting and reporting for the impairment of long-lived assets. This statement supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions for the disposal of a segment of a business of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The provisions of this statement are effective for the financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The adoption of FAS 144 on January 1, 2002 did not have a material impact on our financial position or results of operations. NOTE 8: COMPREHENSIVE LOSS The Company reports comprehensive income (loss) as required by Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income," (FAS 130). FAS 130 requires that changes in fair value of the Company's derivative instruments designated as cash flow hedges, as well as other certain changes in stockholders' equity, be included in other comprehensive income (loss). For the three months ended March 31, 2002 and 2001, comprehensive income (loss) was $(29,972,776) and $(30,222,346) respectively as follows: Three Months Ended March 31, 2002 2001 ------------------------------ Comprehensive loss: Net loss $(31,187,730) $(28,948,653) Cumulative effect of change in accounting principle - (716,504) (Additions) subtractions to other comprehensive loss for changes in fair value of cash flow hedges $ 1,504,784 (783,837) Reclassification from other comprehensive loss to interest expense for ineffective portion and time value of cash flow hedges (289,830) 226,648 ----------------------------- Comprehensive loss $(29,972,776) $(30,222,346) ============================= 10 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this Report. OVERVIEW We are a rapidly growing single-source provider of voice, data and Internet communications services, or integrated communications provider, with 17 years of marketing, sales and service experience. We target predominantly medium and larger-sized business customers who seek greater capacity for voice and data traffic, a single provider for their telecommunications requirements and improved levels of service. We have a large, experienced sales force consisting of 153 account executives supported by 193 network coordinators as of March 31, 2002. Our sales force is located close to our customers in 25 sales branches primarily in the Northeast and Mid-Atlantic states. We are currently operating our own state-of-the-art network facilities to carry telecommunications traffic. Our PowerPath(R) Network uses packet- switching, a technology that transmits data in discrete packages. It uses Internet protocol (IP), which is a method that allows computers with different architectures and operating systems to communicate over the Internet, and asynchronous transfer mode, or ATM, architecture, which permits the network to transmit multiple types of media, such as voice, data and video with various levels of Quality of Service, or QOS. The first phase of our network, which became operational for full production mode in January 2000, included 22 Cisco Systems, or Cisco, advanced data switches and two network operations centers. Presently, we are interconnecting our facilities with a combination of our owned fiber facilities and leased transmission capacity over fiber optic cable strands from Level 3 Communications and NorthEast Optic Network. The remaining leased transmission services will gradually be replaced by our fiber links, which we own following our investment in fiber strands through Williams Communications and other regional and metro fiber carriers. We have selected Cisco to provide the Wavelength Digital Multiplexing (WDM) and SONET technology to activate or light up the fiber and complete a highly competitive, scalable and secure fiber transport infrastructure. Cisco has reviewed and certified our network design and has designated our network as a Cisco Powered Network. In May 1999, we began testing our network with some of our customers and in September 1999, we initiated commercial service. As of March 31, 2002 we were servicing more than 6,000 customer locations with PowerPath(R) access across the Northeast and Mid-Atlantic states. In December 2000, we announced completion of a successful Class-4/5 pilot phase using a softswitch from Telcordia Technologies. The softswitch technology integrated with our PowerPath(R) Network allows us to deliver both local and long distance voice services using a Voice over IP (VoIP) packet based network. We became an integrated communications provider, or ICP, in January 1998. Prior to that, based on agency revenues, we were the largest independent sales agent for NYNEX Corp. and then Bell Atlantic (now Verizon). At the end of 1997, before withdrawing from the Verizon agency program, we were managing relationships for approximately 7,000 customers, representing 11 over 280,000 local access lines and over $200 million in annual local telecommunications spending. As of March 31, 2002, after only 51 months as an integrated communications provider, we were serving over 15,000 customers and had 607,000 access lines and equivalent circuits, or ALEs. ALEs are the total number of voice circuits and equivalent data circuits we have in service. Voice circuits are the actual number of voice circuits purchased by our Customers. Equivalent data circuits represent the data transmission capacity purchased by our customers divided by 64 kilobits per second, which is the capacity necessary to carry one voice circuit. Our Services We offer the following services: Local Telephone Services. We offer connections between our customers' telecommunications equipment and the local telephone network which we lease from incumbent phone companies in most instances. For large customers or customers with specific requirements, we integrate their private systems with analog or digital connections. We also provide all associated call processing features as well as continuously connected private lines for voice interconnectivity between separate facilities. We are now actively engaged in activating local dial tone services using the Company's PowerPath(R) Network through the use of softswitch technology developed by Telcordia Technologies. We will continue to rollout local dial tone services market by market throughout 2002 as an addition to our existing converged product portfolio. We also offer local telephone services through resale of the incumbent local exchange carrier (ILEC) service. Long Distance Telephone Services. We offer a full range of domestic and international long distance services, including "1+" outbound calling, inbound toll free service, and standard and customized calling plans. We also offer related services such as calling cards, operator assistance and conference calling. High Speed Data Services. We offer a wide array of high speed data services. Our portfolio includes Frame Relay as well as point to point solutions from 56kbps to 45mbps. Internet Services. We have built an extensive IP network infrastructure for our PowerPath(R) Network. We became registered as an official Internet Service Provider, or ISP, in 2000, which enabled us to deliver Internet access to our customers as part of our PowerPath(R) Network converged services offering. We launched our iMail web based email product during the summer of 2000 and plan to further expand this offering to include unified messaging services. We provide the necessary configuration support and other network support services on a 24-hour,7-day a week basis. We offer Internet access from 56k to 45mbps to our business customers. Hosting Services. We provide web hosting services via our Springfield, Massachusetts Data Center opened in early 2001 and through our Advanced Technology Center (ATC) in Waltham, Massachusetts opened in September 2001. The ATC is a 50,000 square foot state of the art data center that houses our Eastern Massachusetts Super Node for the PowerPath(R) Network and an Internet/WAN Collocation Center. We currently offer customers hosting solutions that include shared and dedicated web hosting and web site design services, Internet/WAN collocation services and data center storage networking services. 12 In 2002, we plan to offer network attached storage and remote data archiving services, and optical networking services for storage area networking and other high bandwidth applications. These services have been designed and released to support our customers' growing E-business and business continuity (continuous systems uptime) requirements. We currently support approximately 200 web sites for customers at our ATC in Waltham, Massachusetts. In addition, we also support 15 Internet/WAN collocations customers that utilize some or all of our complete suite of Hosting Solutions. We are also engaged in the further analysis and potential development of services such as managed firewall and monitoring service, data security, and other network operating system support services. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2001. Total revenues for the quarter ended March 31, 2002 ("2002 Quarter") were $83,085,000, as compared to $67,621,000 for the quarter ended March 31, 2001 ("2001 Quarter"), or an increase of 23%. The 2002 Quarter revenues also represented an increase of 5% over the revenues of $79,139,000 for the quarter ended December 31, 2001. We have added approximately 112,200 access lines since the quarter ending March 31, 2001 resulting in the increase in revenue due to the addition of ALE's for both new and existing customer relationships. One basis for measurement of an ICP's progress is the growth in ALEs. During the 2002 Quarter, we provisioned 18,000 net ALEs, bringing the total lines in service to 607,000. Net lines provisioned through the 2002 Quarter represented a 3% sequential increase over net lines provisioned through the quarter ended December 31, 2001. Data ALEs represent more than 27% of total ALEs as of March 31, 2002. Costs of telecommunications revenues, excluding depreciation, for the 2002 Quarter were $63,411,000, as compared to $55,344,000 for the 2001 Quarter. As a percentage of telecommunications revenues, cost of telecommunications revenues was 76% for the 2002 Quarter, as compared to 82% for the 2001 Quarter. The decrease in the percentage of the cost of the telecommunications revenues primarily reflects the migration of new and existing customers onto our PowerPath(R)Network and the increased use of our own lower cost fiber facilities. 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 our operations and growth. For the 2002 Quarter, selling, general and administrative expenses (SG&A) decreased 2.8% to $20,597,000 from $21,200,000 for the 2001 Quarter; and increased from $20,347,000 in the quarter ended December 31, 2001. The decrease in SG&A from the 2001 Quarter is due to the decision to limit our expansion and leverage our current branch infrastructure. The increase from the December 31,2001 quarter represents slightly higher payroll and payroll related expenses. For the 2002 Quarter, SG&A expenses were 24.8% of total revenue for the quarter as compared to 31.4% of total revenue for the 2001 quarter. As of March 31, 2002, we employed 700 people including 153 account executives and 193 network coordinators in branch locations throughout the Northeast and Mid-Atlantic states as compared to 693 employees at March 31, 2001. 13 Depreciation and amortization expense increased to $24,042,000 in the 2002 Quarter from $16,634,000 for the 2001 Quarter. This increase was a result of additional expenses associated with the equipment and software relating to the network deployment and the upgrade of our information systems. Network equipment and software is being depreciated over 2-5 years, reflecting the risk of rapid technological change. Other expense, net, increased by 84% to $6,222,000 for the 2002 Quarter from the 2001 Quarter. Interest expense increased due to the increase in borrowings required in connection with the deployment of our network, working capital requirements and funding our operating losses. The increase is further effected by a decrease in interest income due to lower invested cash balances throughout the quarter. As a result of the above factors, the net losses totaled to $31,188,000 for the 2002 Quarter. Liquidity and Capital Resources Working capital at March 31, 2002 was ($548,000) compared to $20,976,000, at December 31, 2001, a decrease of $21,524,000 million, which was used to fund our operating losses and capital expenditures including capital lease payments. Cash balances at March 31, 2002 and December 31,2001 totaled $49,579,000 and $66,289,000, respectively. The Company has entered into an equipment lease financing arrangement that restricts $7.5 million of cash as security for this arrangement. Since September 30, 1998, we have entered into various lease and vendor financing agreements which provide for the acquisition of equipment and software. As of March 31, 2002, the aggregate amount borrowed under these agreements was approximately $143.4 million with an outstanding balance of approximately $91.0 million. In May 2000, the Company increased its working capital from the net proceeds realized from a $200 million preferred stock financing with Bain Capital Inc. ($75 million), Thomas H. Lee Partners, L.P. ($75 million) and CSFB Private Equity ($50 million). The investment consists of 8.25% Series B redeemable convertible preferred stock which converts into our common stock at $50 per share at any time of the option holder. The Company may require conversion of the preferred shares if the common stock of the Company reaches certain levels. The Company may elect to redeem the preferred shares on the fifth anniversary of the closing and all outstanding shares of preferred stock must be redeemed or converted by May 2010. The net proceeds from the sale of the Series B redeemable preferred stock are being used to fund strategic marketing and technology initiatives of our business plan which include the purchase of dark fiber and optronics, PowerPath(R) Network expansion and new PowerPath(R) Network product and applications development. In March 2000, TD Securities (U.S.) Inc. underwrote a $225 million senior secured credit facility ("Senior Facility") to fund our base plan for expansion of our branch sales offices and our PowerPath(R) Network. The proceeds were used to retire the $43 million balance of a $75 million existing credit facility and to repay in full a $25 million vendor financing facility. The Senior Facility includes a $50 million senior secured 7-1/2 year revolving credit facility, a $100 million senior secured 7-1/2 year delayed draw term loan and a $75 million senior secured 8 year term loan. 14 In March 2002, we amended the agreement covering our Senior Facility to include new covenant levels as well as an increase in the interest rate grids. The Senior Facility provides for certain financial and operational covenants, including but not limited to minimum access lines installed and billable, minimum quarterly revenue and operating cash flow, and maximum capital expenditures and other investments. As of March 31, 2002, the Company is in compliance with all the amended covenants. In connection with the amendment, the bank syndicate will receive common stock warrants, which could total 3.25% of our outstanding shares of common stock if warrants to purchase common stock are issued in conjunction with the Company's Vendor Finance Facility, as discussed in the following paragraph. The issuance, terms and prices of the warrants are structured in the same manner as the warrants issuable under the Vendor Finance Facility. As of March 31, 2002, the full $225 million of the Senior Facility has been utilized. In March 2002, we entered into an agreement with a vendor ("Vendor Finance Facility"), which an executive officer thereof is on the Board of Directors of the Company, which restructures approximately $48 million in outstanding capital leases. The leases have been restructured into 36 month leases beginning in February 2002. There will be no principle or interest payments for the first six months and the leases will then be amortized over the remaining 30 months. In addition, subject to meeting the conditions for the financing, we will also receive up to $40 million in capital lease financing from the finance subsidiary of this vendor for equipment purchases in 2002 available in four separate tranches of $10 million each. These are available quarterly on the first days of February, May, August and November 2002. For each new tranche of capital drawn, there are no payments required for the first six months, and then the leases will be amortized over the next 30 months. This additional capital is dependent upon our compliance with the conditions in the agreement, including compliance with financial and operating covenants. These covenants are virtually the same as those in the amended Senior Facility with an additional covenant relating to minimum unrestricted cash balance. Prior to each tranche period, we must elect to utilize the financing tranche for that period or decline it and the remaining tranches. If we elect to use a tranche, we will issue warrants before the beginning of the tranche period equal to 2% of our outstanding common stock for the first $10 million, 1% of the then outstanding common stock for each of tranches two and three, and 2.5% of the then outstanding common stock for the fourth tranche. The number of shares of common stock outstanding for the first tranche is determined as of January 1, 2002. The second through fourth tranches are determined as of the first day of the month immediately preceding the first day of the tranche period. The initial warrants will be issued at an exercise price of $4.10. Subsequent warrants, if issued, would be priced at the average of our stock price for the period from the 10th to the 14th trading days of the month during which such warrants are issued. On February 27,2002, the company elected to fully utilize the first $10 million tranche of the Vendor Financing Facility, resulting in the issuance of 542,075 warrants to the vendor and 271,038 warrants to the bank syndicate, at an exercise price of $4.10. At the date of issuance, these warrants were valued at approximately $1,488,000 and will be recorded as interest expense over the remaining term of the facility. On May 1, 2002, the Company elected to fully utilize the second $10 million tranche of the Vendor Finance Facility, resulting in the issuance of 272,067 warrants to the vendor and 136,034 to the bank syndicate, at an exercise price of $2.408. 15 The aforementioned warrants are subject to ant-dilution adjustments for certain events. The conversion ratio for the Series B Preferred Stock is subject to ant- dilution adjustments for certain events. As a result of the warrants issued associated with the first tranche of the Vendor Financing Facility, the conversion ratio associated with the series B Preferred Stock converts into an additional 50,000 shares of common stock. The fair value associated with these additional shares, $2,500,000 (as determined at the commitment date), will be accreted as additional dividends to preferred stock from the date of issuance of the warrants to the redemption date of the Series B Preferred Stock. We will continue to use the balance of the proceeds realized from the Senior Facility and the Series B redeemable convertible preferred stock financing for general corporate purposes including, capital expenditures, working capital and operating losses associated with the continued deployment of our network, further penetration of our existing region and our expansion into new markets throughout the Northeast and Mid-Atlantic states. Until utilized, the net proceeds from the Senior Facility and Series B redeemable convertible preferred stock financing are being invested in short-term, interest-bearing instruments and other investment-grade securities. We believe that proceeds available from the Series B redeemable convertible preferred stock financing and the Senior Facility, cash on hand and the amounts expected to be available under our bank and lease financing arrangements will be sufficient to fund our planned capital expenditures, working capital and operating losses for at least the next 12 months. We also believe that the above noted sources fully fund our business plan. We cannot assure you that if we require funds in addition to the funds made available through the Senior Facility and the preferred stock financing, such financing will be available, or if available, on terms acceptable to us when needed. If we are unable to obtain such financing when needed, we may postpone or abandon our development and expansion plans which could have a material adverse effect on our business, results of operations and financial condition. The actual timing and amount of our capital requirements may be materially affected by various factors, including the timing and actual cost of the network, the timing and cost of our expansion into new markets, the extent of competition and pricing of telecommunications services by others in our markets, the demand by customers for our services, technological change and potential acquisitions. The Company's covenants under its Senior Facility and Vendor Financing Facility contemplate improvements in the Company's operating results in fiscal 2002 over 2001. Among other things, these covenants require significant improvement in Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), as defined in the Senior Facility and the Vendor Financing Facility. The Company's ability to remain in compliance with the covenants is dependent upon the Company's continued execution of its business plan which consists of the following primary initiatives; continued migration of existing offnet customers onto the Company's network, improving margins by reducing network costs of goods sold (primarily by replacing leased network facilities with owned and operated fiber facilities), 16 controlling selling, general and administrative expenses and continued revenue growth by adding new customers and selling new services. In the event that conditions arise that do not allow the Company to meet all of the primary initiatives of its business plan, management expects to take all necessary actions to remain in compliance with its required covenants which may include the reduction of certain operating expenses, migration of customers onto the Company's network and elimination of certain discretionary expenses. Management believes that if necessary, these actions could be implemented to meet its covenants, including its EBITDA covenant. Recent Accounting Pronouncements In July, 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" (FAS 141) and Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 eliminates the pooling-of- interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt FAS 142 in their fiscal year beginning after December 15, 2001. For the intangible assets acquired on or before June 30, 2001 the intangibles will be amortized during this transition period until adoption of FAS 142. The adoption FAS 141 and FAS 142 on January 1, 2002 did not have a material impact on our financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses the financial accounting and reporting for the impairment of long-lived assets. This statement supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions for the disposal of a segment of a business of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The provisions of this statement are effective for the financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The adoption of FAS 144 on January 1, 2002 did not have a material impact on our financial position or results of operations. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to financial risk, including changes in interest rates, relates primarily to outstanding debt obligations. We utilize our senior secured credit facility to fund a substantial portion of our capital requirements. This facility bears interest at a variable interest rate, which is subject to market changes. Our earnings are affected by changes in short-term interest rates as a result of our borrowings under the Senior Facility. The Senior Facility interest payments are determined by the outstanding indebtedness and the LIBOR rate at the beginning of the period in which interest is computed. As required under the Senior Facility, we utilize interest rate swap and collar agreements to hedge variable rate interest risk on 50% of the Senior Facility. All of our derivative financial instrument transactions are entered into for non-trading purposes. Notional amounts outstanding at March 31, 2002 subject to the interest rate collar is $33 million, with an expected maturity date in the year 2003. The interest rate collar effectively locks $33 million of our Senior Facility borrowings between 12.25% and 9.67%. Notional amount outstanding at March 31, 2002 subject to the interest rate swap is $17 million, with an expected maturity date in the year 2003. The interest rate swap effectively caps $17 million of our Senior Facility borrowings at 10.75%. In December 2001 and January 2002, we entered into two additional interest rate cap agreements of 6.5% maturing in October 2003 and September 2003 on $12.5 million and $50 million of borrowings, respectively. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding debt obligations. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in interest rates on market sensitive instruments, considering the hedge agreements noted above. We compare the market values for interest risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market interest rates in effect at March 31, 2002. We compared the market values resulting from these computations with the market values of these financial instruments at March 31, 2002. The differences in the comparison are the hypothetical gains or losses associated with each type of risk. As a result of our analysis we determined at March 31, 2002, with respect to our variable rate debt obligations, a 10% increase in interest rates with all other variables held constant would result in increased interest expense and cash expenditures for interest of approximately $335,000 for the quarter ended March 31, 2002. A 10% decrease in interest rates would result in reduced interest expense and cash expenditures of approximately $16,000 for the same period taking into consideration the interest rate collar as noted. For purposes of specific risk analysis we use sensitivity analysis to determine the impacts that market risk exposure may have on the fair value of our outstanding fixed rate redeemable convertible preferred stock. To perform sensitivity analysis, we assess the risk of loss in fair values from the impact of hypothetical changes in dividend rates on market sensitive 18 instruments. We compare the market values for dividend risk based on the present value of future cash flows as impacted by the changes in the rates. We selected discount rates for the present value computations based on market dividend rates in effect at March 31, 2002. We compared the market values resulting from these computations with the market values of these financial instruments at March 31, 2002. The differences in the comparison are the hypothetical gains or losses associated with each type of risk. As a result of our analysis we determined at March 31, 2002, with respect to our fixed rate redeemable convertible preferred stock, a 10% increase in dividend rates with all other variables held constant would result in increased dividends of approximately $481,000 for the quarter ended March 31, 2001. A 10% decrease in dividend rates would result in reduced dividends of approximately $481,000 for the same period. Part II Item 2. Changes in Securities (c) On February 27,2002, we issued 542,075 five-year warrants to purchase our common stock with an exercise price of $4.10 per share to Cisco Systems Capital Corp. ("Cisco") in connection with the Company's election to utilize the first tranche of $10 million of the Vendor Finance Facility provided by Cisco. On February 27,2002, we also issued 271,038 five-year warrants with an exercise price of $4.10 per share to Toronto Dominion (Texas) Inc. in connection with the Company's election to utilize the first tranche of $10 million of the Cisco Vendor Finance Facility. Reference is made to the disclosure set forth in the "Liquidity and Capital Resources" section of Part I, Item 2 (Management's Discussion and Analysis of Financial Condition And Results Of Operations) as part of this Quarterly Report on Form 10-Q, Exhibit 10.1 filed herein and Exhibit 10.27 filed as part of our Annual Report on Form 10-K for the year ended December 31, 2001 for a complete description of the transactions described above. All of the warrants were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 10.1 Amended and Restated Master Agreement to Lease Equipment entered into as of February 27, 2002 by and between Cisco Systems Capital Corp. and CTC Communications Corp.** 10.2 Warrant dated February 27, 2002 issued to Toronto Dominion (Texas) Inc. 10.3 Warrant dated February 27, 2002 issued to Cisco Systems Capital Corp. 99 Risk Factors ** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. OMITTED PORTIONS ARE FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (b) Reports on Form 8-K We filed the following reports on Form 8-K during the quarter ended March 31, 2002. Date Items Reported ------- ---------------------------------------------------------- 3/18/02 Announcement of the deployment of our Fiber Network and Local Dial Tone Services into Rhode Island 3/25/02 Announcement that we have entered into a multi-year agreement with Cape Cod Bank and Trust to provide converged voice, data and Internet services to over 30 bank locations throughout southeastern Massachusetts. 19 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 GROUP, INC. Date: May 15, 2002 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: May 15, 2002 /S/ JOHN D. PITTENGER ----------------------------- John D. Pittenger Executive Vice President, and Chief Financial Officer EX-10.1 3 aaa.txt EXHIBIT 10.1 PORTIONS OF THIS EXHIBIT (MARKED WITH AN ASTERISK) HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. OMITTED PORTIONS ARE FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. AMENDED AND RESTATED MASTER AGREEMENT TO LEASE EQUIPMENT No. 1258 THIS AMENDED AND RESTATED MASTER AGREEMENT TO LEASE EQUIPMENT (this "Agreement") is entered into as of February 27, 2002 by and between CISCO SYSTEMS CAPITAL CORPORATION ("Lessor"), having its principal place of business at 170 West Tasman Drive, Mailstop SJCLP1, 2nd Floor, San Jose, California 95134 and CTC COMMUNICATIONS CORP., a Massachusetts corporation ("Lessee"), having its principal place of business at 360 Second Avenue, Waltham, Massachusetts, and amends, restates and supercedes that certain Master Agreement to Lease Equipment entered into between Lessor and Lessee dated October 3, 2000 (the "Existing Master Lease"). Notwithstanding anything to the contrary contained herein or in any related document, this Agreement and the other Lease Documents will not be deemed effective until approved by the Lessor's senior bank group. I. THE LEASE 1.1 Lease of Equipment. In accordance with the terms and conditions of this Agreement, Lessor shall lease to Lessee, and Lessee shall lease from Lessor, the personal property described in the lease schedule(s)(each, a "Schedule") to be entered into from time to time into which this Agreement is incorporated (each Schedule, together with this Agreement and the Appendix, as defined below, and any other appendix entered into from time to time, a "Lease"), together with all substitutions, replacements, repairs, parts and attachments, improvements and accessions thereto (the "Equipment"). Each "Schedule" as defined in the Existing Master Lease, that was executed in connection with the Existing Master Lease, shall constitute a Schedule under this Agreement. The cost of the Equipment that shall be leased to Lessee pursuant to this Agreement from and after February 1, 2002, and all Schedules entered into pursuant to this Agreement on and after February 1, 2002, shall not exceed the maximum amount set forth in that certain Appendix to Amended and Restated Master Agreement to Lease Equipment dated concurrently herewith and incorporated herein (the "Appendix"), which shall further describe the terms and conditions of the Lease, the Lease utilization period and the type of Equipment that shall be leased to Lessee after February 1, 2002. Capitalized terms not otherwise defined in this Agreement have the meanings specified in the applicable Schedule or the Appendix, as the case may be. The obligations of Lessee to Lessor under each of the Schedules dated prior to February 1, 2002 that were executed in connection with the Existing Master Lease, shall be restructured as set forth in the Appendix. Each Lease shall constitute a separate, distinct, and independent lease and contractual obligation of Lessee. Except as expressly set forth in any Lease, Lessor shall at all times retain the full legal title to the Equipment, it being expressly agreed by both parties that each Lease is an agreement of lease only. 1.2 Equipment Procurement. Except as set forth in the Appendix, Lessee has selected or will select Equipment to be procured from Cisco Systems, Inc. or another manufacturer, reseller or vendor acceptable to Lessor(together, "Vendor"). Lessee will notify Lessor in writing of its procurement or intent to procure such Equipment and its request to enter into a Lease in respect of such Equipment. Upon Lessor's acceptance of the Equipment for purposes of any Lease, Lessee shall be deemed to have assigned to Lessor all Lessee's right, title and interest in and to the Equipment and any purchase order or contract relating thereto; provided that Lessor shall have no obligation under such purchase order or contract other than the obligation to pay the Vendor the purchase price of such Equipment. Lessee shall execute and return to Lessor (i) each Schedule prepared by Lessor relating to any Equipment within five days of Lessee's receipt of same, and (ii) each Certificate of Acceptance within five days of receipt and acceptance of the applicable Equipment. If for whatever reason the lease transaction in respect of any Equipment is not consummated, Lessee shall be solely liable to pay Vendor in accordance with the applicable purchase order or contract and shall indemnify and hold Lessor harmless from any liability or payment incurred or made in connection therewith. In such event, upon Lessor's receipt of satisfactory evidence of such payment by Lessee, Lessor shall assign to Lessee, without warranty, its right, title and interest in and to the Equipment and any purchase order or contract relating thereto. 1.3 Term of Lease. The Original Term of each Lease shall begin on the Commencement Date as specified in the applicable Schedule and, subject to Sections 3.5 and 4.2, shall terminate on the date specified in the applicable Schedule. If so provided in the applicable Schedule, the Original Term for any Lease may be succeeded by one or more Extended Terms. Subject to Sections 3.5 and 4.2 and any express provisions of the Schedule, no Lease may be terminated by Lessor or Lessee, for any reason whatsoever, prior to the end of the Original Term or any pending Extended Term. 1.4 Rental Payments. Lessee shall pay Lessor Rent for the Equipment in the amounts and at the times specified in the applicable Schedule. All Rent and other amounts payable by Lessee to Lessor hereunder shall be paid to Lessor at the address specified above, or at such other place as Lessor may designate in writing to Lessee from time to time. 1.5 Return of Equipment. Upon expiration of the Lease Term, Lessee shall immediately return the Equipment to Lessor in the condition and at the place provided in Section 3.3. II. DISCLAIMERS AND WARRANTIES; INTELLECTUAL PROPERTY 2.1 Disclaimers; Warranties. Lessee represents and acknowledges that the Equipment is of a size, design, capacity and manufacture selected by it, and that it is satisfied that the Equipment is suitable for its purposes. LESSEE LEASES THE EQUIPMENT AS IS, AND, NOT BEING THE MANUFACTURER OF THE EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, DESIGN OR CONDITION OF THE EQUIPMENT. LESSOR SHALL NOT BE RESPONSIBLE FOR ANY LOSS OR DAMAGE RESULTING FROM THE INSTALLATION, OPERATION OR OTHER USE, OR DEINSTALLATION OF THE EQUIPMENT, INCLUDING ANY DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOSS. Lessee shall look solely to the manufacturer or the supplier of the Equipment for correction of any problems that may arise with respect thereto, and all transferable manufacturer and supplier warranty rights are, to the extent such rights have been transferred to Lessor, hereby assigned without representation or warranty by Lessor to Lessee for the Lease Term, which warranties Lessee is authorized to enforce if and when there exists no Event of Default. Any such enforcement shall be at Lessee's sole cost and expense. 2.2 Intellectual Property. Lessee acknowledges that neither this Agreement nor any Lease conveys any explicit or implicit license for the use of software or other intellectual property of Cisco Systems, Inc. or its affiliates relating to the Equipment and that such license rights, to the extent they exist, are contained in separate documentation entered into between Lessee and Cisco Systems, Inc. or other persons. LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS WHATSOEVER WITH RESPECT TO THE INTELLECTUAL PROPERTY RIGHTS, INCLUDING ANY PATENT, COPYRIGHT AND TRADEMARK RIGHTS, OF ANY THIRD PARTY WITH RESPECT TO THE EQUIPMENT, WHETHER RELATING TO INFRINGEMENT OR OTHERWISE. Lessor shall, when reasonably requested in writing by Lessee, provided there exists no Event of Default and an indemnity satisfactory to Lessor is delivered by Lessee, and at Lessee's cost and expense, enforce rights of indemnification, if any, for patent infringement obtained from the manufacturer under any agreement for purchase of the Equipment. If notified promptly in writing of any action brought against Lessee based on a claim that the Equipment infringes a patent right, Lessor shall promptly notify the manufacturer thereof for purposes of exercising, for the benefit of Lessee, Lessor's rights with respect to such claim under any such agreement. III. LESSEE OBLIGATIONS 3.1 Net Lease; Payments Unconditional. EACH LEASE IS A NET LEASE, AND ALL COSTS, EXPENSES AND LIABILITIES RELATING TO THE EQUIPMENT, INCLUDING IN RESPECT OF TAXES, INSURANCE AND MAINTENANCE, SHALL BE BORNE SOLELY BY LESSEE. LESSEE'S OBLIGATION TO PAY ALL RENT AND OTHER SUMS THEREUNDER, AND THE RIGHTS OF LESSOR IN AND TO SUCH PAYMENTS, SHALL BE ABSOLUTE AND UNCONDITIONAL, AND SHALL NOT BE SUBJECT TO ANY ABATEMENT, REDUCTION, SETOFF, DEFENSE, COUNTERCLAIM, INTERRUPTION, DEFERMENT OR RECOUPMENT, FOR ANY REASON WHATSOEVER. 3.2 Use of Equipment. Lessee shall use the Equipment solely in the conduct of its business, in a manner and for the use contemplated by the manufacturer thereof, and in compliance with all laws, rules and regulations of every governmental authority having jurisdiction over the Equipment or Lessee and with the provisions of all policies of insurance carried by Lessee pursuant to Section 3.6. 3.3 Delivery; Installation; Return; Maintenance and Repair; Inspection. Lessee shall be solely responsible, at its own expense, for (a) the delivery of the Equipment to Lessee, (b) the packing, rigging and delivery of the Equipment back to Lessor, upon expiration or termination of the Lease Term, in good repair, condition and working order, ordinary wear and tear excepted, at the location(s) within the continental United States specified by Lessor, and (c) the installation, de-installation, maintenance and repair of the Equipment. During the Lease Term, Lessee shall ensure that the Equipment is covered by a maintenance agreement, to the extent available, with the manufacturer of the Equipment or other party reasonably acceptable to Lessor. Lessee shall, at its expense, keep the Equipment in good repair, condition and working order, ordinary wear and tear excepted, and at the expiration or termination of the Lease Term with respect to any of the Equipment, have such Equipment inspected and certified acceptable for maintenance service by the manufacturer. If any of the Equipment, upon its return to Lessor, is not in good repair, condition and working order, ordinary wear and tear excepted, and so inspected and certified, Lessee shall be obligated to pay Lessor for the out-of-pocket expenses Lessor incurs in bringing such Equipment up to such status, but not in excess of the Casualty Value for such Equipment, promptly after its receipt of an invoice for such expenses. Lessor shall be entitled to inspect the Equipment at reasonable times. 3.4 Taxes. Lessee shall pay, and hereby indemnifies Lessor on a net, after- tax basis, against, and shall hold it harmless from, all license fees, assessments, and sales, use, property, excise and other taxes and charges, other than those measured by Lessor's net income, now and hereafter imposed by any governmental body or agency upon or with respect to any of the Equipment, or the possession, ownership, use or operation thereof, or any Lease, or the consummation of the transactions contemplated by any Lease. Notwithstanding the foregoing, to the extent required of it by applicable law and in reliance upon Lessee's disclosure of the location of such Equipment, Lessor shall file personal property tax returns, and shall pay personal property taxes payable with respect to the Equipment. Lessee shall pay to Lessor the amount of all such personal property taxes within 15 days of its receipt of an invoice for such taxes. For any Lease that is specified as an FMV Lease in the applicable Schedule, Lessee acknowledges that it is the intent of Lessor, and a material inducement to Lessor to enter into such Lease, to obtain all state and Federal income tax benefits of ownership with respect to the Equipment under such Lease, including entitlement to annual accelerated cost recovery deductions. 3.5 Loss of Equipment. Lessee assumes the risk that, and shall promptly notify Lessor in writing if, any item of Equipment becomes lost, stolen, damaged, destroyed or otherwise unfit or unavailable for use from any cause whatsoever (an "Event of Loss") after it has been delivered to a common carrier for shipment to Lessee. Unless the item is damaged and is reparable within a reasonable period of time in the judgment of Lessor (in which event Lessee shall promptly cause such item to be repaired and restored to the condition and value it had prior to such Event of Loss, at its own cost and expense), Lessee shall pay to Lessor on the Rent payment date following Lessor's receipt of such notice (or, if none, 30 days after such Event of Loss), an amount equal to the Rent payment or payments due and payable with respect to such Equipment on or prior to such date, plus a sum equal to the Casualty Value of such Equipment as of such date. Upon making such payment, the Rent for such Equipment shall cease to accrue, the term of the Lease as to such Equipment shall terminate and (except in the case of loss, unrecovered theft or complete destruction) Lessor shall be entitled to recover possession of such Equipment in accordance with the provisions of Section 3.3 above. If Lessor has received the foregoing amount, Lessee shall be entitled to the proceeds of any recovery in respect of such Equipment from insurance or otherwise, provided that if the Equipment is subject to an FMV Lease, Lessee shall be entitled to receive such proceeds only up to the Casualty Value therefor, any excess amount to be paid to Lessor. 3.6 Insurance. Lessee shall obtain and maintain for the Lease Term at its own expense, property damage and liability insurance and insurance against loss or damage to the Equipment as a result of fire, explosion, theft, vandalism and such other risks of loss as are normally maintained on equipment of the type leased hereunder by companies carrying on the business in which Lessee is engaged, in such amounts, in such form and with insurers as shall be satisfactory to Lessor. Each insurance policy shall name Lessee as insured and Lessor and its assignees as additional insureds and loss payees thereof as their interest may appear, and shall provide that it may not be cancelled or altered without at least 30 days' prior written notice thereof being given to Lessor (or 10 days', in the event of non- payment of premium). 3.7 Indemnity. Except with respect to the gross negligence or willful misconduct of Lessor, Lessee hereby indemnifies, protects, defends and holds harmless Lessor from and against any and all claims, liabilities (including negligence, tort and strict liability), demands, actions, suits, and proceedings, losses, costs, expenses and damages, including reasonable attorneys' fees and costs (collectively, "Claims"), arising out of, connected with, or resulting from any Lease or any of the Equipment, or any ancillary or related software or other intangibles, whether arising before, during or after the Lease Term (but not Claims relating to events occurring after Lessee has returned the Equipment to Lessor in accordance with Section 3.3), including Claims relating to the manufacture, selection, purchase, delivery, possession, condition, use, operation, return or other disposition of the Equipment. Each of the parties shall give the other prompt written notice of any Claim of which it becomes aware. 3.8 Prohibitions Related to Lease and Equipment. Without the prior written consent of Lessor, which consent as it pertains to clauses (b) and (d) below shall not be unreasonably withheld, Lessee shall not: (a) assign, transfer, or otherwise dispose of any Equipment, the Lease or any rights or obligations thereunder; (b) sublease any of the Equipment or permit the Equipment to be controlled by any other person; (c) create or incur, or permit to exist, any security interest, lien or encumbrance with respect to any of the Equipment; (d) cause or permit any of the Equipment to be moved from the location specified in the applicable Schedule; or (e) cause or permit any of the Equipment to be moved outside the United States. 3.9 Identification. Lessee shall place and maintain permanent markings provided by Lessor on the Equipment evidencing ownership, security and other interests therein, as specified from time to time by Lessor. 3.10 Alterations and Modifications. Lessee shall not make any additions, attachments, alterations or improvements to the Equipment without the prior written consent of Lessor, not to be unreasonably withheld. Any addition, attachment, alteration or improvement to any item of Equipment shall belong to and become the property of Lessor unless, at the request of Lessor, it is removed prior to the return of such item of Equipment by Lessee. Lessee shall be responsible for all costs relating to such removal and shall restore such item of Equipment to the condition and value otherwise required hereunder. 3.11 Personal Property. Lessee acknowledges and represents that the Equipment shall be and remain personal property, notwithstanding the manner by which it may be attached or affixed to realty, and Lessee shall do all acts and enter into all agreements necessary to ensure that the Equipment remains personal property. If requested by Lessor with respect to any item of Equipment, Lessee shall obtain and deliver to Lessor equipment access agreements, satisfactory to Lessor, from all persons claiming any interest in the real property on which such item of Equipment is installed or located. 3.12 Financial Statements. Lessee shall promptly furnish to Lessor such financial or other statements regarding the condition and operations of Lessee and any guarantor of any Lease, and information regarding the Equipment, as Lessor may from time to time reasonably request. 3.13 Lessee Representations. Lessee hereby represents that, with respect to this Agreement, the Appendix, and each Schedule, certificate evidencing acceptance of equipment, assignment of purchase order, insurance letter, UCC financing statement, or other document now or hereafter executed by Lessee in connection with any Lease, including, without limitation, the Letter Re: Warrant Representations and Use of Cisco Name, and the other documents that are signed either by Lessee or CTC Communications Group, Inc. and delivered to Lessor in connection with the Appendix, other than any proposal letters (collectively, "Lease Documents"): (a) the execution, delivery and performance thereof by Lessee or its attorney-in-fact have been duly authorized by all necessary corporate, partnership or company action; (b) the person executing such documents is duly authorized to do so; and (c) such documents constitute legal, valid and binding obligations of Lessee, enforceable in accordance with their terms. IV. DEFAULT AND REMEDIES 4.1 Events of Default. The occurrence of any of the following shall constitute an "Event of Default" hereunder and under each Lease: (a) Lessee fails to pay any Rent or other amount due under any Lease within five days after it becomes due and payable; (b) any representation or warranty of Lessee made in any Lease Document shall have been false or misleading in any material respect as of the date when it was made; (c) Lessee fails to maintain insurance as required herein or breaches any of clauses (a), (b) or (e) of Section 3.8; (d) Lessee or CTC Communications Group, Inc. fails to perform any other covenant, condition or agreement made by it under any Lease, any warrant to purchase stock issued by CTC Communications Group, Inc. to Lessor, or any of the other Lease Documents, and such failure continues for 10 days; provided, if such failure is not capable of being cured it shall constitute an immediate Event of Default; (e) bankruptcy, receivership, insolvency, reorganization, dissolution, liquidation or other similar proceedings are instituted by or against Lessee, any guarantor of any Lease or any partner of a partnership Lessee or guarantor, or all or any part of such person's property, under the Federal Bankruptcy Code or other law of the United States or of any other competent jurisdiction, and, if such proceeding is brought against such person, it consents thereto or fails to cause the same to be discharged within 45 days after it is filed; (f) Lessee materially defaults under any agreement with respect to the purchase or installation of any of the Equipment; or (g) Lessee or any guarantor of any Lease, or any of their respective subsidiaries or other affiliates, defaults under any other instrument or agreement with Lessor or Cisco Systems, Inc. 4.2 Remedies. If an Event of Default exists, Lessor may exercise any one or more of the following remedies, in addition to those arising under applicable law: (a) proceed, by appropriate court action, to enforce performance by Lessee of the applicable covenants of any or all of the Leases; (b) terminate any or all Leases by notice to Lessee and take possession of any or all of the Equipment and, for such purpose, enter upon any premises where the Equipment is located with or without notice or process of law and free from all claims by Lessee or any other person, or require Lessee to assemble the Equipment and deliver it to Lessor in accordance with Section 3.3;(c) recover any and all direct, incidental and consequential damages, including all accrued and unpaid Rent and other amounts owing under any Lease, and (i) for any Lease that is an FMV Lease, the Equipment for which has not been returned to Lessor in the condition required hereunder, an amount equal to the Casualty Value thereof; or(ii) for any Lease that is an FMV Lease, the Equipment for which has been so returned to Lessor, such amounts as are provided for the lessee breach of a personal property lease under the Uniform Commercial Code of the jurisdiction specified in Section 5.11 (the "Code"), using the Discount Rate to calculate present values for such purpose; or (iii) for any Lease that is not an FMV Lease, an amount equal to the present value, discounted at the Discount Rate, of the sum of all Rent and other payments remaining to be paid under such Lease through the Lease Term plus the applicable purchase option amount specified in Paragraph 7 of the Schedule; and (d) sell or re- lease any or all of the Equipment, through public or private sale or lease transactions, and apply the proceeds thereof to Lessee's obligations under such Leases or otherwise seek recovery in accordance with applicable provisions of the Code. Lessee shall remain liable for any resulting deficiency and Lessor may retain any surplus it may realize in connection with an FMV Lease. The "Discount Rate" shall be the rate for U.S. Treasury obligations having a constant maturity of three months, as specified in the Federal Reserve Statistical Release H.15 (or replacement publication) issued most recently prior to the date of termination of the Lease. Lessee shall pay all costs and expenses (including reasonable attorneys' fees) incurred by Lessor in retaking possession of, and removing, storing, repairing, refurbishing and selling or leasing such Equipment and enforcing any obligations of Lessee pursuant to any Lease. V. MISCELLANEOUS 5.1 Performance of Lessee's Obligations. Upon Lessee's failure to pay any amount or perform any obligation under any Lease when due, Lessor shall have the right, but shall not be obligated, to pay such sum or perform such obligation, whereupon such sum or cost of such performance shall immediately become due and payable thereunder, with interest thereon at the Default Rate from the date such payment or performance was made. 5.2 Right to Use. So long as no Event of Default exists, neither Lessor nor its assignee shall interfere with Lessee's right to use the Equipment under any Lease. 5.3 Assignment by Lessor. Lessor may assign or transfer any or all of Lessor's interest in this Agreement, any Lease, any Equipment or Rents, without notice to Lessee. Any assignee of Lessor shall have all of the rights, but none of the obligations (unless otherwise provided in the applicable assignment), of a "Lessor" under this Agreement and the applicable Lease, and Lessee agrees that it will not assert against any assignee any defense, counterclaim or offset that Lessee may have against Lessor or any preceding assignee, and that upon notice of such assignment or transfer, it will pay all Rent and other sums due under this Agreement and the applicable Lease to such assignee or transferee. Lessee acknowledges that any assignment or transfer by Lessor shall not materially change Lessee's duties or obligations under this Agreement or any Lease, nor materially increase the burdens or risks imposed on Lessee. 5.4 Further Assurances. Upon the request of Lessor from time to time, Lessee shall execute and deliver such further documents and do such further acts as Lessor may reasonably request in order fully to effect the purposes of this Agreement or any Lease. Lessee hereby appoints Lessor its attorney in fact, coupled with an interest, authorized, without any obligation to do so, (a) to sign on Lessee's behalf and file, record and register financing statements, and amendments and continuations thereof, and any other documents relating to liens, security interests or property rights of Lessor, Lessee or any third person with respect to any Equipment and ancillary property, in accordance with any Uniform Commercial Code or other code or statute, and (b) to enforce, in its own name or in the name of Lessee, claims relating to any Equipment against insurers, manufacturers or other persons, and to make, adjust, settle, compromise and receive payments as to such claims. 5.5 Rights and Remedies. Each right and remedy granted to Lessor under any Lease shall be cumulative and in addition to any other right or remedy existing in equity, at law, by virtue of statute or otherwise, and may be exercised by Lessor from time to time concurrently or independently and as often and in such order as Lessor may elect. Any failure or delay on the part of Lessor in exercising any such right or remedy shall not operate as a waiver thereof. 5.6 Notices. Any notice, request, demand, consent, approval or other communication provided for or permitted in relation to any Lease shall be in writing and shall be conclusively deemed to have been received by a party hereto on the day it is delivered to such party at its address, or received by the party at such facsimile number, as is set forth in such Lease (or at such other addresses or fax numbers such party shall specify to the other party in writing), or if sent by registered or certified mail, return receipt requested, on the fifth day after the day on which it is mailed, postage prepaid, addressed to such party. 5.7 Section Headings; Interpretation. Section headings are inserted for convenience of reference only and shall not affect any construction or interpretation of any Lease Document. In interpreting the provisions of any Lease Document, (a) the term "including" is not limiting; (b) references to "person" include individuals, corporations and other legal persons and entities; (c) the singular of defined terms includes the plural and vice- versa; and (d) section and paragraph references are to the document in which such reference appears, unless the context otherwise requires. 5.8 Entire Lease. This Agreement, together with the other Lease Documents, constitute the entire agreement between Lessor and Lessee with respect to the lease of the Equipment. No waiver or amendment of, or any consent with respect to, any provision of any Lease Document shall bind either party unless set forth in a writing, specifying such waiver, consent, or amendment, signed by both parties. TO THE EXTENT PERMITTED BY APPLICABLE LAW AND NOT OTHERWISE SPECIFICALLY GRANTED TO LESSEE IN ANY LEASE DOCUMENT, LESSEE HEREBY WAIVES ANY AND ALL RIGHTS OR REMEDIES CONFERRED UPON A LESSEE UNDER THE CODE OR ANY OTHER APPLICABLE LAW OR STATUTE, WITH RESPECT TO A DEFAULT BY LESSOR UNDER THIS AGREEMENT OR ANY LEASE. Each FMV Lease is intended by the parties as a "finance lease" under the Code. 5.9 Severability. Should any provision of any Lease Document be or become invalid, illegal, or unenforceable under applicable law, the other provisions of such Lease Document shall not be affected and shall remain in full force and effect. 5.10 Attorneys' Fees; Default Interest; Maximum Rates. Lessee shall reimburse Lessor for all charges, costs, expenses and attorney's fees incurred by Lessor (a) in defending or protecting its interests in the Equipment, (b) in the enforcement of this Agreement or any Lease, and (c) in any lawsuit or other legal proceeding to which this Agreement or any Lease gives rise. Any nonpayment of Rent or other amount payable under any Lease shall result in Lessee's obligation to promptly pay Lessor on such overdue payment, for the period of time during which it is overdue (including during any grace period), interest at a rate ("Default Rate") equal to fourteen percent (14%) per annum. To the extent that any payment of interest (including any amount deemed imputed interest for purposes of applicable law) under any Lease Document would otherwise exceed provisions of any law limiting the highest rate of interest that may be lawfully contracted for, charged or received by Lessor, such payment amount shall be deemed reduced to such amount as is equal to or consistent with the highest rate permitted by applicable law. 5.11 Governing Law and Jurisdiction. THIS AGREEMENT AND THE OTHER LEASE DOCUMENTS SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF CALIFORNIA. LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM ANY LEASE DOCUMENT. LESSEE CONSENTS TO THE NON- EXCLUSIVE JURISDICTION OF THE STATE COURTS OF CALIFORNIA, AND THE FEDERAL COURTS SITTING IN THE STATE OF CALIFORNIA, FOR THE RESOLUTION OF ANY DISPUTES UNDER ANY LEASE DOCUMENT. 5.12 Survival. All obligations of Lessee to make payments to Lessor under any Lease or to indemnify Lessor, including pursuant to Section 3.4 or 3.7 above, with respect to a Lease, and all rights of Lessor hereunder with respect to a Lease, shall survive the termination of such Lease and the return of the Equipment. 5.13 Security. To secure the payment and performance by Lessee of all obligations under each Lease, Lessee hereby grants Lessor a security interest in Lessee's right, title and interest, now existing and hereafter arising, in and to, (a) all Equipment subject to such Lease, (b) all insurance, warranty, rental and other claims and rights to payment and chattel paper arising out of such Equipment, and (c) all books, records and proceeds relating to the foregoing. 5.14 Counterparts; Chattel Paper. Each Lease Document may be executed in counterparts, and when so executed each counterpart shall be deemed to be an original, and such counterparts together shall constitute one and the same instrument. The original of each Schedule shall constitute chattel paper for purposes of the Code. If there exist multiple originals of a Schedule, the one marked "Lessor's Copy" or words of similar import, shall be the only chattel paper. 5.15 Appendix. The Appendix, and any other lease appendix executed by Lessor and Lessee making reference to this Agreement is a part of and incorporated into this Agreement by this reference. LESSEE, BY THE SIGNATURE BELOW OF ITS AUTHORIZED REPRESENTATIVE, ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. EACH PERSON SIGNING BELOW ON BEHALF OF LESSEE REPRESENTS THAT HE OR SHE IS AUTHORIZED TO EXECUTE AND DELIVER THIS AGREEMENT ON BEHALF OF LESSEE. LESSOR: CISCO SYSTEMS CAPITAL CORPORATION By: /s/(Authorized Signature) (Name/Title) LESSEE: CTC COMMUNICATIONS CORP. By: /s/ (Authorized Signature) (Name/Title) By: /s/(Authorized Signature) (Name/Title) APPENDIX To Amended and Restated Master Agreement to Lease Equipment No. 1258 THIS APPENDIX TO AMENDED AND RESTATED MASTER AGREEMENT TO LEASE EQUIPMENT NO. 1258 dated February 27, 2002 (this "Appendix"), effective as of February 1, 2002, is entered into by and between CISCO SYSTEMS CAPITAL CORPORATION ("Lessor"), and CTC COMMUNICATIONS CORP., a Massachusetts corporation ("Lessee"), and acknowledged and agreed to by CTC Communications Group, Inc., and supplements and shall be deemed incorporated into that certain Amended and Restated Master Agreement to Lease Equipment between Lessor and Lessee dated as of February 27, 2002 (the "Agreement"). 1. CERTAIN DEFINITIONS. In addition to terms defined elsewhere in the Agreement or any Schedule thereto, the following terms shall have the following meanings: "Administrative Agent" shall mean Toronto Dominion, as Administrative Agent under the Toronto Dominion Credit Agreement. "ALE" means the total number of voice circuits and equivalent data circuits that the Lessee and its Subsidiaries have in service. Voice circuits are the actual number of voice circuits purchased by the Lessee's and its Subsidiaries' customers, while equivalent data circuits represents the data transmission capacity purchased by such customers divided by 64 kilobits per second (the capacity necessary to carry one voice circuit). "Annualized Consolidated EDITDA" means, at any date of determination, Consolidated EBITDA for the most recently completed full Fiscal Quarter multiplied by four. "Capital Expenditures" means, for any period, the aggregate amount of (a) all expenditures of the Lessee and its Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures, and (b) Capitalized Lease Liabilities incurred by the Lessee and its Subsidiaries during such period. "Capitalized Lease Liabilities" means all monetary obligations of the Lessee or any of its Subsidiaries under any leasing or similar arrangement which have been (or, in accordance with GAAP, should be) classified as capitalized leases, and for proposes of this Appendix, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a premium or penalty. "Capital Securities" means, with respect to any Person, any and all interests, including shares of capital stock, membership interest in limited liability companies and general or limited partnership interests in any partnership participations or other equivalents (however designated whether voting or non- voting) of such Person's capital, whether now outstanding or issued after this date of this Appendix. "Cash Equivalent Investment" means, at any time: (a) any direct obligation of (or unconditionally guaranteed by) the United States or a State thereof (or any agency or political subdivision thereof, to the extent such obligations are supported by the full faith and credit of the United States or a State thereof) maturing not more than one year after such time; (b) commercial paper maturing not more than 270 days from the date of issue, which is rated A-1 or higher by S&P or P-1 or higher by Moody's, or (c) any certificate of deposit, time deposit or bankers acceptance, maturing not more than one year after its date of issuance, which is issued by any bank organized under the laws of the United States (or any State thereof) and which has (x) a credit rating of A2 or higher from Moody's or A or higher from S&P and (y) a combined capital and surplus greater than $500,000,000, "Change of Control" means (a) at any time, (i) any person or group (within the meaning of Sections 13(d) and 14(d) under the Exchange Act), other than the Permitted Holders, shall become the ultimate "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) or holder of voting power, directly or indirectly, with respect to Capital Securities representing either (A) more than 40% of the Capital Securities or voting power with respect to the Parent on a fully diluted basis or (B) more than the percentage of the capital securities or voting power with respect to the Parent on a fully diluted basis then held by the Permitted Holders or (ii) the Fabbricatore Related Parties hold less than 51% of the total number of shares of Capital Securities held by the Fabbricatore Related Parties on and as of March 30, 2000 (as adjusted for stock splits, stock dividends, stock reclassifications and similar transactions); or (a) the failure of the Parent at any time to directly own beneficially and of record on a fully diluted basis 100% of the outstanding capital securities of the Lessee; or (b) during any period of 24 consecutive months, individuals who at the beginning of such period constituted the Board of Directors of the Lessee (together with any new directors whose election to such Board or whose nomination for election by the stockholders of the Lessee was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Lessee then in office; or (c) the occurrence of any "Change of Control" (or similar term) under (and as defined in) any Subordinated Debt Document, as defined in the Toronto Dominion Credit Agreement. "Consolidated Group" means the Parent, the Lessee and each of their respective Subsidiaries. "Consolidated EBITDA" means, for any applicable period, the sum of (a) Net Income for such period, plus (b) to the extent deducted in determining Net Income, the sum of (i) amounts attributable to amortization, (ii) income tax expense, (iii) Interest Expense and (iv) depreciation of assets, in each case annualized for applicable periods of less than a year, for such period. "Contingent Liability" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the Indebtedness of any other Person (other than by endorsements of instruments in the master lease appendix.doc course of collection), or guarantees the payment of dividends or other distributions upon the Capital Securities of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount of the debt, obligation or other liability guaranteed thereby. "Debt Service" means, for any period, any principal payments and any cash Interest Expense required to be paid by the Consolidated Group for such period. "Existing Schedules" shall have the meaning assigned to such term in Section 2(a) of this Appendix. "Fabbricatore Related Parties" means Fabbricatore, the family members of Fabbricatore, Fabbricatore family trusts and any wholly owned Subsidiary of any combination of the foregoing. "First Warrant" shall have the meaning set forth in Section 3(f) of this Appendix. "Fiscal Quarter" means a quarter ending on the last day of March, June, September or December. "Fiscal Year" means any period of twelve consecutive calendar months ending on March 31; references to a Fiscal Year with a number corresponding to any calendar year (e.g., the "2000 Fiscal Year") refer to the Fiscal Year ending on December 31 of such calendar year. "GAAP" means generally accepted accounting principles as in effect from time to time. "Governmental Authority" means any national government, or any state, province or other political subdivision thereof or therein, or any governmental ministry, department, body, commission, board, bureau, agency, central bank, court, tribunal or other instrumentality or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty" shall mean that certain Amended and Restated Guaranty dated as of February 27, 2002, which amends, restates and supercedes that certain Guaranty dated October 3, 2000 by Parent in favor of Lessor, as the same may be amended from time to time. "Hedging Obligations" means, with respect to any Person, all liabilities of such Person under currency exchange agreements, interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Indebtedness" of any Person means, (a) all obligations of such Person for borrowed money or advances and all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all Capitalized Lease Liabilities of such Person; (d) net liabilities of such Person under all Hedging Obligations; (e) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business which are not overdue for a period of more than 60 days or, if overdue for more than 60 days, as to which a dispute exists and adequate reserves in conformity with GAAP have been established on the books of such Person), and indebtedness secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) a Lien on property owned or being acquired by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (f) obligations arising under Synthetic Leases; and (g) all Contingent Liabilities of such Person in respect of any of the foregoing. The Indebtedness of any Person shall include the Indebtedness of any other Person (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such other Person, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Intercreditor Agreement" means that certain Intercreditor Agreement between Toronto Dominion, as Administrative Agent, and Lessor dated February 27, 2002, as amended from time to time. "Interest Expense" means, for any period, the aggregate interest expense (both accrued and paid) of the Consolidated Group for such period, including the portion of any payments made in respect of Capitalized Lease Liabilities allocable to interest expense (net of interest income paid during such period to the Consolidated Group). "Material Adverse Change" means (i) a material adverse change in the business, operations or financial condition of Lessee and its Subsidiaries taken as a whole, or (ii) any event, matter, condition or circumstance which (A) would materially impair the ability of Lessee or any other Person to perform or observe its obligations under or in respect of the Agreement or any other agreements, instruments or documents executed in connection herewith, or (B) affects the legality, validity, binding effect or enforceability of the Agreement or any other agreements, instruments or documents executed in connection herewith. "Net Income" means, for any period, the aggregate of all amounts (exclusive of all amounts in respect of (i) any non-cash extraordinary gains and losses and (ii) any Non-Recurring Items in an amount not to exceed $5,000,000 in the aggregate per annum) which would be included as net income on the consolidated financial statements of the Consolidated Group for such period. "New Schedule" shall have the meaning assigned to such term in Section 3(e) of this Appendix. "Non-Recurring Items" means, for any period, any non-cash item which has reduced Net Income for such period but which, by its nature, will represent a one-time charge and will not reduce Net Income in any subsequent period. "Non-Soft Costs Payments" shall have the meaning assigned to such term in Section 2(a) of this Appendix. "Parent" means CTC Communications Group, Inc. "Permitted Holders" means the Spectrum Related Parties and/or the Fabbricatore Related Parties. "Person" means any natural person, corporation, limited liability company, partnership, joint venture, association, trust or unincorporated organization, governmental authority, or any other legal entity, whether acting in an individual, fiduciary or other capacity. "Pro Forma Debt Service Coverage Ratio" means as of the last day of any Fiscal Quarter the ratio of (a) Annualized Consolidated EBITDA computed for such Fiscal Quarter to (b) the aggregate amount (as determined in good faith by the Parent and the Lessee) of Debt Service for the next four Fiscal Quarters immediately following the Fiscal Quarter most recently ended. "Requirements of Law" means, as to any person, any and all laws, treaties, rules or regulations or determinations of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the person or any of its property or to which the person or any of its property is subject. "Restricted Cash" means any cash or Cash Equivalents of Lessee in a cash collateral account or otherwise that secures payment or performance of any obligation of Lessee to any Person, including without limitation, cash held to secure reimbursement obligations for any letters of credit or bonds, other than the amount of cash or Cash Equivalents, if any, that (i) exceeds any required minimum balances established by any Person and (ii) can be withdrawn and utilized by Lessee absent the occurrence of an event of default under the Toronto Dominion Credit Agreement. "Soft Costs" include, without limitation, costs or expenses for, or associated with, packing, shipping, taxes, maintenance, installation, cabling, and software. "Spectrum Related Parties" means Spectrum Equity Investors II L.P. and its Subsidiaries. "Subsidiary" means any corporation, association, partnership, joint venture or other business entity of which more than 50% of the voting stock or other equity interest is owned directly or indirectly by any person or one or more of the other Subsidiaries of such person or a combination thereof. "Synthetic Leases" means, as applied to any Person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) (a) that is not a capital lease in accordance with GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for federal income tax purposes, other than any such lease under which that Person is the lessor. "Toronto Dominion" means Toronto Dominion (Texas), Inc., and its successors and assigns. "Toronto Dominion Credit Agreement" means that certain Credit Agreement among Lessee, Parent, Toronto Dominion and the other lenders described therein, dated as of March 30, 2000, as amended or amended and restated from time to time. "Total Debt" means, on any date, the outstanding principal amount of all Indebtedness of the Consolidated Group of the type referred to in clause (a) (which in the case of the.A-8. BPH\EXTRANET\CSCC FORM\A003.L.master lease appendix.doc Loans, shall be deemed to equal the average daily amount of the Loans (as defined in the Toronto Credit Agreement) outstanding for the Fiscal Quarter ending on or immediately preceding the date of determination), clause (b) (which in the case of Letter of Credit Outstandings, as defined in the Toronto Credit Agreement, shall be deemed to equal the average daily amount of Letter of Credit Outstandings for the Fiscal Quarter ending on or immediately preceding the date of determination), clause (c) and clause (g), in each case of the definition of "Indebtedness" (exclusive of intercompany Indebtedness between the Consolidated Group) and any Contingent Liability in respect of any of the foregoing. "Total Debt to Capitalization Ratio" means at any time, the ratio of (a) Total Debt outstanding at such time to (b) Total Debt outstanding at such time plus paid-in-equity capital of the Consolidated Group at such time. "Total Leverage Ratio" means, as of the last day of any Fiscal Quarter, the ratio of (a) Total Debt outstanding on the last day of such Fiscal Quarter to (b) Annualized Consolidated EBITA computed for such Fiscal Quarter. "Tranche 1" shall have the meaning assigned to such term in Section 3(a)(i) of this Appendix. "Tranche 2" shall have the meaning assigned to such term in Section 3(a)(ii) of this Appendix. "Tranche 3" shall have the meaning assigned to such term in Section 3(a)(iii) of this Appendix. "Tranche 4" shall have the meaning assigned to such term in Section 3(a)(iv) of this Appendix. "Tranche 1 Commitment Period" shall have the meaning assigned to such term in Section 3(a)(i) of this Appendix. "Tranche 2 Commitment Period" shall have the meaning assigned to such term in Section 3(a)(ii) of this Appendix. "Tranche 3 Commitment Period" shall have the meaning assigned to such term in Section 3(a)(iii) of this Appendix. "Tranche 4 Commitment Period" shall have the meaning assigned to such term in Section 3(a)(iv) of this Appendix. "Unrestricted Cash Balance" means, at any time, the amount by which all cash and Cash Equivalent Investments exceeds the balance at such time of Restricted Cash. "Warrant" shall have the meaning set forth in Section 3(f) of this Appendix. 2. RESTRUCTURING OF EXISTING LEASE SCHEDULES. (a) Restructured Lease Payments. Each of the Schedules executed by Lessee prior to February 1, 2002 in connection with the Existing Master Lease (each such Schedule together with those certain Schedule Nos. 072- 000, 073-000, 074-000, 075-000, 076-000, 077-000 and 078-000, each dated as of a date in February 2002, and any other schedules entered into on or after February 1,2002 but prior to the effectiveness of this Appendix (the "Current Schedules"), referred to hereinafter collectively, as the "Existing Schedules"), except for those Existing Schedules that relate only to Soft Costs and the Current Schedules, shall be restructured as follows. That portion of the payments due under the Existing Schedules as of February 1, 2002 for everything other than Soft Costs (the "Non-Soft Costs Payments"), as determined by Lessor, are payments under existing lease schedules broken down into soft costs and hardware shall be due and payable over a thirty-six (36) month period beginning February 1, 2002 and ending January 1, 2005. The Non-Soft Costs Payments shall be payable as set forth on an Addendum to each Existing Schedule to be executed by Lessor and Lessee on or before March 15, 2002, which Addendum shall (i) provide for no payments for the months of February through July, 2002, with all Non-Soft Costs Payments due under each Existing Schedule amortized over the remaining thirty (30) months of such thirty-six (36) month period, and (ii) incorporate into the amount of the monthly payment a lease rate factor, discount rate and residual payment such that the aggregate monthly payment shall be consistent with the pricing described in the example attached as Exhibit A to the Lease Restructuring Proposal dated January 23, 2002. All payments under each Existing Schedule attributable to Soft Costs shall continue to be due and payable as set forth in such Existing Schedules. All Existing Schedules, Current Schedules and New Schedules constitute Schedules under the Agreement. (b) Future Schedules. Notwithstanding anything to the contrary in any agreement between Lessor and Lessee, from and after February 1, 2002, any future leases of Equipment by Lessor to Lessee shall be pursuant and subject to the terms and conditions of the Agreement, this Appendix, the New.A- 10. BPH\EXTRANET\CSCC FORM\A003.L.master lease appendix.doc Schedules and the other Lease Documents. 3. AVAILABILITY OF LEASE FACILITY. (a) Tranche Availability. Subject to the terms and conditions of the Agreement and this Appendix, and so long as no Event of Default has occurred and lessee is in compliance with its covenants set forth in this Appendix, Lessor shall, from time to time during each applicable Tranche Commitment Period, upon the request of Lessee, lease Equipment to Lessee. The aggregate cost of the Equipment available for lease to Lessee under the Agreement, the Schedules and this Appendix shall not exceed the amounts set forth below for each period of time set forth below: (i) For the period beginning February 1, 2002 and continuing through April 30, 2002 ("Tranche 1 Commitment Period"), Ten Million Dollars ($10,000,000) ("Tranche 1"); (ii) For the period beginning May 1, 2002 and continuing through July 31, 2002 ("Tranche 2 Commitment Period"), Ten Million Dollars ($10,000,000) ("Tranche 2"); (iii) For the period beginning August 1, 2002 and continuing through October 31, 2002 ("Tranche 3 Commitment Period"), Ten Million Dollars ($10,000,000) ("Tranche 3"); and (iv) For the period beginning November 1, 2002 and continuing through January 31, 2003 ("Tranche 4 Commitment Period"), Ten Million Dollars ($10,000,000) ("Tranche 4"). Notwithstanding anything to the contrary in the Agreement, this Appendix or any of the other Lease Documents, in addition to compliance with the covenants set forth in this Appendix and subject to the other terms and conditions of the Lease Documents, Tranches 2, 3 and 4 shall be made available to Lessee only if, immediately prior to and at all times during the applicable Tranche Commitment Period, Lessee (i) has met the financial benchmarks and is in compliance with all the financial covenants described on set forth in Section 5(d), , (ii) with respect to Equipment acquired under the New Schedules and under the Current Schedules, Lessor shall have used all such Equipment (1) within the geographical territory in which the network exists at the time of this Appendix, and (2) in a way that maximizes the utility of the network through deploying such Equipment on a first priority basis to areas of the network that provide the most accretive financial impact, and (iii) has delivered to Lessor the Warrant for the applicable Tranche as set forth below. Lessee understands and agrees that notwithstanding the dates set forth for commencement of Tranches 2, 3 or 4, none of such Tranches shall be available unless and until all of the foregoing conditions has been satisfied, and whether the financial covenants have been satisfied cannot be determined until the fifth (5th) business day after Lessee delivers to Lessor the financial statements and the Compliance Certificate required to be delivered pursuant to Section 5(c)(iv). If Lessee delivers to Lessor a Warrant in connection with any Tranche before delivery of the financial statements and Compliance Certificate that is required to be delivered as a condition to availability of such Tranche, and after delivery of the financial statements and Compliance Certificate Lessor determines that such Tranche is not available as a result of Lessee's failure to meet such financial covenants, Lessor shall return such Warrant to Lessee. (b) Cancellation of Tranches. If Lessee does not use any portion of any Tranche by the last day of the applicable Tranche Commitment Period, such unused portion of such Tranche shall automatically expire and shall not be added to the availability under any future Tranche. If Lessee does not desire to utilize any Tranche Lessee shall deliver to Lessor written notice of cancellation not less than ten (10) days prior the commencement of the applicable Tranche Commitment Period; provided, that cancellation of any Tranche automatically cancels the availability of all future Tranches. In addition, if Lessee fails to deliver to Lessor the Warrant for any Tranche at least five (5) business days prior to the commencement of the applicable Tranche Commitment Period for such Tranche, such Tranche, and all future Tranches, shall be automatically cancelled and Lessee shall not have any right to lease Equipment under such Tranche or any future Tranches. (c) Submission of Requests Prior to Expiration of Commitment Period. Lessee shall submit a request to Lessor for leasing Equipment under any applicable Tranche together with all applicable purchase orders and other information required by Lessor, at least ten (10) business days prior to the expiration of any Tranche Commitment Period. Lessor shall be under no obligation to lease any Equipment to Lessee under any Tranche if Lessee does not submit such request and information as required. (d) Equipment Subject to Lease. Notwithstanding anything to the contrary in the Agreement, the equipment that may be leased by Lessor to Lessee from and after February 1, 2002 under the Lease Documents shall consist of refurbished products manufactured by Cisco Systems, Inc. from Lessor's refurbished equipment inventory at the price set forth in a quotation to be provided at Lessor's option from either the Cisco Capital Sales Team, the Cisco Systems, Inc. Sales Team or a Cisco Value Added Reseller; provided, that upon confirmation from Lessor to Lessee that refurbished inventory of the kind designated by Lessee is not available for leasing to Lessee, Lessor shall so notify Lessee and Lessee may, upon receipt of such notification, and subject to the terms of this Appendix, order new products manufactured by Cisco Systems, Inc. or otherwise acceptable to Lessor, at the price set forth in a quotation to be provided at Lessor's option from either Lessor, the Cisco Systems, Inc. Sales Team or a Cisco Value Added Reseller, in form satisfactory to Lessor (the "Equipment"). In no event shall any of the Tranches be available for Soft Costs. All Equipment leased by Lessee under the Lease Documents shall be shipped to locations within the United States only, shall be used in the United States and only in the location specified in any Schedule, and shall not be moved without the prior written consent of Lessor, which consent shall not be unreasonably withheld. Lessor shall not be responsible for maintenance, software or ancillary services relating to the Equipment, or for ensuring that any necessary maintenance or services agreements or software licenses with Cisco Systems, Inc. or any other third party are in effect at any time. (e) Terms of New Schedules. The term of each Schedule entered into on or after February 1, 2002 for leased Equipment (each, a "New Schedule") shall be thirty-six (36) months. Each New Schedule shall be substantially in the form attached hereto as Exhibit A. The Lease Rate Factor applicable for each New Schedule shall be * for each of months seven (7) through thirty-six (36) of each Schedule, and * for each of months one (1) through six (6), subject to adjustment as set forth below, or as otherwise set forth in any New Schedule as hereafter agreed to between Lessor and Lessee; provided, that if Lessee raises more than Thirty Million Dollars ($30,000,000) in the aggregate from and after February 1, 2002, of either debt, equity or a combination of debt and equity, all New Schedules entered into after the date thereof shall be structured as thirty-six (36) month level fair market value leases with no rent deferrals for the first six (6) months of such Schedules, using a Lease Rate Factor of *. The rent payment for each month in the rental period with respect to each New Schedule shall be calculated by multiplying the total Equipment cost for all Equipment subject to such New Schedule by the Lease Rate Factor applicable for such month. Each of the Lease Rate Factors described above shall be adjusted prior to the date of preparation of any New Schedule to reflect changes equal to or greater than one quarter of one percent (.25%) * Changes to the benchmark rate of less than one quarter of one percent (.25%) will not affect the Lease Rate Factors set forth above. *THIS PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION All Lease payments shall be due and payable in advance on the first day of each month. Rental payments will commence on the first of the month on or after acceptance or deemed acceptance of the Equipment, such deemed acceptance to take place 30 days after shipment of the final piece of Equipment per Schedule, or as otherwise provided in any New Schedule. Each New Schedule shall provide that at the end of the term of the Lease, Lessee shall have the right to select one of the following options: (1) purchase all but not less than all of the Equipment under such New Schedule for the then fair market value; (2) subject to the consent of Lessor renew all, but not less than all of the Equipment on a month to month basis for the daily equivalent of the original rental payment for months seven (7) through thirty-six (36) of the Lease, payable in advance; or (3) return all, but not less than all of the Equipment to Lessor. The Compliance Certificate to be delivered pursuant to Section 5(c)(iv) shall include a certification regarding the amount of additional capital raised by Lessee from and after February 1, 2002. (f) Delivery of Warrants. On or before the date hereof Lessee shall deliver to Lessor a Stock Subscription Warrant (the "First Warrant") to purchase common stock of Parent equal to two percent (2%) of the common stock of Parent issued and outstanding as of January 1, 2002, acceptable to Lessor in its discretion, substantially in the form attached hereto as Exhibit C. On or before the fifth (5th) business day before the commencement of each Tranche Commitment Period, unless such Tranche is cancelled by Lessee as set forth in Section 3(b), Lessee shall deliver to Lessor (i) a Stock Subscription Warrant (each, a "Warrant") equal to the following percentages, based upon the number of shares of common stock issued and outstanding as of the first day of the month immediately preceding the first day of the Tranche Commitment Period, with an exercise price equal to the average of the closing prices of the common stock of Lessee at the end of each of the 10th, 11th, 12th, 13th and 14th trading days of the month ending immediately prior to the first day of the Tranche Commitment Period, substantially in the form of the First Warrant delivered for Tranche 1, and (ii) an opinion letter from Ropes & Gray substantially in the form of the opinion letter delivered in connection with this Appendix and the First Warrant, which includes, without limitation, an opinion that (a) the Warrant delivered in connection with the applicable Tranche is valid, binding and enforceable, Lessee has reserved sufficient shares of common stock for exercise of such Warrant, (b) the warrant shares when issued, sold and delivered in accordance with the terms and for the consideration expressed in such Warrant will be duly and validly issued, fully paid and nonassessable, and (c) the Company is authorized and directed to execute and deliver such Warrant . (i) Tranche 2: One percent (1%) of the outstanding common stock of Lessee: (ii) Tranche 3: One percent (1%) of the outstanding common stock of Lessee; (ii) Tranche 4: Two and one-half percent (2.5%) of the outstanding common stock of Lessee. 4. CONDITIONS PRECEDENT. (a) Conditions to Effectiveness. The effectiveness of the Agreement and this Appendix and the amendments to the Existing Schedules contemplated hereby shall be conditional upon the following conditions having been satisfied or provided for in a manner satisfactory to Lessor: (i) Receipt of Lease Documents. The Agreement, this Appendix, the other Lease Documents, the Guaranty, the Warrant for Tranche 1 or counterparts hereof, the other agreements referred to in subsections (iv) and (vii) below, and the other documents set forth on the Schedule of Documents attached hereto as Exhibit G required to be delivered by Lessee to Lessor shall have been duly executed by, and delivered to, Lessee and Lessor, and Lessor shall have received such documents, instruments, agreements and legal opinions as Lessor shall request in connection with the transactions contemplated by the Lease Documents. (ii) Receipt of Payments Under Existing Lease. Lessor shall have received all payments owed by Lessee to Lessor through January 31, 2001 under the Existing Master Lease, all Existing Schedules, and under all other agreements between Lessor and Lessee. (iii) Reconciliation of Existing Schedules. Lessee shall have executed and delivered to Lessor all Existing Schedules not previously executed by Lessee with respect to equipment that was shipped to Lessee on or before January 31, 2002, and all equipment described as CSC Pre-funded Inventory or PFI, shall have been reconciled with Lessor and supporting Existing Schedules shall have been executed by Lessee and delivered to Lessor. (iv) Agreement with Toronto Dominion. (a) Lessee and the Required Lenders, as defined in the Toronto Dominion Credit Agreement, shall have agreed to financial covenants acceptable to Lessor, (b) Lessee and the Required Lenders shall have executed and delivered to Lessor a Fourth Amendment to Credit Agreement in form acceptable to Lessor, and (c) Administrative Agent shall have delivered to Lessor a Certificate providing that (1) the Fourth Amendment to Credit Agreement is effective, and (2) that Administrative Agent has approved the Agreement, this Appendix, the Stock Subscription Warrant and the other Lease Documents. (v) Due Diligence. Lessee shall have provided to Lessor all information requested by Lessor for the completion of Lessor's due diligence and documentation. Lessor shall have completed its business and legal due diligence, with results satisfactory to Lessor. (vi) No Events of Default. Lessee shall not be in default under any (i) agreement with Lessor or Cisco Systems, Inc., (ii) material agreement with any third party, or (ii) any non-material agreement with any third party where the amount in default under such agreement is more than Ten Thousand Dollars ($10,000) or, if the third party to such agreement accelerated based upon such default, the amount owing would exceed Twenty-Thousand ($20,000). (vii) Subordination Agreement/Release. Lessee shall have obtained from Administrative Agent and from any other Person that has filed a financing statement against Lessee covering equipment or inventory, a release of such entity's security interest in all Equipment subject to the Agreement, or a subordination agreement with respect to such Equipment, in form and substance satisfactory to Lessor. (viii) Intercreditor Agreement. Administrative Agent shall have delivered to Lessor the Intercreditor Agreement executed by Administrative Agent, in form and substance acceptable to Agent, and such Intercreditor Agreement shall be effective. (b) Conditions to Consummation of Each Schedule. Lessor shall not be obligated to enter into any Schedule or lease any Equipment if, as of the date thereof: (i) any representation or warranty by Lessee contained herein or in any of the other Lease Documents shall be untrue or incorrect as of such date, except to the extent that such representation or warranty expressly relates to an earlier date and except for changes therein expressly permitted or expressly contemplated hereunder; or (ii) any Event of Default shall have occurred and be continuing; or (iii) if any of the Equipment covered under such Schedule will be located at either a co-location facility or a location with a customer, in each case with respect to which the lessor at the co-location facility or the customer had not entered into a lease or a customer service agreement, respectively, with Lessee as of February 1, 2002, and Lessee has not obtained from such co-location lessor or customer and delivered to Lessor (x) with respect to such co-location facility a signed Collateral Access Agreement in the form attached hereto as Exhibit E and (y) with respect to such customer, either a Collateral Access Agreement or a customer service agreement signed by the customer that includes the following agreement, together with an address for notice (the "Cisco Access Covenant"): Access to Cisco. Upon written notice by Cisco Systems Capital Corporation, its successors and assigns (collectively, "Cisco") at the address set forth in this Agreement, Customer shall provide reasonable access to premises that are owned, leased or otherwise controlled by Customer during business hours (the "Premises") to Cisco and their respective representatives, employees and agents, to enable Cisco to inspect any assets that have been leased by Cisco to CTC Communications Corp. (the "Cisco Property") and to enable Cisco to remove the Cisco Property from any such Premises. Cisco is a third party beneficiary of this Paragraph __and this Paragraph __shall not be modified or amended except in a writing signed by an authorized representative of Cisco. Notwithstanding anything to the contrary in this Agreement, Customer waives any lien or security interest in the Cisco Property and will not assert any claim against the Cisco Property. 5. FURTHER LESSEE REPRESENTATIONS AND COVENANTS. Lessee agrees as follows: (a) Lessee Representations. Lessee hereby represents and warrants as of the date hereof and as of the date of each Schedule entered into under the Agreement, as follows: (i) There are no actions, suits or proceedings pending or, to the best of Lessee's knowledge, threatened, against or affecting Lessee or any of its Subsidiaries before any Governmental Authority or arbitrator which (i) purport to affect or pertain to the Agreement or any Lease, or (ii) if determined adversely to Lessee or any such Subsidiary, would result in a Material Adverse Change. (ii) Lessee and its Subsidiaries possess all approvals, authorizations, permits, franchises, licenses, patents, trademarks, trade names, service marks, and copyrights, free from burdensome restrictions, that are reasonably necessary for the ownership, maintenance and operation of their respective businesses and the maintenance and operation of the Equipment, and neither Lessee nor any of its Subsidiaries is in material violation of any right of others with respect to the foregoing. (iii) Lessee and its Subsidiaries have filed all federal and other material tax returns and reports required to be filed and have paid all federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets and otherwise due and payable, except those which are being or will be contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. Lessee has not received any notice of any proposed tax assessment against Lessee or any of its Subsidiaries that would, if made, result in a Material Adverse Change. (iv) There exists no Event of Default. (v) Lessee is not in default under any agreement except as set forth on the Disclosure Schedule attached hereto as Exhibit D. (vi) Attached hereto as Exhibit F is a true and correct Schedule of Locations of Equipment which sets forth and the locations of all Equipment subject to all Existing Schedules, a description of the Equipment located at each such location, the street address of such location, a contact person at such location, and a telephone number for such contact person. Such Schedule of Locations also includes a true and correct list of all co-location facilities designated under the heading "Co-Location Facilities". (vii) There are no liens or security interests against any equipment or inventory of Lessee, other than purchase money liens and leases in specific items of equipment, and the security interests of Toronto Dominion, as Administrative Agent. (viii) Since February 1, 2002, no Material Adverse Change has occurred. (ix) The Toronto Dominion Credit Agreement does not prohibit the execution and delivery of the Guaranty by Parent to Lessor, and no consent under the Toronto Dominion Credit Agreement is required in order to bind Parent to the obligations thereunder. (b) Negative Covenants. Lessee shall not: (i) Engage in any material line of business substantially different from those lines of business carried on by it or contemplated to be carried on by it (as disclosed to Lessor) on the date of the Agreement; (ii) Merge with or consolidate into, or acquire all or substantially all of the assets of, any other corporation or entity, or sell, transfer, lease or otherwise dispose of all or substantially all of its assets, or permit any Subsidiary to do any of the foregoing, except that any of Lessee's wholly owned Subsidiaries may merge with, consolidate into or transfer all or substantially all of its assets to another of Lessee's wholly owned Subsidiaries, or to Lessee, and in connection therewith, such Subsidiary may be liquidated or dissolved; (iii) Declare or pay any dividends in respect of Lessee's capital stock, or purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, return any capital to its shareholders as such, or make any distribution of assets to its shareholders as such, or permit any of its Subsidiaries to purchase, redeem, retire or otherwise acquire for value any stock of Lessee, except that Lessee may (A) declare and deliver dividends and distributions payable only in common stock of Lessee, (B) purchase, redeem, retire or otherwise acquire shares of its capital stock with the proceeds received from a substantially concurrent issue of new shares of its capital stock, and (C) repurchase stock owned by employees, directors and consultants of Lessee pursuant to the terms of any employment, consulting or other stock restriction agreements at such time as any such employee, director or consultant terminates his or her affiliation with Lessee, provided that no Event of Default shall exist either immediately prior to or after giving effect to such repurchase, and provided further that the total amount paid in connection therewith by Lessee shall not exceed $100,000 in any year. (iv) Notwithstanding anything to the contrary in the Agreement or any Schedule, move any Equipment from one location to another location without the prior written consent of Lessor, which consent shall not be unreasonably withheld. Lessor shall not withhold its consent if Lessee provides to Lessor, prior to moving any such Equipment, a description of the Equipment it intends to transfer, the Schedule number to which such Equipment is subject, the address of the location from which and to which the Equipment shall be moved, and a Collateral Access Agreement from the lessee or owner, as the case may be, of such new location if, with respect to a co-location facility the lessor or owner has not previously delivered to Lessor a Collateral Access Agreement or, with respect to a customer, if such customer at such new location has not entered into a Customer Service Agreement that includes the Cisco Access Covenant or previously delivered to Lessor a Collateral Access Agreement. (c) Affirmative Covenants. Lessee shall, and shall cause each of its Subsidiaries to: (i) Maintain and preserve (A) its corporate existence, and (B) all material copyrights, patents, trademarks, trade names and service marks and other intellectual property rights, and all other material rights, qualifications, permits, licenses, franchises and privileges, necessary or desirable in the ordinary course of business and operations and the ownership of its properties, except as permitted by clause 2(a)(ii) hereof; (ii) Obtain and maintain all licenses, authorizations, consents, filings, exemptions, registrations and other governmental approvals of any Governmental Authority necessary or desirable (A) in connection with the execution, delivery and performance of the Lease Documents or any related documents and instruments and the leasing of the Equipment as contemplated thereby, or (B) in the ordinary course of its business and operations and the ownership of its properties, except, in the case of this clause (B), to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Change; (iii) Comply in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business, except as may be contested in good faith, or as to which a bona fide dispute may exist, or where non- compliance could not reasonably be expected to result in a Material Adverse Change; and (iv) Deliver to Lessor, as soon as available, but in any event within 30 days after the end of each Fiscal Year of Lessee, and 30 days after the end of each of the first three Fiscal Quarters of Lessee, a consolidated balance sheet of Lessee and its Subsidiaries as at such quarter or year-end date, and the related consolidated statements of income and cash flows for such period, all in reasonable detail and, in the case of the year-end financials, audited by an independent certified public accountant, which statements shall be prepared in accordance with GAAP and, in the case of the year-end, shall not be subject to any qualifications or exceptions as to the scope of the audit, nor to any qualifications or exceptions not reasonably acceptable to Lessor, together with a Compliance Certificate, in substantially the form of Exhibit B attached hereto, of the chief financial officer, controller or treasurer of Lessee as of the end of the applicable accounting period. (v) Include in any Customer Service Agreement or like agreement that Lessee enters into after February 1, 2002, the Cisco Access Covenant. (vi) Deliver to Lessor at the time Lessee enters into any Customer Service Agreement or amends any existing Customer Service Agreement, whether or not Lessee intends at such time to maintain any of Lessor's Equipment at any location of such customer, a Collateral Access Agreement signed by such customer or a Customer Service Agreement that includes the Cisco Access Covenant. (vii) Deliver to Lessor at the time Lessee enters into any agreement with a lessor or owner of a co-location facility, whether or not Lessee intends at such time to maintain any of Lessor's Equipment at such co-location facility, a Collateral Access Agreement signed by such owner or lessor. (viii) On or before April 30, 2002, deliver to Lessor a Collateral Access Agreement for each of the co-location facilities at which Lessee maintains any Equipment, which co- location facilities are described on Exhibit F, and those locations at which Equipment with an aggregate cost of more than $15,000 is maintained. Upon the request of Lessor, Lessee shall assist Lessee to obtain access to other locations for the purpose of inspecting or removing Equipment, and, without limiting the generality of the foregoing, shall deliver to the lessee or owner of such locations written instructions authorizing such lessee or owner to allow Cisco access to such facility for the purposes described herein. (ix) Upon any receipt of a notice of default from Toronto Dominion or any other lender or agent under the Toronto Dominion Credit Agreement, deliver a copy of such notice to Lessor. (x) If Lessee and the lenders under the Toronto Credit Agreement enter into any amendment to the financial covenants set forth in the Toronto Credit Agreement, Lessee shall, at the option of Lessor, make the same changes to the financial covenants set forth in this Appendix; provided, that Lessor shall have the right, but not the obligation, to make such changes. Lessee shall keep Lessor apprised of any negotiations with Toronto Dominion with respect to any change in the financial covenants and shall deliver to Lessor an executed copy of any such amendment immediately upon the effectiveness thereof. If Lessor determines that it wants to make the same changes as set forth in any such amendment, Lessor shall execute and deliver to Lessee an amendment to this Appendix changing the financial covenants, within three (3) business days after delivery of such amendment by Lessor to Lessee. (d) Financial Covenants. From the date of this Appendix through the date that all Lease Payments are paid in full, neither the Parent nor the Lessee will permit any of the events set forth below to occur: (i) Maximum Total Debt to Capitalization Ratio. Neither the Lessee nor the Parent will permit the Total Debt to Capitalization Ratio as of the last day of any Fiscal Quarter to be greater than 55%. (ii) Minimum ALE's Installed and Billed. Neither the Lessee nor the Parent will permit the aggregate number of ALE's installed and billed as of the last day of any Fiscal Quarter set forth below to be less than the amount set forth opposite such Fiscal Quarter: Quarterly Period Ending ALEs March 31, 2002 530,000 June 30, 2002 535,000 September 30, 2002 and thereafter 555,000 (iii) Minimum Revenue. Neither Lessee nor the Parent will permit the revenue received by the Consolidated Group as of the last day of any Fiscal Quarter set forth below to be less than the amount set forth opposite such Fiscal Quarter: Quarterly Period Ending Revenue March 31, 2002 $74,000,000 June 30, 2002 $78,000,000 September 30, 2002 and thereafter $84,000,000 (iv) Minimum Consolidated EBITDA. Neither the Lessee nor the Parent will permit the Consolidated EBITDA as of the last day of any Fiscal Quarter set forth below to be less than the amount set forth opposite such Fiscal Quarter: Quarterly Period Ending Consolidated EBITDA March 31, 2002 ($3,500,000) June 30, 2002 $1,500,000 September 30, 2002 and thereafter $8,000,000 (v) Maximum Total Leverage Ratio. Neither Parent nor the Lessee will permit the Total Leverage Ratio as of the last day of any Fiscal Quarter occurring during any period set forth below to be greater than the ratio set forth opposite such period: Period Total Leverage Ratio 7/01/01 through and including 6/30/02 N/A 7/01/02 though and including 9/30/02 10.50:1 10/01/02 through and including 12/31/02 6.50:1 1/01/03 through and including 3/31/03 4.50:1 4/01/03 and thereafter 3.00:1 (vi) Capital Expenditures. Lessee will not, and will not permit any of its Subsidiaries to, make or commit to make Capital Expenditures in any Fiscal Year which in the aggregate exceed the amount set forth below opposite such Fiscal Year: Fiscal Year Amount 2002 $100,000,000 2003 $100,000,000 2004 $100,000,000 2005 $100,000,000 2006 $100,000,000 and thereafter $100,000,000 (vii) Minimum Pro Forma Debt Service Coverage Ratio. Neither Parent nor the Lessee will permit the Pro Forma Debt Service Coverage Ratio as of the last day of the Fiscal Quarter occurring during any period set forth below to be less than the ratio set forth opposite such period: Period Pro Forma Debt Service Coverage Ratio 07/01/01 through and including 3/31/03 N/A 4/01/03 through and including 6/30/03 1.00:1 07/01/03 and thereafter 1.10:1 (viii) Minimum Interest Coverage Ratio. Neither Parent nor the Lessee will permit the minimum Interest Coverage Ratio as of the last day of any Fiscal Quarter occurring during any period set forth below to be less than the ratio set forth opposite such period: Period Interest Coverage Ratio 7/01/01 through and including 6/30/02 N/A 7/01/02 through and including 9/30/02 1.00:1 10/01/02 through and including 12/31/02 1.50:1 1/01/03 through and including 3/31/03 2.00:1 4/01/03 and thereafter 3.00:1 (ix) Minimum Unrestricted Cash Balance. Neither Parent nor the Lessee will permit the Unrestricted Cash Balance as of the last day of the Fiscal Quarter occurring during any period set forth below to be less than the amount set forth opposite such period: Period Minimum Unrestricted Cash March 31, 2002 $39,900,000 June 30, 2002 $25,900,000 September 30, 2002 and thereafter $13,100,000 6. FURTHER EVENTS OF DEFAULT. The following shall be additional Events of Default under the Agreement: (a) Lessee, any of its Subsidiaries, Parent, or any of its Subsidiaries, defaults under any (i) agreement with Lessor or Cisco Systems, Inc., (ii) material agreement with any third party, or (ii) non-material agreement with any third party where the amount in default under such agreement is more than Ten Thousand Dollars ($10,000) or, if the third party to such agreement has accelerated based upon such default, the amount owing under such agreement exceeds Twenty-Thousand ($20,000), and in each case such default continues after expiration of any applicable grace period. (b) An "Event of Default" occurs under any agreement with Toronto Dominion; or (c) There occurs any Change of Control. Notwithstanding anything to the contrary in this Appendix, the Agreement or any of the other Lease documents (i) failure of Lessee to meet the quarterly Minimum Unrestricted Cash Balance covenant set forth in Section 5(d)(ix) shall not constitute an Event of Default; provided, that failure to meet such covenant in any one Fiscal Quarter shall mean that Lessee shall not have availability under Tranches 2, 3 and 4, and (ii) Lessor shall have the right to cease leasing Equipment to Lessee if Lessee fails to meet or satisfy, or breaches, any of the financial convents set forth in Section 5(d) of this Appendix. 7. CONFLICT OF TERMS. Notwithstanding that this Appendix is incorporated into the Agreement, if there is any direct conflict between the terms of this Appendix and the terms of the Agreement the terms of this Appendix shall govern and control. IN WITNESS WHEREOF, Lessor and Lessee have caused this Appendix to be duly executed by their authorized representatives as of the date of the Agreement. CISCO SYSTEMS CAPITAL CORPORATION, Lessor By: /s/ [Authorized Signature] Title: CTC COMMUNICATIONS CORP. Lessee By: /s/ [Authorized Signature] Title: ACKNOWLEDGED AND AGREED: CTC COMMUNICATIONS GROUP, INC. By: /s/ [Authorized Signature] Title: EXHIBIT B Compliance Certificate Date: __________, ___ To: Cisco Systems Capital Corporation Mailstop SJCLP1, 2nd Floor 170 West Tasman Drive San Jose, California 95134-1706 Attn: Loan Administration, Worldwide Financial Services Re: Var1 Ladies and Gentlemen: This Compliance Certificate is made and delivered pursuant to the Amended and Restated Master Agreement to Lease Equipment dated as of February __, 2002 (as amended, modified, renewed or extended from time to time, the "Agreement"), between CTC Communications Corp. ("Lessee") and Cisco Systems Capital Corporation ("Lessor"), and reference is made thereto for full particulars of the matters described therein. All capitalized terms used in this Compliance Certificate and not otherwise defined herein shall have the meanings assigned to them in the Agreement. This Compliance Certificate relates to the accounting period ending __________, ____. I am the ____________ of Lessee. I have reviewed the terms of the Agreement and I have made, or caused to be made under my supervision, a detailed review of the transactions and conditions of Lessee and its Subsidiaries during such accounting period. I hereby certify that the information set forth on Schedule 1 hereto (and on any additional schedules hereto setting forth further supporting detail) is true, accurate and complete as of the end of such accounting period. I hereby further certify that (i) as of the date hereof that no Event of Default has occurred and is continuing, (ii) on and as of the date hereof, there has occurred no Material Adverse Change since the date of the financial statements furnished to Lessor prior to the Closing Date, except in each case as may be set forth in a separate attachment hereto describing in detail the nature of each condition or event constituting an exception to the foregoing statements, the period during which it has existed and the action which Lessee is taking or proposes to take with respect to each such condition or event, and (iii) as of the date hereof, since February 1, 2002, Lessee has raised additional capital in the form of equity in the amount of $___________, and additional capital in the form of debt financing in the amount of $_________, for an aggregate amount of additional equity of $_________. IN WITNESS WHEREOF, the undersigned officer has signed this Compliance Certificate on behalf of Lessee this day of . SCHEDULE 1 to the Compliance Certificate Dated _________________, _____ CTC COMMUNICATIONS CORP. For the fiscal quarter ended __________, _____ [Section references are to the Appendix] Actual Required/Permitted Maximum Total Debt to Capitalization Ratio _____% Not to exceed ____% [See Table in Appendix] Minimum ALEs Installed and Billed _______ Not less than _______ [See Table in Appendix] Minimum Revenue of Consolidated Group $______ Not less than $_____ [See Table in Appendix] Minimum Consolidated EDITDA $______ Not less than $_____ [See Table in Appendix] Maximum Total Debt Leverage Ratio ____:___ Not to exceed ____:____ [See Table in Appendix] Capital Expenditures $______ Not to exceed $_______ [See Table in Appendix] Maximum Total Leverage Ratio ____:___ Not to exceed $_____ [See Table in Appendix] Minimum Pro Forma Debt Service Coverage Ratio ____:___ Not less than ___:___ [See Table in Appendix] Minimum Interest Coverage Ratio ____:___ Not less than ___:___ [See Table in Appendix] Minimum Unrestricted Cash $______ Not less than ___:___ [See Table in Appendix] EXHIBIT D Disclosure Schedule None. EXHIBIT A SCHEDULE NO. ___ To Amended and Restated Master Agreement To Lease Equipment No. 1258 THIS SCHEDULE NO. __ (this "Schedule") dated as of ____________________, by and between CISCO SYSTEMS CAPITAL CORPORATION ("Lessor"), having its principal place of business at 170 West Tasman Drive, Mailstop SJCLP1, 2nd Floor, San Jose, California 95134, fax number __________________, and CTC Communications Corp. ("Lessee") having its principal place of business at _________________________________________, fax number __________________, supplements that certain Amended and Restated Master Agreement to Lease Equipment No. 1258 dated as of February, 27, 2002 (the "Agreement," and together with this Schedule, the "Lease") between Lessor and Lessee, incorporated herein by this reference. Capitalized terms not otherwise defined herein have the meanings specified in the Agreement. 1. EQUIPMENT DESCRIPTION. Quantity, manufacturer, model and serial number of the Equipment subject to this Schedule are as specified in the Invoice(s) referenced at Annex A hereto (collectively, the "Invoice"). Unless otherwise specified in the applicable Invoice, the Equipment is new. 2. EQUIPMENT LOCATION. The Equipment shall at all times be installed or located at the location specified in Annex A or such other location as is permitted under the Agreement. 3. EQUIPMENT COST. The "Equipment Cost" for any item of Equipment is the equipment purchase price specified in the Invoice, not including any taxes, shipping, insurance, installation, cabling, maintenance, software or related expenses which shall be paid for directly by Lessee . The aggregate Equipment Cost for all Equipment under this Schedule is ___________________. 4. RENTAL PAYMENT AMOUNT. Based on the aggregate Equipment Cost above and the Lease Rate Factor of * for each of months one (1) through six (6) and * for each of months seven (7) through thirty-six (36), the monthly rental payment in respect of the Equipment is $__________ for each of months (1) through six (6) and $_____________ for each of months seven (7) through thirty-six (36) ("Rent"). *THIS PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION 5. LEASE TERM. The "Lease Term" of this Lease shall begin on the Commencement Date and shall consist of an "Original Term" equal to 36 months and, the term shall automatically be extended on a month-to-month basis (each, an "Extended Term") unless either party notifies the other not later than 30 days prior to the end of the Lease Term or any extension thereof of its election not to extend such lease term or extended term. . The "Commencement Date" of this Lease shall be the earlier to occur of (i) the execution date specified in the certificate of acceptance, if any, delivered by Lessee ("Certificate of Acceptance") relating to any item of Equipment, (ii) thirty (30) days after shipment of the final piece of Equipment specified in the Invoice, or (iii) _____________, _____. Notwithstanding any provision to the contrary contained in any Lease Document, Lessee shall be deemed to have irrevocably accepted, for purposes of the Lease, the Equipment on the Commencement Date. Lessee agrees to complete, sign and return to Lessor any Certificate of Acceptance sent to Lessee, promptly upon Lessee's receipt and acceptance of the relevant Equipment. 6. RENT PAYMENTS. Rent shall be payable in thirty-six (36) consecutive monthly payments in advance, on the first day of each such period, commencing with the first day of the calendar month immediately following the Commencement Date (unless the Commencement Date is the first day of the month and rent is payable in advance, in which case the first Rent Payment shall be due on such date). Lessor agrees that no Rent shall be payable for any period prior to the Commencement Date or for the period from the Commencement Date (provided such date is not the first day of the month) until, but not including, the first day of the calendar month immediately following the Commencement Date. Unless otherwise agreed in writing by the Lessor at such time, the Rent for any Extended Term ("Extended Term Rent") shall be payable monthly, in advance, and shall be in a daily-equivalent amount equal to that of the original Rent for months seven (7) through thirty (30). 7. END OF TERM PURCHASE OPTION. (a) This Lease shall be deemed a "FMV Lease" and Lessee shall have an end of term purchase option as follows. Provided this Lease has not been terminated earlier and there exists no Default or Event of Default, not earlier than 90 days and not later than 30 days before the end of the Original Term, Lessee may deliver to Lessor an irrevocable notice electing to purchase all (but not less than all) of the Equipment at the end of the Original Term for an amount equal to the Fair Market Value, as defined below, ofsuch Equipment, which amount Lessee shall pay to Lessor on the last day of the Original Term. If no such notice is delivered by Lessee to Lessor within such period, Lessee shall be deemed to have waived any right to purchase such Equipment. (b) Upon full payment to it of the amount specified in clause (a)of this Paragraph7, Lessor shall transfer its right, title and interest in and to such Equipment to Lessee without recourse or warranty, except that Lessor shall warrant that such Equipment is free and clear of any lien or encumbrance arising by or through Lessor. (c) "Fair Market Value" shall mean the value which would obtain in an arm's-length transaction between an informed and willing buyer-user (other than a lessee currently in possession or a used equipment dealer) under no compulsion to buy, and an informed and willing seller under no compulsion to sell and, in such determination, costs of removal from the location of current use shall not be a deduction from such value. Fair Market Value shall be determined by the mutual agreement of Lessor and Lessee in accordance with the preceding sentence or, if Lessee and Lessor cannot agree within 20 days after Lessee's notice of election to purchase under clause (a) of this Paragraph 7, by a qualified independent equipment appraiser selected by Lessor, at Lessee's cost. 8. CASUALTY VALUE. The Casualty Value of the Equipment shall at any time be the greater of (a) Fair Market Value at such time; or (b) as of the date of the shipment from the manufacturer, * of Equipment Cost, such amount to decrease from month to month thereafter by * of Equipment Cost. *THIS PORTION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION IN WITNESS WHEREOF, Lessor and Lessee have caused this Schedule to be duly executed by their authorized representatives as of the date first above written. Each signatory of the Lessee represents that he or she is duly authorized to execute and deliver this Schedule on behalf of Lessee. CISCO SYSTEMS CAPITAL CORPORATION, Lessor By: Title: CTC COMMUNICATIONS CORP., Lessee By: Title: ANNEX A TO SCHEDULE NO. _____ TO AMENDED AND RESTATED MASTER AGREEMENT TO LEASE EQUIPMENT NO. _____ EQUIPMENT INVOICES, COST AND LOCATION As set forth below: EX-10.2 4 bbb.txt Exhibit 10.2 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. STOCK SUBSCRIPTION WARRANT To Purchase Common Stock of CTC Communications Group, Inc. Date of Initial Issuance: February 27, 2002 Number of Shares: 96,369 Initial Warrant Price: $4.10 Expiration Date: February 27, 2009 THIS CERTIFIES THAT for value received, TORONTO DOMINION (TEXAS), INC., or its registered assigns (hereinafter called "Holder"), is entitled to purchase from CTC COMMUNCATIONS GROUP, INC., a Delaware corporation ("Company"), at any time during the Term of this Warrant, ninety six thousand three hundred sixty nine (96,369) shares of common stock of Company (the "Common Stock"), at the Warrant Price, payable as provided herein. The exercise of this Warrant shall be subject to the provisions, limitations and restrictions herein contained. This Warrant may be exercised in whole or in part. SECTION 1. Definitions For all purposes of this Warrant, the following terms shall have the meanings indicated (any capitalized terms used herein and not otherwise defined herein to have the meanings ascribed to them in the Agreement): "Agreement" shall mean the Amended and Restated Credit Agreement, dated as of August 15, 2000, among the CTC Communications Corp., as Borrower, the Company, the various financial institutions and other Persons from time to time thereto, as Lenders, Toronto Dominion (Texas), Inc., as Administrative Agent, Lehman Brothers, as Syndication Agent, and Credit Suisse First Boston, as Documentation Agent, as amended, supplemented, amended and restated or otherwise modified from time to time. "Common Stock" shall mean and include Company's authorized common stock, as constituted at the date hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Term of this Warrant" shall mean the period beginning on the date of initial issuance hereof and ending on the seventh (7th) anniversary of such date of initial issuance. "Warrant Price" shall mean $4.10 per share, subject to adjustment in accordance with Section 5 hereof. "Warrants" shall mean this Warrant and any other Warrant or Warrants issued in connection with the Agreement to the original holder of this Warrant or issued to any transferees of such original holder or subsequent holder. "Warrant Shares" shall mean shares of Common Stock, subject to adjustment or change as herein provided, purchased or purchasable by Holder upon the exercise hereof. SECTION 2. Exercise of Warrant. 2.1 Procedure for Exercise of Warrant. To exercise this Warrant in whole or in part (but not as to any fractional share of Common Stock), Holder shall deliver to Company at its office referred to in Section 14 hereof at any time and from time to time during the Term of this Warrant: (i) the Notice of Exercise in the form of Exhibit A attached hereto, (ii) cash, certified or official bank check payable to the order of Company, wire transfer of funds to Company's account, or cancellation of any indebtedness of Company to Holder (or any combination of any of the foregoing) in the amount of the Warrant Price for each share being purchased, and (iii) this Warrant. Notwithstanding any provisions herein to the contrary, if the Current Market Price (as defined in Section 6) is greater than the Warrant Price (at the date of calculation, as set forth below), in lieu of exercising this Warrant as hereinabove permitted, Holder may elect to receive shares of Common Stock equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the office of Company referred to in Section 14 hereof, together with the Notice of Exercise, in which event Company shall issue to Holder that number of whole shares of Common Stock computed using the following formula: CS = WCS x (CMP-WP) ------------------- CMP Where CS equals the number of shares of Common Stock to be issued to Holder WCS equals the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) CMP equals the Current Market Price (at the date of such calculation) WP equals the Warrant Price (as adjusted to the date of such calculation) In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of Holder or such other name or names as may be designated by Holder, shall be delivered to Holder hereof within a reasonable time, not exceeding fifteen (15) days, after the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to Holder hereof within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which Holder shall have complied with the conditions for exercise of this Warrant set forth above, irrespective of the date of delivery of such certificate, except that, if the date of such compliance is a date when the stock transfer books of Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2.2 Transfer Restriction Legend. Each certificate for Warrant Shares shall bear the following legend (and any additional legend required by (i) any applicable state securities laws and (ii) any securities exchange upon which such Warrant Shares may, at the time of such exercise, be listed) on the face thereof unless at the time of exercise such Warrant Shares shall be registered under the Securities Act: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution under a registration statement of the securities represented thereby) shall also bear such legend unless, in the opinion of counsel for Holder thereof (which counsel shall be reasonably satisfactory to Company) the securities represented thereby are not, at such time, required by law to bear such legend. SECTION 3. Covenants as to Common Stock. Company covenants and agrees that all shares of Common Stock that may be issued upon the exercise of the rights represented by this Warrant shall, upon issuance, be validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. Company further covenants and agrees that it shall pay when due and payable any and all federal and state taxes which may be payable in respect of the issue of this Warrant or any Common Stock or certificates therefor issuable upon the exercise of this Warrant. Company further covenants and agrees that Company shall at all times have authorized and reserved, free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. Company further covenants and agrees that if any shares of capital stock to be reserved for the purpose of the issuance of shares upon the exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon exercise, then Company shall in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. If and so long as the Common Stock issuable upon the exercise of this Warrant is listed on any national securities exchange, Company shall, if permitted by the rules of such exchange, list and keep listed on such exchange, upon official notice of issuance, all shares of such Common Stock issuable upon exercise of this Warrant. SECTION 4. Representations and Warranties Regarding Capitalization Issues ... As of the date immediately preceding the date of this Warrant : (i) The authorized capital of the Company consists of (A) 100 million shares of common stock, of which 27,103,730 shares are issued and outstanding, and (B) 10 million shares of preferred stock, of which 200,000 shares are issued and outstanding and are convertible into 4,000,000 shares of common stock at $50.00 per share. (ii) The Company has reserved (A) 4,959,606 shares of common stock for issuance under its Nonqualified Stock Option Plan, under which 4,023,193 options are outstanding at an average price of $7.07 per share, and (B) 7,779,823 shares of common stock for issuance under its Incentive Stock Option Plan, under which 3,934,805 options are outstanding at an average price of $9.83 per share. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company, or any calls, commitments or claims of any character relating to, its capital stock or other securities. (iii) No shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. SECTION 5. Adjustment of Number of Shares ... Upon each adjustment of the Warrant Price as provided in Section 6, Holder shall thereafter be entitled to purchase, at the Warrant Price resulting from such adjustment, only the number of shares (calculated to the nearest tenth of a share) obtained by multiplying the Warrant Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Price resulting from such adjustment. SECTION 6. Adjustment of Warrant Price ... The Warrant Price shall be subject to adjustment from time to time as follows: (i) If Company shall at any time or from time to time during the Term of this Warrant issue shares of Common Stock other than Excluded Stock (as hereinafter defined) without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such Common Stock, the Warrant Price in effect immediately prior to each such issuance shall forthwith (except as provided in this clause (i)) be adjusted to a price equal to the quotient obtained by dividing: (A) an amount equal to the sum of (x) the total number of shares of Common Stock outstanding (including any shares of Common Stock deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) immediately prior to such issuance multiplied by the Warrant Price in effect immediately prior to such issuance, plus (y) the consideration received by Company upon such issuance, by (B) the total number of shares of Common Stock outstanding (including any shares of Common Stock deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) immediately after the issuance of such Common Stock. For the purposes of any adjustment of the Warrant Price pursuant to this clause (i), the following provisions shall be applicable: 1. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by Company for any underwriting or otherwise in connection with the issuance and sale thereof. 2. In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors of Company, irrespective of any accounting treatment; provided, however, that such fair market value as determined by the Board of Directors, together with any cash consideration being paid, shall not exceed an aggregate amount equal to the product of (i) the aggregate Current Market Price per share of Common Stock as determined as provided in clause (vii) below, multiplied by (ii) the number of shares of Common Stock being issued in such issuance. 3. In the case of the issuance of (i) options to purchase or rights to subscribe for Common Stock, (ii) securities or obligations by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities or obligations: (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (1) and (2) above with the proviso in subdivision (2) being applied to the number of shares of Common Stock deliverable upon such exercise), if any, received by Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or obligations or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities or obligations and subsequent conversions or exchanges thereof shall be deemed to have been issued at the time such securities or obligations were issued or such options or rights were issued and for a consideration equal to the consideration received by Company for any such securities or obligations and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by Company upon the conversion or exchange of such securities or obligations or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (1) and (2) above with the proviso in subdivision (2) being applied to the number of shares of Common Stock deliverable upon such conversion, exchange or exercise); (D) on any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities or obligations, other than a change resulting from the antidilution provisions thereof, the Warrant Price shall forthwith be readjusted to such Warrant Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities or obligations not converted prior to such change or options or rights related to such securities or obligations not converted prior to such change being made upon the basis of such change; and (D) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities or obligations, the Warrant Price shall forthwith be readjusted to such Warrant Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities or obligations being made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the conversion or exchange of such securities or obligations or upon the exercise of the options or rights related to such securities or obligations. "Excluded Stock" shall mean shares of Common Stock issued by Company (1) under any circumstance for which an adjustment is provided in clauses (iii) or (iv) of this Section 6 or in Section 8, and (2) in connection with the issuance of Common Stock (including any share of Common Stock deemed to have been issued pursuant to subdivision (3) of clause (i) above) (appropriately adjusted for stock splits and combinations) to directors, officers, or employees of, or consultants to, Company under any stock option or other similar incentive plan approved by the Board of Directors of Company as in effect on the date of this Warrant. (ii) "Excluded Stock" shall mean shares of Common Stock issued by Company (1) under any circumstance for which an adjustment is provided in clauses (iii) or (iv) of this Section 6 or in Section 8, and (2) in connection with the issuance of Common Stock (including any share of Common Stock deemed to have been issued pursuant to subdivision (3) of clause (i) above) (appropriately adjusted for stock splits and combinations) to directors, officers, or employees of, or consultants to, Company under any stock option or other similar incentive plan approved by the Board of Directors of Company as in effect on the date of this Warrant. (iii) If, at any time during the Term of this Warrant, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Warrant Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (iv) If, at any time during the Term of this Warrant, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date for such combination, the Warrant Price shall appropriately increase so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. (v) In case, at any time during the Term of this Warrant, Company shall declare a cash dividend upon its Common Stock payable otherwise than out of earnings or earned surplus or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by Company or other persons, assets (excluding cash dividends and distributions) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of Company convertible into or exchangeable for Common Stock), then, in each such case, immediately following the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend or distribution, the Warrant Price in effect thereafter shall be determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction of which the numerator shall be an amount equal to the difference of (x) the Current Market Price of one share of Common Stock minus (y) the fair market value (as determined by the Board of Directors of Company, whose determination shall be conclusive) of the amount of cash, stock, securities, evidences of indebtedness, assets, options or rights, as the case may be, so distributed in respect of one share of Common Stock, and of which the denominator shall be such Current Market Price. (vi) All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-tenth (1/10) of a share, as the case may be. (vii) For the purpose of any computation pursuant to this Section 6, the Current Market Price at any date of one share of Common Stock shall be deemed to be the average of the daily closing prices for the 15 consecutive business days ending on the last business day before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 15 business day period). The closing price for each day shall be the last reported sales price regular way or, in case no such reported sales took place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading or as reported by Nasdaq (or if the Common Stock is not at the time listed or admitted for trading on any such exchange or if prices of the Common Stock are not reported by Nasdaq then such price shall be equal to the average of the last reported bid and asked prices on such day as reported by The National Quotation Bureau Incorporated or any similar reputable quotation and reporting service, if such quotation is not reported by The National Quotation Bureau Incorporated); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to in this clause (vii) are available for the period required hereunder, the Current Market Price shall be determined in good faith by the Board of Directors of Company or, if such determination cannot be made or if Holder disputes in writing any determination so made by the Company's Board of Directors within 30 days of being informed of such determination, by a nationally recognized independent investment banking or accounting firm selected by the Board of Directors of Company (or if such selection cannot be made, by a nationally recognized independent investment banking or accounting firm selected by the American Arbitration Association in accordance with its rules). (viii) Whenever the Warrant Price shall be adjusted as provided in this Section 6, Company shall prepare a statement showing the facts requiring such adjustment and the Warrant Price that shall be in effect after such adjustment. Company shall cause a copy of such statement to be sent by mail, first class postage prepaid, to each Holder at its, his or her address appearing on Company's records. Where appropriate, such copy may be given in advance and may be included as part of the notice required to be mailed under the provisions of clause (x) of this Section 6. (ix) Adjustments made pursuant to clauses (iii), (iv) and (v) above shall be made on the date such dividend, subdivision, split-up, combination or distribution, as the case may be, is made, and shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to such dividend, subdivision, split-up, combination or distribution. (x) In the event Company shall propose to take any action of the types described in clauses (iii), (iv), or (v) of this Section 6, Company shall forward, at the same time and in the same manner, to Holder such notice, if any, which Company shall give to the holders of capital stock of Company. (xi) In any case in which the provisions of this Section 6 shall require that an adjustment shall become effective immediately after a record date for an event, Company may defer until the occurrence of such event issuing to Holder of all or any part of this Warrant which is exercised after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such exercise by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such exercise before giving effect to such adjustment exercise; provided, however, that Company shall deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. SECTION 7. Ownership. 7.1 Ownership of This Warrant. Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than Company) for all purposes and shall not be affected by any notice to the contrary until presentation of this Warrant for registration of transfer as provided in this Section 7. 7.2 Transfer and Replacement. This Warrant and all rights hereunder are transferable in whole or in part upon the books of Company by Holder hereof in person or by duly authorized attorney, and a new Warrant or Warrants, of the same tenor as this Warrant but registered in the name of the transferee or transferees (and in the name of Holder, if a partial transfer is effected) shall be made and delivered by Company upon surrender of this Warrant duly endorsed, at the office of Company referred to in Section 14 hereof, together with a properly executed Assignment (in the form of Exhibit B or Exhibit C hereto, as the case may be). Upon receipt by Company of evidence reasonably satisfactory to it of the loss, theft or destruction, and, in such case, of indemnity or security reasonably satisfactory to it, and upon surrender of this Warrant if mutilated, Company shall make and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be promptly cancelled by Company upon the surrender hereof in connection with any transfer or replacement. Except as otherwise provided above, in the case of the loss, theft or destruction of a Warrant, Company shall pay all expenses, taxes and other charges payable in connection with any transfer or replacement of this Warrant, other than stock transfer taxes (if any) payable in connection with a transfer of this Warrant, which shall be payable by Holder. Holder shall not transfer this Warrant and the rights hereunder except in compliance with federal and state securities laws. SECTION 8. Mergers, Consolidation, Sales. In the case of any proposed consolidation or merger of Company with another entity, or the proposed sale of all or substantially all of its assets to another person or entity, or any proposed reorganization or reclassification of the capital stock of Company, then, as a condition of such consolidation, merger, sale, reorganization or reclassification, Company shall give 30 days' prior written notice thereof to Holder hereof and lawful and adequate provision shall be made whereby Holder shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein, in lieu of the shares of the Common Stock of Company immediately theretofore purchasable hereunder, such shares of stock, securities or assets as may (by virtue of such consolidation, merger, sale, reorganization or reclassification) be issued or payable with respect to or in exchange for the number of shares of such Common Stock purchasable hereunder immediately before such consolidation, merger, sale, reorganization or reclassification. In any such case appropriate provision shall be made with respect to the rights and interests of Holder to the end that the provisions hereof shall thereafter be applicable as nearly as may be practicable, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of this Warrant. SECTION 9. Notice of Dissolution or Liquidation. In case of any distribution of the assets of Company in dissolution or liquidation (except under circumstances when the foregoing Section 8 shall be applicable), Company shall give notice thereof to Holder hereof and shall make no distribution to shareholders until the expiration of thirty (30) days from the date of mailing of the aforesaid notice and, in any case, Holder hereof may exercise this Warrant within thirty (30) days from the date of the giving of such notice, and all rights herein granted not so exercised within such thirty-day period shall thereafter become null and void. SECTION 10. Notice of Extraordinary Dividends. If the Board of Directors of Company shall declare any dividend or other distribution on its Common Stock except out of earned surplus or by way of a stock dividend payable in shares of its Common Stock, Company shall mail notice thereof to Holder hereof not less than thirty (30) days prior to the record date fixed for determining shareholders entitled to participate in such dividend or other distribution, and Holder hereof shall not participate in such dividend or other distribution unless this Warrant is exercised prior to such record date. The provisions of this Section 10 shall not apply to distributions made in connection with transactions covered by Section 8. SECTION 11. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant but in any case where Holder would, except for the provisions of this Section 11, be entitled under the terms hereof to receive a fractional share upon the complete exercise of this Warrant, Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the excess of the value of such fractional share (determined in such reasonable manner as may be prescribed in good faith by the Board of Directors of Company) over the Warrant Price for such fractional share. SECTION 12. Special Arrangements of Company. Company covenants and agrees that during the Term of this Warrant, unless otherwise approved by Holder: 12.1 Shall Not Amend Certificate. Company shall not amend its certificate or articles, as the case may be, of incorporation to eliminate as an authorized class of capital stock that class denominated as "Common Stock" on the date hereof. 12.2 Shall Bind Successors. This Warrant shall be binding upon any corporation or other person or entity succeeding to Company by merger, consolidation or acquisition of all or substantially all of Company's assets. SECTION 13. Registration. Company covenants and agrees that the shares of Common Stock issuable upon the exercise of this Warrant shall be entitled to the benefits of the registration rights set forth in Exhibit D attached hereto. SECTION 14. Notices. Any notice or other document required or permitted to be given or delivered to Holder shall be delivered at, or sent by certified or registered mail to, Holder at its address for notices set forth in the Agreement or to such other address as shall have been furnished to Company in writing by Holder. Any notice or other document required or permitted to be given or delivered to Company shall be delivered at, or sent by certified or registered mail to, Company at its address for notices set forth in the Agreement or to such other address as shall have been furnished in writing to Holder by Company. Any notice so addressed and mailed by registered or certified mail shall be deemed to be given when so mailed. Any notice so addressed and otherwise delivered shall be deemed to be given when actually received by the addressee. SECTION 15. No Rights as Stockholder; Limitation of Liability. This Warrant shall not entitle Holder to any of the rights of a shareholder of Company except upon exercise in accordance with the terms hereof. No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the Warrant Price hereunder or as a shareholder of Company, whether such liability is asserted by Company or by creditors of Company. SECTION 16. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SECTION 17. Amendments. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by both parties (or any respective predecessor in interest thereof). The headings in this Warrant are for purposes of reference only and shall not affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, Company has caused this Warrant to be signed by its duly authorized officer this 27th day of February, 2002. CTC COMMUNICATIONS GROUP, INC. By: Title: EXHIBIT A FORM OF NOTICE OF EXERCISE [To be signed only upon exercise of the Warrant] TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THE ATTACHED WARRANT The undersigned hereby exercises the right to purchase _________ shares of Common Stock which the undersigned is entitled to purchase by the terms of the attached Warrant according to the conditions thereof, and herewith [check appropriate box(es)] ? makes payment of $__________ therefor in cash; ? makes payment of $__________ therefor through cancellation of indebtedness; or ? directs Company to issue ______ shares, and to withhold ____ shares in lieu of payment of the Warrant Price, as described in Section 2.1 of the Warrant. All shares to be issued pursuant hereto shall be issued in the name of and the initial address of such person to be entered on the books of CTC Communications Group, Inc. shall be: The shares are to be issued in certificates of the following denominations: [Type Name of Holder] By: Title: Dated: EXHIBIT B FORM OF ASSIGNMENT (ENTIRE) [To be signed only upon transfer of entire Warrant] TO BE EXECUTED BY THE REGISTERED HOLDER TO TRANSFER THE ATTACHED WARRANT FOR VALUE RECEIVED ___________________________ hereby sells, assigns and transfers unto _______________________________ all rights of the undersigned under and pursuant to the attached Warrant, and the undersigned does hereby irrevocably constitute and appoint _____________________ Attorney to transfer said Warrant on the books of CTC Communications Group, Inc., with full power of substitution. [Type Name of Holder] By: Title: Dated: NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT C FORM OF ASSIGNMENT (PARTIAL) [To be signed only upon partial transfer of Warrant] TO BE EXECUTED BY THE REGISTERED HOLDER TO TRANSFER THE ATTACHED WARRANT FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers unto _______________________________ (i) the rights of the undersigned to purchase ___ shares of Common Stock under and pursuant to the attached Warrant, and (ii) on a non-exclusive basis, all other rights of the undersigned under and pursuant to the attached Warrant, it being understood that the undersigned shall retain, severally (and not jointly) with the transferee(s) named herein, all rights assigned on such non-exclusive basis. The undersigned does hereby irrevocably constitute and appoint __________________________ Attorney to transfer said Warrant on the books of CTC Communications Group, Inc., with full power of substitution. [Type Name of Holder] By: Title: Dated: NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT D REGISTRATION RIGHTS The Common Stock issuable upon exercise of the attached Warrant shall be deemed "registrable securities" under, and Holder of the attached Warrant shall otherwise be entitled to the benefit of, the following agreement (the "Agreement") between Company and its investor(s): None [Identify Agreement by date, title and parties.] Company agrees that no amendments shall be made to the Agreement which would have an adverse impact on Holder's registration rights thereunder without the consent of Holder. By acceptance of the Warrant to which this Exhibit D is attached, Holder shall be deemed to be a party to the Agreement. If no Agreement is identified above, then Holder shall be entitled to the benefits of the following registration rights (hereinafter referred to as the "Registration Rights") which shall be incorporated into and deemed part of the attached Warrant; provided, that the Registration Rights granted pursuant to Section 4 below shall be effective notwithstanding the existence of non-existence of any Agreement: 1. Certain Definitions. As used herein, the following terms shall have the following respective meanings (any capitalized terms used in these Registration Rights and not otherwise defined below to have the meanings ascribed to them in the attached Warrant): "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Holder" shall mean any holder of Registrable Securities. "Other Shareholders" shall mean holders of securities of Company who are entitled by contract with Company or who are permitted by Company to have securities included in a registration of Company's securities. The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the effectiveness of such registration statement. "Registrable Securities" shall mean the Warrant Shares less any Warrant Shares theretofore sold to the public or in a private placement. "Registration Expenses" shall mean all expenses incurred by Company in compliance with Section 2 and 4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of Company, which shall be paid in any event by Company). 2. Company Registration. (a) Notice of Registration. If Company shall determine to register any of its Common Stock or securities convertible into or exchangeable or exercisable for Common Stock either for its own account or for the account of any Other Shareholder other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or any other registration on any registration form which does not permit secondary sales, Company shall: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within fifteen (15) days after receipt of the written notice from Company described in clause (i) above, subject to (a) requirements and rights existing as of the date of this Warrant of Other Shareholders, and (b) any limitations on the number of shares as set forth in Section 2(b) below. (b) Underwriting. If the registration of which Company gives notice is for a registered public offering involving an underwriting, Company shall so advise Holders as part of the written notice given pursuant to Section 2(a)(i). In such event, the right of any Holder to registration pursuant to Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with Company, directors and officers and the Other Shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by Company. Notwithstanding any other provision of this Section 2, if the underwriter determines that marketing or other factors require a limitation on the number of shares to be underwritten, the underwriter may (subject to the allocation priority set forth below) exclude from such registration and underwriting some or all of the Registrable Securities which would otherwise be underwritten pursuant hereto. Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner. The number of shares that may be included in the registration and underwriting on behalf of such Holders, directors and officers and Other Shareholders (if any) shall be allocated among such Holders, directors and officers and Other Shareholders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration at the time of filing the registration statement. If any Holder of Registrable Securities or any officer, director or Other Shareholder disapproves of the terms of any such underwriting, it, he or she may elect to withdraw therefrom by written notice to Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 3. Registration Rights. In the event that Company grants after the date hereof registration rights, including demand registration rights, to any other holder of securities of Company, Company shall promptly give to Holder written notice thereof and, if in the opinion of Holder such registration rights are more favorable than the registration rights provided under the attached Warrant, Holder shall so notify Company within thirty (30) days of receipt of the foregoing notice from Company. Holder shall have the right, upon notice to Company after receipt of the Company's notice to Holder as set forth immediately above, to deem such registration rights to be incorporated into the attached Warrant, whereupon such registration rights shall automatically be deemed to be incorporated in the attached Warrant. 4. Demand Registration Rights. After receipt of a written request from a Holder representing at least an aggregate of twenty percent (20%) of the total of all Warrant Shares then subject to purchase upon exercise of the Warrant, requesting that the Company register Warrant Shares issuable upon Holder's exercise of the Warrant or any of the Warrant Shares under the Securities Act and specifying the intended method or methods of disposition thereof, the Company shall promptly notify all Holders of Warrants or Warrant Shares in writing of the receipt of such request and each such Holder may elect, by written notice to the Company within fifteen (15) business days from the date of such Holders's receipt of the Company's notice, to have its Warrant Shares included in such registration. The Company shall, as expeditiously as possible following such request, use its best efforts to effect the registration under the Securities Act of all Warrant Shares which the Company has been requested to register by Holder for sale, all to the extent requested to permit the disposition (in accordance with the intended method or methods thereof, as aforesaid) of the Warrant Shares so registered; provided, that the Company shall not be required to effect more than three (3) registrations of any Warrant Shares pursuant to this Section 4, not including registration statements on Form S- 3 which shall not count for purposes of this limitation. No holder of any other warrant issued after the date of this Warrant shall receive or be entitled to receive registration rights that are more favorable than the registration rights available to Holder pursuant to this Section 4. 5. Expenses of Registration. Company (or Other Shareholders) shall bear all Registration Expenses incurred in connection with any registration, qualification and compliance by Company (or such Other Shareholders) pursuant to Sections 2 and 4. . 6. Registration Procedures. In the case of each registration effected by Company pursuant to these Registration Rights, Company shall keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. Company shall, at its expense: (i) keep such registration effective for a period of one hundred twenty (120) days or until Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (ii) furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; and (iii) use its best efforts to register or qualify the Registrable Securities under the securities laws or blue-sky laws of such jurisdictions as any Holder may request; provided, however, that Company shall not be obligated to register or qualify such Registrable Securities in any particular jurisdiction in which Company would be required to execute a general consent to service of process in order to effect such registration, qualification or compliance, unless Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder. 7. Indemnification. (i) Company, with respect to each registration, qualification and compliance effected pursuant to these Registration Rights, shall indemnify and hold harmless each Holder, each of its officers, directors, partners, and agents, and each party controlling such Holder, and each underwriter, if any, and each party who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by Company of the Securities Act or any rule or regulation thereunder applicable to Company and relating to action or inaction required of Company in connection with any such registration, qualification or compliance, and shall reimburse each such Holder, each of its officers, directors, partners, and agents, and each party controlling such Holder, each such underwriter and each party who controls any such underwriter, for any legal and any other expenses incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided that Company shall not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based solely upon written information furnished to Company by such Holder or underwriter, as the case may be, and stated to be specifically for use in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance. (ii) Each Holder shall, if Registrable Securities held by it, him or her are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless Company, each of its directors and officers and each underwriter, if any, of Company's securities covered by such a registration statement and each party who controls Company or such underwriter against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse Company and such directors, officers, partners, agents, parties, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document solely in reliance upon and in conformity with written information furnished to Company by such Holder and stated to be specifically for use in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance; provided, however, that the obligations of such Holder hereunder shall be limited to an amount equal to the proceeds to each such Holder of securities sold as contemplated herein. (iii) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have been advised by counsel that actual or potential differing interests or defenses exist or may exist between the Indemnifying Party and the Indemnified Party, in which case such expense shall be paid by the Indemnifying Party), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under these Registration Rights. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall provide such information as may be reasonably requested by an Indemnifying Party in order to enable such Indemnifying Party to defend a claim as to which indemnity is sought. 8. Information by Holder. Each Holder shall furnish to Company such information regarding such Holder as Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in these Registration Rights. 9. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the Registrable Securities to the public without registration, Company agrees to: (i) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times that Holder holds Registrable Securities from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by Company for an offering of its securities to the general public; (ii) File with the Commission in a timely manner all reports and other documents required of Company under the Exchange Act at any time after it has become subject to such reporting requirements; and (iii) So long as Holder owns any Registrable Securities, furnish to Holder forthwith upon request a written statement by Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after the end of the ninety (90) day period referred to in clause (i)), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Company, and such other reports and documents so filed as Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing Holder to sell any such securities without registration. EX-10.3 5 ccc.txt Exhibit 10.3 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. STOCK SUBSCRIPTION WARRANT To Purchase Common Stock of CTC Communications Group, Inc. Date of Initial Issuance: February 27, 2002 Number of Shares: 542,075 Initial Warrant Price: $4.10 Expiration Date: February 27, 2009 THIS CERTIFIES THAT for value received, CISCO SYSTEMS CAPITAL CORPORATION, a Nevada corporation, or its registered assigns (hereinafter called "Holder"), is entitled to purchase from CTC COMMUNCATIONS GROUP, INC. a Delaware corporation ("Company"), at any time during the Term of this Warrant, five hundred forty-two thousand seventy-five (542,075) shares of common stock of Company (the "Common Stock"), at the Warrant Price, payable as provided herein. The exercise of this Warrant shall be subject to the provisions, limitations and restrictions herein contained. This Warrant may be exercised in whole or in part. SECTION 1. Definitions. For all purposes of this Warrant, the following terms shall have the meanings indicated (any capitalized terms used herein and not otherwise defined herein to have the meanings ascribed to them in the Agreement): "Agreement" shall mean the Amended and Restated Master Agreement to Lease Equipment, dated as of February 27, 2002, between the CTC Communications Corp., as lessee, and Holder, as lessor. "Common Stock" shall mean and include Company's authorized common stock, as constituted at the date hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Term of this Warrant" shall mean the period beginning on the date of initial issuance hereof and ending on the seventh (7th) anniversary of such date of initial issuance. "Warrant Price" shall mean $4.10 per share, subject to adjustment in accordance with Section 5 hereof. "Warrants" shall mean this Warrant and any other Warrant or Warrants issued in connection with the Agreement to the original holder of this Warrant or issued to any transferees of such original holder or subsequent holder. "Warrant Shares" shall mean shares of Common Stock, subject to adjustment or change as herein provided, purchased or purchasable by Holder upon the exercise hereof. SECTION 2. Exercise of Warrant. 2.1 Procedure for Exercise of Warrant. To exercise this Warrant in whole or in part (but not as to any fractional share of Common Stock), Holder shall deliver to Company at its office referred to in Section 14 hereof at any time and from time to time during the Term of this Warrant: (i) the Notice of Exercise in the form of Exhibit A attached hereto, (ii) cash, certified or official bank check payable to the order of Company, wire transfer of funds to Company's account, or cancellation of any indebtedness of Company to Holder (or any combination of any of the foregoing) in the amount of the Warrant Price for each share being purchased, and (iii) this Warrant. Notwithstanding any provisions herein to the contrary, if the Current Market Price (as defined in Section 6) is greater than the Warrant Price (at the date of calculation, as set forth below), in lieu of exercising this Warrant as hereinabove permitted, Holder may elect to receive shares of Common Stock equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the office of Company referred to in Section 14 hereof, together with the Notice of Exercise, in which event Company shall issue to Holder that number of whole shares of Common Stock computed using the following formula: CS = WCS x (CMP-WP) ------------------- CMP Where CS equals the number of shares of Common Stock to be issued to Holder WCS equals the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) CMP equals the Current Market Price (at the date of such calculation) WP equals the Warrant Price (as adjusted to the date of such calculation) In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of Holder or such other name or names as may be designated by Holder, shall be delivered to Holder hereof within a reasonable time, not exceeding fifteen (15) days, after the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to Holder hereof within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which Holder shall have complied with the conditions for exercise of this Warrant set forth above, irrespective of the date of delivery of such certificate, except that, if the date of such compliance is a date when the stock transfer books of Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2.2 Transfer Restriction Legend. Each certificate for Warrant Shares shall bear the following legend (and any additional legend required by (i) any applicable state securities laws and (ii) any securities exchange upon which such Warrant Shares may, at the time of such exercise, be listed) on the face thereof unless at the time of exercise such Warrant Shares shall be registered under the Securities Act: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution under a registration statement of the securities represented thereby) shall also bear such legend unless, in the opinion of counsel for Holder thereof (which counsel shall be reasonably satisfactory to Company) the securities represented thereby are not, at such time, required by law to bear such legend. SECTION 3. Covenants as to Common Stock. Company covenants and agrees that all shares of Common Stock that may be issued upon the exercise of the rights represented by this Warrant shall, upon issuance, be validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. Company further covenants and agrees that it shall pay when due and payable any and all federal and state taxes which may be payable in respect of the issue of this Warrant or any Common Stock or certificates therefor issuable upon the exercise of this Warrant. Company further covenants and agrees that Company shall at all times have authorized and reserved, free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. Company further covenants and agrees that if any shares of capital stock to be reserved for the purpose of the issuance of shares upon the exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon exercise, then Company shall in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. If and so long as the Common Stock issuable upon the exercise of this Warrant is listed on any national securities exchange, Company shall, if permitted by the rules of such exchange, list and keep listed on such exchange, upon official notice of issuance, all shares of such Common Stock issuable upon exercise of this Warrant. SECTION 4. Representations and Warranties Regarding Capitalization Issues. As of the date immediately preceding the date of this Warrant: (i) The authorized capital of the Company consists of (A) 100 million shares of common stock, of which 27,103,730 shares are issued and outstanding, and (B) 10 million shares of preferred stock, of which 200,000 shares are issued and outstanding and are convertible into 4,000,000 shares of common stock at $50.00 per share. (ii) The Company has reserved (A) 4,959,606 shares of common stock for issuance under its [Nonqualified Stock Option Plan, under which 4,023,193 options are outstanding at an average price of $7.07 per share, and (B) 7,779,823 shares of common stock for issuance under its Incentive Stock Option Plan, under which 3,934,805 options are outstanding at an average price of $9.83 per share. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company, or any calls, commitments or claims of any character relating to, its capital stock or other securities. (iii) No shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. SECTION 5. Adjustment of Number of Shares. Upon each adjustment of the Warrant Price as provided in Section 6, Holder shall thereafter be entitled to purchase, at the Warrant Price resulting from such adjustment, only the number of shares (calculated to the nearest tenth of a share) obtained by multiplying the Warrant Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Price resulting from such adjustment. SECTION 6. Adjustment of Warrant Price. The Warrant Price shall be subject to adjustment from time to time as follows: (i) If Company shall at any time or from time to time during the Term of this Warrant issue shares of Common Stock other than Excluded Stock (as hereinafter defined) without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such Common Stock, the Warrant Price in effect immediately prior to each such issuance shall forthwith (except as provided in this clause (i)) be adjusted to a price equal to the quotient obtained by dividing: (A) an amount equal to the sum of (x) the total number of shares of Common Stock outstanding (including any shares of Common Stock deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) immediately prior to such issuance multiplied by the Warrant Price in effect immediately prior to such issuance, plus (y) the consideration received by Company upon such issuance, by (B) the total number of shares of Common Stock outstanding (including any shares of Common Stock deemed to have been issued pursuant to subdivision (3) of this clause (i) and to clause (ii) below) immediately after the issuance of such Common Stock. For the purposes of any adjustment of the Warrant Price pursuant to this clause (i), the following provisions shall be applicable: 1. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by Company for any underwriting or otherwise in connection with the issuance and sale thereof. 2. In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors of Company, irrespective of any accounting treatment; provided, however, that such fair market value as determined by the Board of Directors, together with any cash consideration being paid, shall not exceed an aggregate amount equal to the product of (i) the aggregate Current Market Price per share of Common Stock as determined as provided in clause (vii) below, multiplied by (ii) the number of shares of Common Stock being issued in such issuance. 3. In the case of the issuance of (i) options to purchase or rights to subscribe for Common Stock, (ii) securities or obligations by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities or obligations: (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (1) and (2) above with the proviso in subdivision (2) being applied to the number of shares of Common Stock deliverable upon such exercise), if any, received by Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or obligations or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities or obligations and subsequent conversions or exchanges thereof shall be deemed to have been issued at the time such securities or obligations were issued or such options or rights were issued and for a consideration equal to the consideration received by Company for any such securities or obligations and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by Company upon the conversion or exchange of such securities or obligations or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (1) and (2) above with the proviso in subdivision (2) being applied to the number of shares of Common Stock deliverable upon such conversion, exchange or exercise); (D) on any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities or obligations, other than a change resulting from the antidilution provisions thereof, the Warrant Price shall forthwith be readjusted to such Warrant Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities or obligations not converted prior to such change or options or rights related to such securities or obligations not converted prior to such change being made upon the basis of such change; and (D) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities or obligations, the Warrant Price shall forthwith be readjusted to such Warrant Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities or obligations being made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the conversion or exchange of such securities or obligations or upon the exercise of the options or rights related to such securities or obligations. "Excluded Stock" shall mean shares of Common Stock issued by Company (1) under any circumstance for which an adjustment is provided in clauses (iii) or (iv) of this Section 6 or in Section 8, and (2) in connection with the issuance of Common Stock (including any share of Common Stock deemed to have been issued pursuant to subdivision (3) of clause (i) above) (appropriately adjusted for stock splits and combinations) to directors, officers, or employees of, or consultants to, Company under any stock option or other similar incentive plan approved by the Board of Directors of Company as in effect on the date of this Warrant. (ii) "Excluded Stock" shall mean shares of Common Stock issued by Company (1) under any circumstance for which an adjustment is provided in clauses (iii) or (iv) of this Section 6 or in Section 8, and (2) in connection with the issuance of Common Stock (including any share of Common Stock deemed to have been issued pursuant to subdivision (3) of clause (i) above) (appropriately adjusted for stock splits and combinations) to directors, officers, or employees of, or consultants to, Company under any stock option or other similar incentive plan approved by the Board of Directors of Company as in effect on the date of this Warrant. (iii) If, at any time during the Term of this Warrant, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Warrant Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (iv) If, at any time during the Term of this Warrant, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date for such combination, the Warrant Price shall appropriately increase so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. (v) In case, at any time during the Term of this Warrant, Company shall declare a cash dividend upon its Common Stock payable otherwise than out of earnings or earned surplus or shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by Company or other persons, assets (excluding cash dividends and distributions) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of Company convertible into or exchangeable for Common Stock), then, in each such case, immediately following the record date fixed for the determination of the holders of Common Stock entitled to receive such dividend or distribution, the Warrant Price in effect thereafter shall be determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction of which the numerator shall be an amount equal to the difference of (x) the Current Market Price of one share of Common Stock minus (y) the fair market value (as determined by the Board of Directors of Company, whose determination shall be conclusive) of the amount of cash, stock, securities, evidences of indebtedness, assets, options or rights, as the case may be, so distributed in respect of one share of Common Stock, and of which the denominator shall be such Current Market Price. (vi) All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-tenth (1/10) of a share, as the case may be. (vii) For the purpose of any computation pursuant to this Section 6, the Current Market Price at any date of one share of Common Stock shall be deemed to be the average of the daily closing prices for the 15 consecutive business days ending on the last business day before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 15 business day period). The closing price for each day shall be the last reported sales price regular way or, in case no such reported sales took place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading or as reported by Nasdaq (or if the Common Stock is not at the time listed or admitted for trading on any such exchange or if prices of the Common Stock are not reported by Nasdaq then such price shall be equal to the average of the last reported bid and asked prices on such day as reported by The National Quotation Bureau Incorporated or any similar reputable quotation and reporting service, if such quotation is not reported by The National Quotation Bureau Incorporated); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to in this clause (vii) are available for the period required hereunder, the Current Market Price shall be determined in good faith by the Board of Directors of Company or, if such determination cannot be made or if Holder disputes in writing any determination so made by the Company's Board of Directors within 30 days of being informed of such determination, by a nationally recognized independent investment banking or accounting firm selected by the Board of Directors of Company (or if such selection cannot be made, by a nationally recognized independent investment banking or accounting firm selected by the American Arbitration Association in accordance with its rules). (viii) Whenever the Warrant Price shall be adjusted as provided in this Section 6, Company shall prepare a statement showing the facts requiring such adjustment and the Warrant Price that shall be in effect after such adjustment. Company shall cause a copy of such statement to be sent by mail, first class postage prepaid, to each Holder at its, his or her address appearing on Company's records. Where appropriate, such copy may be given in advance and may be included as part of the notice required to be mailed under the provisions of clause (x) of this Section 6. (ix) Adjustments made pursuant to clauses (iii), (iv) and (v) above shall be made on the date such dividend, subdivision, split-up, combination or distribution, as the case may be, is made, and shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to such dividend, subdivision, splitup, combination or distribution. (x) In the event Company shall propose to take any action of the types described in clauses (iii), (iv), or (v) of this Section 6, Company shall forward, at the same time and in the same manner, to Holder such notice, if any, which Company shall give to the holders of capital stock of Company. (xi) In any case in which the provisions of this Section 6 shall require that an adjustment shall become effective immediately after a record date for an event, Company may defer until the occurrence of such event issuing to Holder of all or any part of this Warrant which is exercised after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such exercise by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such exercise before giving effect to such adjustment exercise; provided, however, that Company shall deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. SECTION 7. Ownership. 7.1 Ownership of This Warrant. Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than Company) for all purposes and shall not be affected by any notice to the contrary until presentation of this Warrant for registration of transfer as provided in this Section 7. 7.2 Transfer and Replacement. This Warrant and all rights hereunder are transferable in whole or in part upon the books of Company by Holder hereof in person or by duly authorized attorney, and a new Warrant or Warrants, of the same tenor as this Warrant but registered in the name of the transferee or transferees (and in the name of Holder, if a partial transfer is effected) shall be made and delivered by Company upon surrender of this Warrant duly endorsed, at the office of Company referred to in Section 14 hereof, together with a properly executed Assignment (in the form of Exhibit B or Exhibit C hereto, as the case may be). Upon receipt by Company of evidence reasonably satisfactory to it of the loss, theft or destruction, and, in such case, of indemnity or security reasonably satisfactory to it, and upon surrender of this Warrant if mutilated, Company shall make and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be promptly cancelled by Company upon the surrender hereof in connection with any transfer or replacement. Except as otherwise provided above, in the case of the loss, theft or destruction of a Warrant, Company shall pay all expenses, taxes and other charges payable in connection with any transfer or replacement of this Warrant, other than stock transfer taxes (if any) payable in connection with a transfer of this Warrant, which shall be payable by Holder. Holder shall not transfer this Warrant and the rights hereunder except in compliance with federal and state securities laws. SECTION 8. Mergers, Consolidation, Sales. In the case of any proposed consolidation or merger of Company with another entity, or the proposed sale of all or substantially all of its assets to another person or entity, or any proposed reorganization or reclassification of the capital stock of Company, then, as a condition of such consolidation, merger, sale, reorganization or reclassification, Company shall give 30 days' prior written notice thereof to Holder hereof and lawful and adequate provision shall be made whereby Holder shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein, in lieu of the shares of the Common Stock of Company immediately theretofore purchasable hereunder, such shares of stock, securities or assets as may (by virtue of such consolidation, merger, sale, reorganization or reclassification) be issued or payable with respect to or in exchange for the number of shares of such Common Stock purchasable hereunder immediately before such consolidation, merger, sale, reorganization or reclassification. In any such case appropriate provision shall be made with respect to the rights and interests of Holder to the end that the provisions hereof shall thereafter be applicable as nearly as may be practicable, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of this Warrant. SECTION 9. Notice of Dissolution or Liquidation. In case of any distribution of the assets of Company in dissolution or liquidation (except under circumstances when the foregoing Section 8 shall be applicable), Company shall give notice thereof to Holder hereof and shall make no distribution to shareholders until the expiration of thirty (30) days from the date of mailing of the aforesaid notice and, in any case, Holder hereof may exercise this Warrant within thirty (30) days from the date of the giving of such notice, and all rights herein granted not so exercised within such thirty- day period shall thereafter become null and void. SECTION 10. Notice of Extraordinary Dividends. If the Board of Directors of Company shall declare any dividend or other distribution on its Common Stock except out of earned surplus or by way of a stock dividend payable in shares of its Common Stock, Company shall mail notice thereof to Holder hereof not less than thirty (30) days prior to the record date fixed for determining shareholders entitled to participate in such dividend or other distribution, and Holder hereof shall not participate in such dividend or other distribution unless this Warrant is exercised prior to such record date. The provisions of this Section 10 shall not apply to distributions made in connection with transactions covered by Section 8. SECTION 11. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant but in any case where Holder would, except for the provisions of this Section 11, be entitled under the terms hereof to receive a fractional share upon the complete exercise of this Warrant, Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the excess of the value of such fractional share (determined in such reasonable manner as may be prescribed in good faith by the Board of Directors of Company) over the Warrant Price for such fractional share. SECTION 12. Special Arrangements of Company. Company covenants and agrees that during the Term of this Warrant, unless otherwise approved by Holder: 12.1 Shall Not Amend Certificate. Company shall not amend its certificate or articles, as the case may be, of incorporation to eliminate as an authorized class of capital stock that class denominated as "Common Stock" on the date hereof. 12.2 Shall Bind Successors. This Warrant shall be binding upon any corporation or other person or entity succeeding to Company by merger, consolidation or acquisition of all or substantially all of Company's assets. SECTION 13. Registration. Company covenants and agrees that the shares of Common Stock issuable upon the exercise of this Warrant shall be entitled to the benefits of the registration rights set forth in Exhibit D attached hereto. SECTION 14. Notices. Any notice or other document required or permitted to be given or delivered to Holder shall be delivered at, or sent by certified or registered mail to, Holder at its address for notices set forth in the Agreement or to such other address as shall have been furnished to Company in writing by Holder. Any notice or other document required or permitted to be given or delivered to Company shall be delivered at, or sent by certified or registered mail to, Company at its address for notices set forth in the Agreement or to such other address as shall have been furnished in writing to Holder by Company. Any notice so addressed and mailed by registered or certified mail shall be deemed to be given when so mailed. Any notice so addressed and otherwise delivered shall be deemed to be given when actually received by the addressee. SECTION 15. No Rights as Stockholder; Limitation of Liability. This Warrant shall not entitle Holder to any of the rights of a shareholder of Company except upon exercise in accordance with the terms hereof. No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the Warrant Price hereunder or as a shareholder of Company, whether such liability is asserted by Company or by creditors of Company. SECTION 16. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SECTION 17. Amendments. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by both parties (or any respective predecessor in interest thereof). The headings in this Warrant are for purposes of reference only and shall not affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, Company has caused this Warrant to be signed by its duly authorized officer this 27th day of February, 2002. CTC COMMUNICATIONS GROUP, INC. By: Title: EXHIBIT A FORM OF NOTICE OF EXERCISE [To be signed only upon exercise of the Warrant] TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THE ATTACHED WARRANT The undersigned hereby exercises the right to purchase _________ shares of Common Stock which the undersigned is entitled to purchase by the terms of the attached Warrant according to the conditions thereof, and herewith [check appropriate box(es)] . makes payment of $__________ therefor in cash; . makes payment of $__________ therefor through cancellation of indebtedness; or . directs Company to issue ______ shares, and to withhold ____ shares in lieu of payment of the Warrant Price, as described in Section 2.1 of the Warrant. All shares to be issued pursuant hereto shall be issued in the name of and the initial address of such person to be entered on the books of CTC Communications Group, Inc. shall be: The shares are to be issued in certificates of the following denominations: [Type Name of Holder] By: Title: Dated: - ---------------------------- EXHIBIT B FORM OF ASSIGNMENT (ENTIRE) [To be signed only upon transfer of entire Warrant] TO BE EXECUTED BY THE REGISTERED HOLDER TO TRANSFER THE ATTACHED WARRANT FOR VALUE RECEIVED ___________________________ hereby sells, assigns and transfers unto _______________________________ all rights of the undersigned under and pursuant to the attached Warrant, and the undersigned does hereby irrevocably constitute and appoint _____________________ Attorney to transfer said Warrant on the books of CTC Communications Group, Inc., with full power of substitution. [Type Name of Holder] By: Title: Dated: NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. - ----------------------------- EXHIBIT C FORM OF ASSIGNMENT (PARTIAL) [To be signed only upon partial transfer of Warrant] TO BE EXECUTED BY THE REGISTERED HOLDER TO TRANSFER THE ATTACHED WARRANT FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers unto _______________________________ (i) the rights of the undersigned to purchase ___ shares of Common Stock under and pursuant to the attached Warrant, and (ii) on a non-exclusive basis, all other rights of the undersigned under and pursuant to the attached Warrant, it being understood that the undersigned shall retain, severally (and not jointly) with the transferee(s) named herein, all rights assigned on such non-exclusive basis. The undersigned does hereby irrevocably constitute and appoint __________________________ Attorney to transfer said Warrant on the books of CTC Communications Group, Inc., with full power of substitution. [Type Name of Holder] By: Title: Dated: NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT D REGISTRATION RIGHTS The Common Stock issuable upon exercise of the attached Warrant shall be deemed "registrable securities" under, and Holder of the attached Warrant shall otherwise be entitled to the benefit of, the following agreement (the "Agreement") between Company and its investor(s): None [Identify Agreement by date, title and parties.] Company agrees that no amendments shall be made to the Agreement which would have an adverse impact on Holder's registration rights thereunder without the consent of Holder. By acceptance of the Warrant to which this Exhibit D is attached, Holder shall be deemed to be a party to the Agreement. If no Agreement is identified above, then Holder shall be entitled to the benefits of the following registration rights (hereinafter referred to as the "Registration Rights") which shall be incorporated into and deemed part of the attached Warrant; provided, that the Registration Rights granted pursuant to Section 4 below shall be effective notwithstanding the existence of nonexistence of any Agreement: 1. Certain Definitions. As used herein, the following terms shall have the following respective meanings (any capitalized terms used in these Registration Rights and not otherwise defined below to have the meanings ascribed to them in the attached Warrant): "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Holder" shall mean any holder of Registrable Securities. "Other Shareholders" shall mean holders of securities of Company who are entitled by contract with Company or who are permitted by Company to have securities included in a registration of Company's securities. The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the effectiveness of such registration statement. "Registrable Securities" shall mean the Warrant Shares less any Warrant Shares theretofore sold to the public or in a private placement. "Registration Expenses" shall mean all expenses incurred by Company in compliance with Section 2 and 4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of Company, which shall be paid in any event by Company). 2. Company Registration. (a) Notice of Registration. If Company shall determine to register any of its Common Stock or securities convertible into or exchangeable or exercisable for Common Stock either for its own account or for the account of any Other Shareholder other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or any other registration on any registration form which does not permit secondary sales, Company shall: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within fifteen (15) days after receipt of the written notice from Company described in clause (i) above, subject to (a) requirements and rights existing as of the date of this Warrant of Other Shareholders, and (b) any limitations on the number of shares as set forth in Section 2(b) below. (b) Underwriting. If the registration of which Company gives notice is for a registered public offering involving an underwriting, Company shall so advise Holders as part of the written notice given pursuant to Section 2(a)(i). In such event, the right of any Holder to registration pursuant to Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with Company, directors and officers and the Other Shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by Company. Notwithstanding any other provision of this Section 2, if the underwriter determines that marketing or other factors require a limitation on the number of shares to be underwritten, the underwriter may (subject to the allocation priority set forth below) exclude from such registration and underwriting some or all of the Registrable Securities which would otherwise be underwritten pursuant hereto. Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner. The number of shares that may be included in the registration and underwriting on behalf of such Holders, directors and officers and Other Shareholders (if any) shall be allocated among such Holders, directors and officers and Other Shareholders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration at the time of filing the registration statement. If any Holder of Registrable Securities or any officer, director or Other Shareholder disapproves of the terms of any such underwriting, it, he or she may elect to withdraw therefrom by written notice to Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 3. Registration Rights. In the event that Company grants after the date hereof registration rights, including demand registration rights, to any other holder of securities of Company, Company shall promptly give to Holder written notice thereof and, if in the opinion of Holder such registration rights are more favorable than the registration rights provided under the attached Warrant, Holder shall so notify Company within thirty (30) days of receipt of the foregoing notice from Company. Holder shall have the right, upon notice to Company after receipt of the Company's notice to Holder as set forth immediately above, to deem such registration rights to be incorporated into the attached Warrant, whereupon such registration rights shall automatically be deemed to be incorporated in the attached Warrant. 4. Demand Registration Rights. After receipt of a written request from a Holder representing at least an aggregate of twenty percent (20%) of the total of all Warrant Shares then subject to purchase upon exercise of the Warrant, requesting that the Company register Warrant Shares issuable upon Holder's exercise of the Warrant or any of the Warrant Shares under the Securities Act and specifying the intended method or methods of disposition thereof, the Company shall promptly notify all Holders of Warrants or Warrant Shares in writing of the receipt of such request and each such Holder may elect, by written notice to the Company within fifteen (15) business days from the date of such Holders's receipt of the Company's notice, to have its Warrant Shares included in such registration. The Company shall, as expeditiously as possible following such request, use its best efforts to effect the registration under the Securities Act of all Warrant Shares which the Company has been requested to register by Holder for sale, all to the extent requested to permit the disposition (in accordance with the intended method or methods thereof, as aforesaid) of the Warrant Shares so registered; provided, that the Company shall not be required to effect more than three (3) registrations of any Warrant Shares pursuant to this Section 4, not including registration statements on Form S-3 which shall not count for purposes of this limitation. No holder of any other warrant issued after the date of this Warrant shall receive or be entitled to receive registration rights that are more favorable than the registration rights available to Holder pursuant to this Section 4. 5. Expenses of Registration. Company (or Other Shareholders) shall bear all Registration Expenses incurred in connection with any registration, qualification and compliance by Company (or such Other Shareholders) pursuant to Sections 2 and 4. . 6. Registration Procedures. In the case of each registration effected by Company pursuant to these Registration Rights, Company shall keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. Company shall, at its expense: (i) keep such registration effective for a period of one hundred twenty (120) days or until Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (ii) furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; and (iii) use its best efforts to register or qualify the Registrable Securities under the securities laws or blue-sky laws of such jurisdictions as any Holder may request; provided, however, that Company shall not be obligated to register or qualify such Registrable Securities in any particular jurisdiction in which Company would be required to execute a general consent to service of process in order to effect such registration, qualification or compliance, unless Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder. 7. Indemnification. (i) Company, with respect to each registration, qualification and compliance effected pursuant to these Registration Rights, shall indemnify and hold harmless each Holder, each of its officers, directors, partners, and agents, and each party controlling such Holder, and each underwriter, if any, and each party who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by Company of the Securities Act or any rule or regulation thereunder applicable to Company and relating to action or inaction required of Company in connection with any such registration, qualification or compliance, and shall reimburse each such Holder, each of its officers, directors, partners, and agents, and each party controlling such Holder, each such underwriter and each party who controls any such underwriter, for any legal and any other expenses incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided that Company shall not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based solely upon written information furnished to Company by such Holder or underwriter, as the case may be, and stated to be specifically for use in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance. (ii) Each Holder shall, if Registrable Securities held by it, him or her are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless Company, each of its directors and officers and each underwriter, if any, of Company's securities covered by such a registration statement and each party who controls Company or such underwriter against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse Company and such directors, officers, partners, agents, parties, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document solely in reliance upon and in conformity with written information furnished to Company by such Holder and stated to be specifically for use in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance; provided, however, that the obligations of such Holder hereunder shall be limited to an amount equal to the proceeds to each such Holder of securities sold as contemplated herein. (iii) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have been advised by counsel that actual or potential differing interests or defenses exist or may exist between the Indemnifying Party and the Indemnified Party, in which case such expense shall be paid by the Indemnifying Party), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under these Registration Rights. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall provide such information as may be reasonably requested by an Indemnifying Party in order to enable such Indemnifying Party to defend a claim as to which indemnity is sought. 8. Information by Holder. Each Holder shall furnish to Company such information regarding such Holder as Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in these Registration Rights. 9. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the Registrable Securities to the public without registration, Company agrees to: (i) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times that Holder holds Registrable Securities from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by Company for an offering of its securities to the general public; (ii) File with the Commission in a timely manner all reports and other documents required of Company under the Exchange Act at any time after it has become subject to such reporting requirements; and (iii) So long as Holder owns any Registrable Securities, furnish to Holder forthwith upon request a written statement by Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after the end of the ninety (90) day period referred to in clause (i)), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Company, and such other reports and documents so filed as Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing Holder to sell any such securities without registration. EX-99 6 ddd.txt EXHIBIT 99 RISK FACTORS From time to time we have, and may in the future make, forward-looking statements, based on our then-current expectations, including statements made in Securities and Exchange Commission filings, in press releases and oral statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties, and actual results could differ materially from those expressed or implied in the forward- looking statements for a variety of reasons. These reasons include, but are not limited to, factors outlined below. We do not undertake to update or revise our forward-looking statements publicly even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. THE DECLINE IN THE NATIONAL ECONOMY AND THE EFFECT OF RECENT TERRORIST ATTACKS MAY NEGATIVELY AFFECT OUR OPERATIONS The continued decline in our national economy and the effect of the September 11, 2001 terrorist attacks in New York City and Washington D.C. could have an adverse effect on our revenues, results of operations, and financial condition. At the time of the attacks, the demand by businesses for communications services had been experiencing weakness. Economic and political uncertainly resulting from general economic conditions and these attacks could result in further declines. We do not know what effect the government's attempts to bolster the economy, or effects of the war on terrorism, could have on our business, revenues, or results of operations. If businesses decide to cut back, defer or cancel purchases of new communications services, our revenues could be adversely affected, which could have an adverse effect on our results or operations and could have an adverse effect on our financial condition. IF WE DO NOT SUCCESSFULLY EXECUTE OUR NEW BUSINESS STRATEGY, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. Our business strategy is complex and requires that we successfully complete many tasks, a number of which we must complete simultaneously. If we are unable to effectively implement or coordinate the implementation of these multiple tasks, we may be unable to compete effectively in our markets and our financial results may suffer. OUR INCURRENCE OF NEGATIVE CASH FLOWS AND OPERATING LOSSES DURING THE NEXT SEVERAL YEARS MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. During recent periods we have experienced substantial net losses, operating losses and negative cash flow. Our expenses have increased significantly, and we expect our expenses to continue to increase as we deploy our network and implement our business plan. Accordingly, we expect to incur significant operating losses, net losses and negative cash flow during the next year, which may adversely affect the price of our common stock. IF OUR NETWORK DOES NOT FUNCTION PROPERLY, WE WILL BE UNABLE TO PROVIDE THE TELECOMMUNICATIONS SERVICES ON WHICH OUR FUTURE PERFORMANCE WILL IN LARGE PART DEPEND. Because the design of our network has not been widely deployed, we cannot assure you that our network will provide the functionality that we expect. We also cannot be sure that we will be able to incorporate local dial tone capabilities into our network because this technology has not been widely implemented. Without this capability we will not be able to provide on our network all of our target customers' fixed line telecommunications services. IF WE DO NOT OBTAIN INTERCONNECTION AGREEMENTS WITH OTHER CARRIERS, WE WILL BE UNABLE TO PROVIDE ENHANCED SERVICES ON OUR NETWORK. Negotiation of interconnection agreements with incumbent local exchange carriers, or ILECs, can take considerable time, effort and expense, and these agreements are subject to federal, state and local regulation. We may not be able to effectively negotiate the necessary interconnection agreements. Without these interconnection agreements, we will be unable to provide enhanced connectivity to our network and local dial tone services and to achieve the financial results we expect. BECAUSE OF OUR LIMITED EXPERIENCE, WE MAY NOT BE ABLE TO PROPERLY OR TIMELY DEPLOY, OPERATE AND MAINTAIN OUR NETWORK, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL RESULTS. The failure of our network equipment and fiber to operate as anticipated or the inability of equipment suppliers to timely supply such equipment could materially and adversely affect our financial results. Because we have limited experience operating and maintaining telecommunications networks, we may not be able to deploy our network properly or do so within the time frame we expect. In addition, we may encounter unanticipated difficulties in operating and maintaining our network. If network implementation does not occur in a timely and effective manner, our financial results could be adversely affected. OUR HIGH LEVERAGE CREATES FINANCIAL AND OPERATING RISK THAT COULD LIMIT THE GROWTH OF OUR BUSINESS. We have a significant amount of indebtedness. As of March 31, 2002, we had approximately $315.9 million of total indebtedness outstanding. We have incurred substantial debt financing to fund our business plan. Our high leverage could have important consequences to us, including, ... limiting our ability to obtain necessary financing for future working capital, capital expenditures, debt service, or refinancing requirements or other purposes; ... limiting our flexibility in planning for, or reacting to, changes in our business; ... placing us at a competitive disadvantage to competitors with less leverage; ... increasing our vulnerability in the event of a downturn in our business or the economy generally; ... requiring that we use a substantial portion of our cash flow from operations for debt service and not for other purposes. WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL WE WILL REQUIRE TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH ON ACCEPTABLE TERMS OR AT ALL, WHICH COULD CAUSE US TO DELAY OR ABANDON OUR DEVELOPMENT AND EXPANSION PLANS. We will need significant additional capital to expand our business plan. We cannot assure you that capital will be available to us when we need it or at all. If we are unable to obtain capital when we need it, we may delay or abandon our expansion plans. That could have a material adverse effect on our business and financial condition. OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED COMPETITORS WITH GREATER FINANCIAL RESOURCES AND MORE EXPERIENCE. We operate in a highly competitive environment. We have no significant market share in any market in which we operate. We will face substantial and growing competition from a variety of data transport, data networking, telephony service and integrated telecommunications service providers. We also expect that the incumbent local exchange carriers ultimately will be able to provide the range of services we currently offer. Many of our competitors are larger and better capitalized than we are, are incumbent providers with long-standing customer relationships, and have greater name recognition. We may not be able to compete effectively against our competitors. OUR INFORMATION SYSTEMS MAY NOT PRODUCE ACCURATE AND PROMPT BILLS WHICH COULD CAUSE A LOSS OR DELAY IN THE COLLECTION OF REVENUE AND COULD ADVERSELY AFFECT OUR RELATIONS WITH OUR CUSTOMERS. We depend on our information systems to bill our customers accurately and promptly. Because of the deployment of our network and our expansion plans, we are continuing to upgrade our information systems. Our failure to identify all of our information and processing needs or to adequately upgrade our information systems could delay our collection efforts, cause us to lose revenue and adversely affect our relations with our customers. WE MAY NOT RECEIVE TIMELY AND ACCURATE CALL DATA RECORDS FROM OUR SUPPLIERS WHICH COULD CAUSE A LOSS OR DELAY IN THE COLLECTION OF REVENUE AND COULD ADVERSELY AFFECT OUR RELATIONS WITH OUR SUPPLIERS. Our billing and collection activities are dependent upon our suppliers providing us with accurate call data records. If we do not receive accurate call data records in a timely manner, our collection efforts could suffer and we could lose revenue. In addition, we pay our suppliers according to our calculation of the charges based upon invoices and computer tape records provided by these suppliers. Disputes may arise between us and our suppliers because these records may not always reflect current rates and volumes. If we do not pay disputed amounts, a supplier may consider us to be in arrears in our payments until the amount in dispute is resolved, which could adversely affect our relations with our suppliers. WE DEPEND ON THE NETWORKS AND SERVICES OF THIRD PARTY PROVIDERS TO SERVE OUR CUSTOMERS AND OUR RELATIONSHIPS WITH OUR CUSTOMERS COULD BE ADVERSELY AFFECTED BY FAILURES IN THOSE NETWORKS AND SERVICES. We depend on other carriers for the switching and transmission of our customer traffic. After we complete deploying our network, we will still rely to some extent on others for switching and transmission of customer traffic. We cannot be sure that any third party switching or transmission facilities will be available when needed or on acceptable terms. Although we can exercise direct control of the customer care and support we provide, most of the services we currently offer are provided by others. The availability of these services are subject to work stoppages, lack of available facilities, physical damage, power loss, capacity limitations, software defects, breaches of security and other factors which may cause interruptions in service or reduced capacity for our customers. These problems, although not within our control, could adversely affect customer confidence and damage our relationships with our customers. INCREASES IN CUSTOMER ATTRITION RATES COULD ADVERSELY AFFECT OUR OPERATING RESULTS. Our customers may not continue to purchase local, long distance, data or other services from us. Because we have been selling voice and data telecommunications under our own brand name for a short time, our customer attrition rate is difficult to evaluate. We could lose customers as a result of national advertising campaigns, telemarketing programs and customer incentives provided by major competitors as well as for other reasons not in our control as well as a result of our own performance. Increases in customer attrition rates could have a material adverse effect on our results of operations. WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WHICH COULD MATERIALLY ADVERSELY AFFECT ALL ASPECTS OF OUR BUSINESS. We are pursuing a business plan that will result in rapid growth and expansion of our operations if we are successful. This rapid growth would place significant additional demands upon our current management and other resources. Our success will depend on our ability to manage our growth. To accomplish this we will have to train, motivate and manage an increasing number of employees. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition. WE MAY BE UNABLE TO RETAIN OR REPLACE OUR SENIOR MANAGEMENT OR HIRE AND RETAIN OTHER HIGHLY SKILLED PERSONNEL UPON WHICH OUR SUCCESS WILL DEPEND. We believe that our continued success will depend upon the abilities and continued efforts of our management, particularly members of our senior management team. The loss of the services of any of these individuals could have a material adverse effect on our business, results of operations and financial condition. Our success will also depend upon our ability to identify, hire and retain additional highly skilled sales, service and technical personnel. Demand for qualified personnel with telecommunications experience is high and competition for their services is intense. If we cannot attract and retain the additional employees we need, we will be unable to successfully implement our business strategy. CHANGES TO THE REGULATIONS APPLICABLE TO OUR BUSINESS COULD INCREASE OUR COSTS AND LIMIT OUR OPERATIONS. We are subject to federal, state, and local regulation of our local, long distance, and data services. The outcome of the various administrative proceedings at the federal and state level and litigation in federal and state courts relating to this regulation as well as federal and state legislation may increase our costs, increase competition and limit our operations. RAPID TECHNOLOGICAL CHANGES IN THE TELECOMMUNICATIONS INDUSTRY COULD RENDER OUR SERVICES OR NETWORK OBSOLETE FASTER THAN WE EXPECT OR REQUIRE US TO SPEND MORE THAN WE CURRENTLY ANTICIPATE. The telecommunications industry is subject to rapid and significant changes in technology. Any changes could render our services or network obsolete, require us to spend more than we anticipate or have a material adverse effect on our operating results and financial condition. Advances in technology could also lead to more entities becoming our direct competitors. Because of this rapid change, our long-term success will increasingly depend on our ability to offer advanced services and to anticipate or adapt to these changes, such as evolving industry standards. We cannot be sure that: ... we will be able to offer the services our customers require; ... our services will not be economically or technically outmoded by current or future competitive technologies; ... our network or our information systems will not become obsolete; ... we will have sufficient resources to develop or acquire new technologies or introduce new services that we need to effectively compete; or ... our cost of providing service will decline as rapidly as the costs of our competitors. WE MAY PURSUE ACQUISITIONS WHICH COULD DISRUPT OUR BUSINESS AND MAY NOT YIELD THE BENEFITS WE EXPECT. We may pursue strategic acquisitions as we expand. Acquisitions may disrupt our business because we may: ... experience difficulties integrating acquired operations and personnel into our operations; ... divert resources and management time; ... be unable to maintain uniform standards, controls, procedures and policies ... enter markets or businesses in which we have little or no experience; and find that the acquired business does not perform as we expected. OUR EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS CONTROL A SUBSTANTIAL AMOUNT OF OUR VOTING SHARES AND WILL BE ABLE TO SIGNIFICANTLY INFLUENCE ANY MATTER REQUIRING SHAREHOLDER APPROVAL. Our officers and directors and parties related to them now control approximately 28.8% of the voting power of our outstanding capital stock. Robert J. Fabbricatore, our Chairman and Chief Executive Officer, controls approximately 9.7% of our voting power. Therefore, the officers and directors are able to significantly influence any matter requiring shareholder approval. FLUCTUATIONS IN OUR OPERATING RESULTS COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. Our annual and quarterly revenue and results could fluctuate as a result of a number of factors, including: ... variations in the rate of timing of customer orders, ... variations in our provisioning of new customer services, ... the speed at which we expand our network and market presence, ... the rate at which customers cancel services, or churn, ... costs of third party services purchased by us, and ... competitive factors, including pricing and demand for competing services. Also, our revenue and results may not meet the expectations of securities analysts and our stockholders. As a result of fluctuations or a failure to meet expectations, the price of our common stock could be materially adversely affected. OUR STOCK PRICE IS LIKELY TO BE VOLATILE. The trading price of our common stock is likely to be volatile. The stock market in general, and the market for technology and telecommunications companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. Other factors that could cause the market price of our common stock to fluctuate substantially include: ... announcements of developments related to our business, or that of our competitors, our industry group or our customers; ... fluctuations in our results of operations; ... hiring or departure of key personnel; ... a shortfall in our results compared to analysts' expectations and changes in analysts' recommendations or projections; ... sales of substantial amounts of our equity securities into the marketplace; ... regulatory developments affecting the telecommunications industry or data services; and ... general conditions in the telecommunications industry or the economy as a whole. ^ -----END PRIVACY-ENHANCED MESSAGE-----