-----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, IGhQSQAbUqbFAdh1ip85yyVnS+qE1KDqivQYaAxdSYAEjHGXKp/MOMNdE54eoAbM zo+ACMHCaObMYTqYeBeuHA== 0001056114-02-000018.txt : 20020814 0001056114-02-000018.hdr.sgml : 20020814 20020814180928 ACCESSION NUMBER: 0001056114-02-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02738071 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 q.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 June 30, 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 August 14, 2002, 27,367,767 shares of Common Stock, $.01 par value, were outstanding. INDEX PAGE NUMBER PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3 Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22-23 PART II. OTHER INFORMATION: Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities 24 Item 3. Default Upon Senior Securities Inapplicable Item 4. Submission of Matters to a vote of Security Holders 24 Item 5. Other Information 24-25 Item 6. Exhibits & Reports on Form 8-K 25 CTC COMMUNICATIONS GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2002 2001 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $27,000,035 $66,289,140 Restricted cash - current 1,850,000 550,000 Accounts receivable, net 47,780,669 47,059,065 Prepaid expenses and other current assets 6,551,823 4,762,692 ----------- ------------ Total current assets 83,182,527 118,660,897 Property and equipment: Property and equipment 410,337,482 366,087,446 Accumulated depreciation and amortization (184,164,719) (135,762,149) ------------- ------------- Total property and equipment, net 226,172,763 230,325,297 Restricted cash - noncurrent 5,650,000 6,950,000 Deferred financing costs and other assets 14,323,048 11,502,131 ------------- ------------- Total assets $329,328,338 $367,438,325 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $75,816,144 $58,298,679 Accrued salaries and related taxes 3,513,798 2,995,383 Current portion of obligations under capital leases (See Note 1 and 3) 67,963,180 33,036,325 Current portion of notes payable (See Note 1 and 3) 227,623,305 3,354,399 ------------- ------------- Total current liabilities 374,916,427 97,684,786 Long term liabilities: Obligations under capital leases, net of current portion 30,170,340 60,324,538 Notes payable, net of current portion -- 225,000,000 Other 2,383,706 2,665,710 ------------- ------------- Total long term liabilities 32,554,046 287,990,248 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 June 30, 2002 and December 31, 2001, respectively (liquidation preference $256,531,611 at June 30, 2002) 233,476,331 222,812,360 Stockholders' deficit: Common stock, par value $0.01 per share; authorized, 100,000,000 shares, 27,206,681 and 27,103,730 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively 272,067 271,037 Additional paid-in capital 98,000,970 95,528,040 Other accumulated comprehensive loss (2,788,153) (2,886,424) Retained deficit (407,103,350) (333,961,722) ------------- ------------- Total stockholders' deficit (311,618,466) (241,049,069) ------------- ------------- Total liabilities and stockholders' deficit $329,328,338 $367,438,325 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. CTC COMMUNICATIONS GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 --------------------------------------------------------- Telecommunications revenue $81,912,855 $74,512,308 $164,997,799 $142,133,452 Operating costs and expenses: Cost of telecommunications revenues (excluding depreciation and amortization) 60,572,300 59,852,566 123,983,027 115,196,751 Selling, general and administrative expenses 19,789,990 20,587,956 40,387,157 41,787,722 Depreciation and amortization 24,444,941 17,094,524 48,487,312 33,728,760 ---------------------------------------------------------- Total operating costs and expenses 104,807,231 97,535,046 212,857,496 190,713,233 ---------------------------------------------------------- Loss from operations (22,894,376) (23,022,738) (47,859,697) (48,579,781) Other income (expense), net: Interest income 351,330 541,979 732,763 1,403,328 Interest expense (8,746,880) (5,132,995) (15,350,722) (9,385,954) ---------------------------------------------------------- Total other expense, net (8,395,550) (4,591,016) (14,617,959) (7,982,626) ---------------------------------------------------------- Net loss ($31,289,926) ($27,613,754) ($62,477,656) ($56,562,407) ========================================================== Net loss available to common stockholders ($36,729,903) ($32,457,901) ($73,141,627) ($66,161,163) ========================================================== Net loss per common share: Basic and Diluted ($1.35) ($1.21) ($2.69) ($2.47) ========================================================== Weighted average number of common shares used in computing net loss per common share: Basic and Diluted 27,206,681 26,810,572 27,197,007 26,736,549 ==========================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. CTC COMMUNICATIONS GROUP, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, June 30, 2002 2001 ---------------------------- Cash flows from operating activities: Net loss ($62,477,656) ($56,562,407) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 48,487,312 33,728,760 Non-cash interest related to warrants 699,670 429,126 Stock-based compensation -- 26,910 Changes in operating assets and liabilities: Accounts receivable (793,483) 1,090,568 Prepaid expenses and other current assets (1,533,953) (920,324) Deferred financing costs and other assets (1,592,399) (150,096) Accounts payable and accrued expenses 17,517,465 (7,894,238) Accrued salaries and related taxes 518,415 758,497 ----------------------------- Net cash provided (used) by operating activities 825,371 (29,493,204) ----------------------------- Cash flows from investing activities: Additions to property and equipment (27,815,186) (40,249,319) Repayments of notes receivable from stockholders 290,064 5,414,676 Notes receivable from stockholders (545,243) (90,000) ----------------------------- Net cash used by investing activities (28,070,365) (34,924,643) ----------------------------- Cash flows from financing activities: Proceeds from the issuance of common stock 349,176 1,349,237 Borrowings under notes payable -- 25,000,000 Repayment of notes payable (731,094) (812,455) Repayment of capital lease obligations (11,662,193) (11,074,326) ----------------------------- Net cash provided (used) by financing activities (12,044,111) 14,462,456 ----------------------------- Decrease in cash (39,289,105) (49,955,391) Cash and cash equivalents, beginning of year 66,289,140 80,029,442 ----------------------------- Cash and cash equivalents, end of period $27,000,035 $30,074,051 ============================= Noncash investing and financing activities: Network and related equipment under capital leases $16,434,850 $17,025,993 ============================= Accretion of preferred stock $10,663,971 $9,598,756 ============================= Issuance of warrants $2,214,417 -- =============================
The accompanying notes are an integral part of these consolidated financial statements. CTC COMMUNICATIONS GROUP, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. LIQUIDITY, CAPITAL RESOURCES AND IMPAIRMENT CONSIDERATIONS Financing Requirements The current sector and economic environment in which the Company operates has adversely affected the Company's ability to attract new customers and expand services provided to existing customers. During the first half of 2002, the telecommunications industry experienced a series of negative events that has caused many potential customers to delay or reduce their purchases. Due to these factors, the Company's operating results have not met its previous estimates and, as a result, the Company will need to raise additional capital early in the fourth quarter of 2002. In addition, as a result of these factors, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements (described below) under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company would be in default and the lenders under these facilities would have the right to demand immediate payment of amounts outstanding under these facilities. In addition, our vendor would no longer be required to advance us additional funds under the Vendor Financing Facility. The Company has retained a financial advisor, Miller Buckfire Lewis & Co., LLC, to assist in developing a plan to amend, restructure or refinance its existing financing facilities and to raise additional capital. There can be no assurance that additional financing will be available, or that the Company will be able to amend, restructure or refinance its financing facilities. In addition, any additional financing, if obtained, may result in substantial dilution to the Company's common stockholders. The inability of the Company to raise the needed additional capital would have a material adverse effect on the operations and business of the Company. If the Company is unable to raise additional funds and satisfactorily amend, restructure or refinance its financing facilities, the Company would need to curtail some or all of its operations and may need to seek protection under the Federal bankruptcy laws. Reclassification of Debt The Company's covenants under its debt and vendor financing facilities (see Note 3) contemplate quarterly increases in the Company's operating results in fiscal 2002 compared with 2001. Among other things, these covenants, as amended, require significant increases 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 ability to execute its business plan and improve its operating results. However, notwithstanding the Company' efforts to remain in compliance by, among other things, curtailing expenses, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company will be in default and the lenders would have the right to demand immediate payment of amounts outstanding under these facilities. Accordingly, obligations under the Company's debt and vendor financing agreements have been classified as current liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2002. Basis of Presentation The accompanying unaudited condensed consolidated 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 the fair presentation have been included. Operating results for the three and six months ended June 30, 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 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2002, the Company has experienced recurring losses from continuing operations and has negative working capital, and, as discussed above, requires additional capital to sustain operations and believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Recoverability of Long-Lived Assets If the Company is required to make changes to its business plan to meet the covenants under its debt and vendor financing facilities, or if present negative economic trends continue, the Company would be required to re- evaluate the recoverability of its long-lived assets. The recoverability of our long-lived assets may also be affected by the continued downward pressure on our stock price and the evaluation of our business plans during the capital raising process. Depending on the outcome of these evaluations, the Company could be required to record impairment charges in future periods (see Note 2). 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. Impairment of Long-Lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), the Company reviews its long- lived assets, including property and equipment, and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future discounted net cash flows will be less than the carrying amount of the assets. Impairment is measured at fair value. 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 8). 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%. Both the collar and the swap mature on September 22, 2003. In December 2001 and January 2002, the Company entered into two interest rate cap agreements of 6.5% maturing in October 2003 and September 2003 on $12.5 million and $50 million of the Senior Facility borrowings, respectively. All of these instruments have been entered into for non- trading purposes. During the three and six months ended June 30, 2002, the Company recorded a loss of $1,406,513 and a gain of $98,271, respectively, in other comprehensive (loss) for the change in fair value of the collar and swap. During the three and six months ended June 30, 2001, the Company recorded a loss of $44,297 and $828,134, respectively, in other comprehensive (loss) for the change in fair value of the collar and swap. Furthermore, during the three and six months ended June 30, 2002, the Company reclassified out of other comprehensive (loss) to interest expense a loss of ($143,626) and a gain of $149,466, respectively, related to the ineffective portion of the collar and the swap and a gain of $37,529 and $34,267 for the same periods related to the collar and the swap excluded from the assessment of hedge effectiveness. During the three and six months ended June 30, 2001, the Company reclassified out of other comprehensive (loss) to interest expense a gain of $1,215 and a loss of $52,942, respectively, related to the ineffective portion of the collar and the swap and gains of $295,357 and $122,866 for the same periods 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 $495,000 of losses on the collar and the swap from accumulated other comprehensive (loss) to interest expense due to the payment of variable interest associated with the Senior Facility. 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 June 30, 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 June 30, 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. We have various covenants in our debt and vendor financing facilities. Key financial covenants at June 30, 2002 and for the remainder of this fiscal year include: Quarter Ended June 2002 September 2002 December 2002 ------------ -------------- -------------- Minimum ALEs installed and billed 535,000 555,000 N/A Minimum Revenue $78,000,000 $84,000,000 N/A Minimum Consolidated EBITDA $1,500,000 $8,000,000 N/A Maximum Total Leverage Ratio N/A 10.50:1 6.50:1 Minimum Interest Coverage Ratio N/A 1.00:1 1.50:1 Minimum Unrestricted Cash Balance $25,900,000 $13,100,000 $13,100,000 The Company reported positive EBITDA of $1,550,565 and $627,615 for the 2002 Quarter and 2002 Six Months, respectively. For the quarter ended June 30, 2002, we were in compliance with our covenants. 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 of $25,900,000 at June 30, 2002. 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 were 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. At the date of issuance, these warrants were valued at approximately $726,000 and will be recorded as interest expense over the remaining term of the facility. On August 1, 2002, the Company elected to fully utilize the third $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 $2.08. At the date of issuance, these warrants were valued at approximately $126,511 and will be recorded as interest expense over the remaining term of the facility. The aforementioned warrants are subject to anti-dilution adjustments for certain events. 4. SERIES B PREFFERED STOCK The conversion ratio for the Series B Preferred Stock is subject to anti- 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. 5. NET LOSS PER COMMON SHARE The following tables set forth the computation of basic and diluted net loss per share:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ---------------------------------------------------------- Numerator: Net loss ($31,289,926) ($27,613,754) ($62,477,656) ($56,562,407) Less: Preferred stock dividends and accretion to redemption value of preferred stock (5,439,977) (4,844,147) (10,663,971) (9,598,756) ------------- ------------- ------------- ------------- Numerator for basic and diluted net loss per share ($36,729,903) ($32,457,901) ($73,141,627) ($66,161,163) ============= ============= ============= ============= Denominator: Denominator for basic and diluted net loss per share - weighted average shares 27,206,681 26,810,572 27,197,007 26,736,549 ============= ============= ============= ============= Basic and diluted loss per common share ($1.35) ($1.21) ($2.69) ($2.47) ============= ============= ============= =============
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 June 30, 2002 $1,519,203 of these loans remains outstanding. 7. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board issued Statement No. 145, "Rescission on FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (FAS 145). Under certain provisions of FAS 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items net of the effects of income taxes. Instead, those gains and losses should be included as a component of income before income taxes. The provisions of this statement are effective for the financial statements issued for fiscal years beginning after May 15, 2002 with early adoption encouraged. Any gain or loss on the extinguishment of debt that was classified as an extraordinary item should be reclassified upon adoption. The adoption of FAS 145 is not expected to have a material impact on our financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146) which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability was recognized at the date of an entity's commitment to an exit plan. FAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of FAS 146 is not expected to have a material impact on our financial position or results of operations. 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 and six months ended June 30, 2002 and 2001, comprehensive loss was as follows:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ---------------------------------------------------------- Comprehensive loss: Net loss ($31,289,926) ($27,613,754) ($62,477,656) ($56,562,407) Cumulative effect of change in accounting principle --- --- --- (716,504) (Additions) subtractions to other comprehensive loss for changes in fair value of cash flow hedges (1,406,513) (44,297) 98,271 (828,134) Reclassification from other comprehensive loss to interest expense for ineffective portion and time value of cash flow hedges 106,097 (296,572) (183,733) (69,924) ------------- ------------- ------------- ------------- Comprehensive loss ($32,590,342) ($27,954,623) ($62,563,118) ($58,176,969) ============= ============= ============= =============
Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below contains certain forward-looking statements related to, among others, but not limited to, statements concerning future revenues and future business plans. Actual results may vary from those contained in such forward-looking statements. The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this report. LIQUIDITY, CAPITAL RESOURCES AND IMPAIRMENT CONSIDERATIONS Financing Requirements The current sector and economic environment in which the Company operates has adversely affected the Company's ability to attract new customers and expand services provided to existing customers. During the first half of 2002, the telecommunications industry experienced a series of negative events that has caused many potential customers to delay or reduce their purchases. Due to these factors, the Company's operating results have not met its previous estimates and, as a result, the Company will need to raise additional capital early in the fourth quarter of 2002. In addition, as a result of these factors, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements (described below) under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company would be in default and the lenders under these facilities would have the right to demand immediate payment of amounts outstanding under these facilities. In addition, our vendor would no longer be required to advance us additional funds under the Vendor Financing Facility. The Company has retained a financial advisor, Miller Buckfire Lewis & Co., LLC, to assist in developing a plan to amend, restructure or refinance its existing financing facilities and to raise additional capital. There can be no assurance that additional financing will be available, or that the Company will be able to amend, restructure or refinance its financing facilities. In addition, any additional financing, if obtained, may result in substantial dilution to the Company's common stockholders. The inability of the Company to raise the needed additional capital would have a material adverse effect on the operations and business of the Company. If the Company is unable to raise additional funds and satisfactorily amend, restructure or refinance its financing facilities, the Company would need to curtail some or all of its operations and may need to seek protection under the Federal bankruptcy laws. Reclassification of Debt The Company's covenants under its debt and vendor financing facilities (see Note 3 to the unaudited condensed consolidated financial statements) contemplate quarterly increases in the Company's operating results in fiscal 2002 compared with 2001. Among other things, these covenants, as amended, require significant increases 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 ability to execute its business plan and improve its operating results. However, notwithstanding the Company' efforts to remain in compliance by, among other things, curtailing expenses, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company will be in default and the lenders would have the right to demand immediate payment of amounts outstanding under these facilities. Accordingly, obligations under the Company's debt and vendor financing agreements have been classified as current liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2002. Basis of Presentation The accompanying unaudited condensed consolidated 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 the fair presentation have been included. Operating results for the three and six months ended June 30, 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 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2002, the Company has experienced recurring losses from continuing operations and has negative working capital, and, as discussed above, requires additional capital to sustain operations and believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Recoverability of Long-Lived Assets If the Company is required to make changes to its business plan to meet the covenants under its debt and vendor financing facilities, or if present negative economic trends continue, the Company would be required to re- evaluate the recoverability of its long-lived assets. The recoverability of our long-lived assets may also be affected by the continued downward pressure on our stock price and the evaluation of our business plans during the capital raising process. Depending on the outcome of these evaluations, the Company could be required to record impairment charges in future periods (see Note 2 to the unaudited condensed consolidated financial statements). OVERVIEW We are a growing single-source provider of voice, data and Internet communications services, or integrated communications provider, with 18 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 149 account executives supported by 197 network coordinators as of June 30, 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 June 30, 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 over 280,000 local access lines and over $200 million in annual local telecommunications spending. As of June 30, 2002, after only 54 months as an integrated communications provider, we were serving over 15,000 customers and had 615,000 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 Solutions We provide our customers with shared and dedicated Web Hosting services as well as Internet/WAN Collocation services all based from our Advanced Technology Center (ATC) in Waltham, MA. Our ATC is a multifunctional Data Center that supports all CTC Hosting Solutions, a PowerPath(R) Supernode configuration, and will host future PowerPath(R) Managed Services. The ATC is a 50,000 square foot state of the art facility equipped with redundant and fault tolerance systems that ensure ongoing service 24 hours per day, 7 days per week, 365 days per year. CTC currently supports over 200 Web Hosting customers and 20 Collocation customers. In 2002 we began to offer Storage Area Network (SAN) service and Data Tape Backup, Archive and Recovery service and Managed Firewall service for our Web Hosting and Collocation customers. These services have been designed and released to support our customers' growing E-Business and Disaster Recovery (rapid recovery/Business Continuity (continuous systems uptime) requirements. We are also engaged in further analysis and potential development of PowerPath(R) Managed services that would create the potential of increasing the average revenue per PowerPath(R) user. These future services include: managed firewall and intrusion detection, managed router/switch/OS/applications, network attached storage, remote tape backup, archiving and recovery, Unified Messaging and IP Telephony services. Results of Operations - Three and Six Months Ended June 30, 2002 Compared to the Three and Six Months Ended June 30, 2001 Total revenues for the quarter ended June 30, 2002 ("2002 Quarter") were $81,912,855, as compared to $74,512,308 for the quarter ended June 30, 2001 ("2001 Quarter"), or an increase of 9.9%. Total revenues for the six months ended June 30, 2002 ("2002 Six Months") were $164,997,799 as compared to $142,133,452 for the six months ended June 30, 2001 ("2001 Six Months") or an increase of 16.1%. The 2002 Quarter revenues also represented a slight decrease of 1.4% from the revenues of $83,084,944 for the quarter ended March 31, 2002. We have added approximately 79,600 access lines since the quarter ending June 30, 2001 resulting in the increase in revenue due to the addition of access line equivalents (ALEs) for both new and existing customer relationships. A common basis for measurement of an integrated communications provider's progress is the growth in 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. We calculate our equivalent data circuits by dividing the data transmission capacity purchased by our customers by 64 kilobits per second, which represents the capacity necessary to carry one voice circuit. ALEs in service increased by 79,600, or approximately 14.9%, since June 30, 2001. This increase is a result of ALEs from new customers and growth from existing customers. This brought total ALEs in service to 615,000 at June 30, 2002. Costs of telecommunications revenues, excluding depreciation, for the 2002 Quarter were $60,572,300, as compared to $59,852,566 for the 2001 Quarter; and were $123,983,027 for the 2002 Six Months as compared to $115,196,751 for the 2001 Six months. As a percentage of telecommunications revenues, cost of telecommunications revenues was 73.9% for the 2002 Quarter and 75.1% for the 2002 Six Months, as compared to 80.3% for the 2001 Quarter and 81.0% for the 2001 Six Months. The decrease in the percentage of the cost of the telecommunications revenues primarily reflects the migration of new and existing customers onto our PowerPath? 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 sales force 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 3.9% to $19,789,990 from $20,587,956 for the 2001 Quarter; and for the 2002 Six Months decreased 3.4% to $40,387,157 from $41,787,722 for the 2001 Six Months. The decrease in SG&A from the 2001 Quarter and 2001 Six Months is due to the decision to limit our expansion and leverage our current branch infrastructure. For the 2002 Quarter and 2002 Six Months, SG&A expenses were 24.2% and 24.5%, respectively, of total revenue as compared to 27.6% and 29.4% of total revenue for the 2001 Quarter and 2001 Six Months. As of June 30, 2002, we employed 712 people including 149 account executives and 197 network coordinators in branch locations throughout the Northeast and Mid-Atlantic states as compared to 676 employees at June 30, 2001. Depreciation and amortization expense increased to $24,444,941 in the 2002 Quarter from $17,094,524 for the 2001 Quarter; and increased to $48,487,312 in the 2002 Six Months from $33,728,760 for the 2001 Six Months. 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 82.9% to $8,395,550 for the 2002 Quarter and increased by 83.1% to $14,617,959 for the 2002 Six Months from the same periods in 2001. Interest expense increased due to the increase in borrowings required in connection with the deployment of our network, working capital requirements, funding our operating losses and issuance of warrants. The increase is further affected 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 $31,289,926 and $62,477,656 for the 2002 Quarter and 2002 Six Months, respectively and net losses totaled to $27,613,754 and $56,562,407 for the 2001 Quarter and 2001 Six Months, respectively. Liquidity and Capital Resources Working deficit at June 30, 2002 was ($291,733,900) compared to working capital of $20,976,111, at December 31, 2001, a decrease of $312,710,011, which was used to fund our operating losses, capital expenditures and capital lease payments. In addition, approximately $35,287,014 of capital lease obligations and $221,062,500 notes payable were reclassified from long term to current liabilities as discussed in Note 1 to the unaudited condensed consolidated financial statements. Cash balances at June 30, 2002 and December 31, 2001 totaled $27,000,035 and $66,289,140, 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 June 30, 2002, the aggregate amount borrowed under these agreements was approximately $157.4 million with an outstanding balance of approximately $98.1 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. 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 as described below. As of June 30, 2002, the Company is in compliance with all the amended covenants however see Note 1 to the unaudited condensed consolidated financial statements. 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 below. 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 June 30, 2002, the full $225 million of the Senior Facility has been utilized. As previously disclosed, we have various covenants in our debt and vendor financing facilities. Key financial covenants at June 30, 2002 and for the remainder of this fiscal year include: Quarter Ended June 2002 September 2002 December 2002 ------------ -------------- ------------ - -- Minimum ALEs installed and billed 535,000 555,000 N/A Minimum Revenue $78,000,000 $84,000,000 N/A Minimum Consolidated EBITDA $1,500,000 $8,000,000 N/A Maximum Total Leverage Ratio N/A 10.50:1 6.50:1 Minimum Interest Coverage Ratio N/A 1.00:1 1.50:1 Minimum Unrestricted Cash Balance $25,900,000 $13,100,000 $13,100,000 The Company reported positive EBITDA of $1,550,565 and $627,615 for the 2002 Quarter and 2002 Six Months, respectively. For the quarter ended June 30, 2002, we were in compliance with our covenants. The Company's covenants under its debt and vendor financing facilities (see Note 3 to the unaudited condensed consolidated financial statements) contemplate quarterly increases in the Company's operating results in fiscal 2002 compared with 2001. Among other things, these covenants, as amended, require significant increases 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 ability to execute its business plan and improve its operating results. However, notwithstanding the Company' efforts to remain in compliance by, among other things, curtailing expenses, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company will be in default and the lenders would have the right to demand immediate payment of amounts outstanding under these facilities. Accordingly, obligations under the Company's debt and vendor financing agreements have been classified as current liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2002. 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. As discussed in Note 1 to the unaudited condensed consolidated financial statements, there are no assurances that tranche 4 will be made available to the Company. 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. At the date of issuance, these warrants were valued at approximately $726,000 and will be recorded as interest expense over the remaining term of the facility. On August 1, 2002, the Company elected to fully utilize the third $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 $2.08. At the date of issuance, these warrants were valued at approximately $126,511 and will be recorded as interest expense over the remaining term of the facility. The aforementioned warrants are subject to anti-dilution adjustments for certain events. The conversion ratio for the Series B Preferred Stock is subject to anti- 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 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. Please see opening section in Management's Discussion and Analysis of Financial Condition and Results of Operations for current discussion of Liquidity, Capital Resources and Impairment Considerations. Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board issued Statement No. 145, "Rescission on FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (FAS 145). Under certain provisions of FAS 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items net of the effects of income taxes. Instead, those gains and losses should be included as a component of income before income taxes. The provisions of this statement are effective for the financial statements issued for fiscal years beginning after May 15, 2002 with early adoption encouraged. Any gain or loss on the extinguishment of debt that was classified as an extraordinary item should be reclassified upon adoption. The adoption of FAS 145 is not expected to have a material impact on our financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146) which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability was recognized at the date of an entity's commitment to an exit plan. FAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of FAS 146 is not expected to have a material impact on our financial position or results of operations. 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 June 30, 2002 subject to the interest 12.25% and 9.67% 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 Notional amount outstanding at June 30, 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 June 30, 2002. We compared the market values resulting from these computations with the market values of these financial instruments at June 30, 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 June 30, 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 $368,000 for the quarter ended June 30, 2002. A 10% decrease in interest rates would result in reduced interest expense and cash expenditures of approximately $92,000 and 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 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 June 30, 2002. We compared the market values resulting from these computations with the market values of these financial instruments at June 30, 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 June 30, 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 $491,000 for the quarter ended June 30, 2002. A 10% decrease in dividend rates would result in reduced dividends of approximately $491,000 for the same period. Part II Item 2. Changes in Securities (c) On May 1, 2002, in connection with the Company's election to utilize the second tranche of $10 million of the Vendor Finance Facility provided by Cisco, we issued (i) a seven-year warrant to purchase 272,067 shares of our common stock at an exercise price of $2.408 per share to Cisco Systems Capital Corp. and (ii) seven-year warrants to purchase an aggregate of 136,034 shares of our common stock at an exercise price of $2.408 per share to the Toronto Dominion (Texas) Inc. and the other Lenders under the TD Credit 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 as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 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 4 - Submission of Matters to a Vote of Security Holders (a) The 2002 Annual Meeting of Stockholders of the Company was held on May 23, 2002. (b) Not applicable. (c) Each nominee for Class II director received the following votes:
Name Votes For Withheld - --------------------------------------------------------------- Richard J. Murphy 23,859,955 127,559 Mark E. Nunnelly 23,847,154 140,359 Richard J. Santagati 23,876,419 111,094 The following table sets forth the other matters voted upon and the respective number of votes cast for, against, number of abstentions and broker nonvotes. Matter Votes Votes Delivered Voted Upon For Against Abstentions Non Voted - --------------------------------------------------------------------------------- To approve the amendment to the 2000 Flexible Stock Plan 22,152,601 1,735,786 99,126 - To approve the amendment to the 1999 Equity Incentive Plan for Non-Employee Directors 22,264,513 1,695,043 27,957 - To approve the retention of Ernst & Young LLP as independent accountants 23,890,276 82,434 14,803 -
(d) Not applicable. Item 5. Other Information The Company has been informed by Nasdaq that its common stock will be delisted from The Nasdaq National Market at the opening of business on August 20, 2002, due to the Company's failure to comply with the minimum bid price for continued listing as set forth in Nasdaq Marketplace Rule 4450(b)(4). Nasdaq has also advised the Company that it does not meet the continued listing standard for the Nasdaq SmallCap Market in accordance with Nasdaq Marketplace Rule 4310(c)(2)(B). Upon the Nasdaq delisting, the Company's common stock will be traded in the over-the-counter market in the so-called "pink sheets" or on the OTC Bulletin Board. Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 10.1 Seven-year warrant issued May 1, 2002 to Cisco Systems Capital Corp. to purchase 272,067 shares at $2.408 per share 99.1 Certification pursuant to Section 906 of Corporate Fraud Accountability Act of 2002 99.2 Risk Factors Per Instruction 2 to Item 601 of Regulation S-K and as disclosed in Part II, Item 2 of this Report, the following Schedule sets forth the list of Warrants we issued on May 1, 2002 pursuant to the terms of the TD Credit Facility, which contain identical terms as the warrant filed as Exhibit 10.1 hereto except for the name of the warrantholder and number of shares issuable upon exercise of the warrant. Name of Warrantholder No. of Shares Issuable Upon Exercise of Warrant - --------------------- ------------------------------------------------ TORONTO DOMINION (TEXAS) INC. 48,367 ING (U.S.) CAPITAL LLC 15,115 CREDIT SUISSE FIRST BOSTON 24,184 LB 1 GROUP INC. 24,184 CISCO SYSTEMS, INC. 15,115 RFC CAPITAL CORPORATION 3,023 IBM CREDIT CORPORATION 6,046 (b) Reports on Form 8-K We filed the following reports on Form 8-K during the quarter ended June 30, 2002 Date Items Reported ------- -------------------------------------------------------- 1. April 16, 2002 Announcement that over 100 customers have been activating using our Inverse Multiplexing over ATM solution. 2. April 24, 2002 Announcement that we have surpassed the milestone of over 1,000,000 minutes of voice traffic per day. 3. April 30, 2002 Announcement of first quarter operating highlights. 4. May 15, 2002 Announcement of receipt of certificate of registration for the PowerPath(R) service mark. 5. May 29, 2002 Announcement that we now offer local dial tone service on our PowerPath(R) Network in Albany NY. 6. June 14, 2002 Report on recent presentations to stockholders and investors. 7. June 18, 2002 Announcement that we now offer local dial tone service on our PowerPath(R) Network in Syracuse NY. 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: August 14, 2002 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: August 14, 2002 /S/ JOHN D. PITTENGER ----------------------------- John D. Pittenger Executive Vice President, and Chief Financial Officer EX-10.1 3 a.txt Exhibit 10.1 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: May 1, 2002 Number of Shares: 272,067 Initial Warrant Price: $2.408 Expiration Date: May 1, 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, two hundred seventy-two thousand sixty seven (272,067) 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 $2.408 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 27,206,681 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. In addition, the Company has declared a preferred stock dividend of 715,683 shares of preferred stock, which are convertible into common stock at $50.00 per share. (ii) The Company has reserved (A) 4,926,839 shares of common stock for issuance under its Nonqualified Stock Option Plan, under which 4,111,474 options are outstanding at an average price of $7.15 per share, (B) 8,255,621 shares of common stock for issuance under its Incentive Stock Option Plan, under which 4,410,130 options are outstanding at an average price of $9.12 per share, and (C) an additional 1,328,519 shares of common stock for issuance under warrants to the following entities at an average price of $4.93 per share: 283,249 to Spectrum; 45,000 to Fleet/Goldman Sachs; 83,333 to Relational Funding; 103,824 to Toronto Dominion; 542,075 to Cisco Systems Capital Corporation; and 271,038 shares to the syndicate of lenders under the credit facility with Toronto Dominion (Texas), Inc. 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); (C) 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 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 29th day of April, 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-99.1 4 b.txt EXHIBIT 99.1 CERTIFICATION Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002 (18 U.S.C. Section 1350, as adopted), Robert J. Fabbricatore, Chief Executive Officer of CTC Communications Group, Inc. (the "Company"), and John D. Pittenger, the Company's Chief Financial Officer, each hereby certify that, to the best of their knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and to which this Certification is attached as Exhibit 99.1 (the "Quarterly Report"), fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of this 14th day of August, 2002. /s/ Robert J. Fabbricatore - -------------------------- Robert J. Fabbricatore, Chief Executive Officer /s/ John D. Pittenger - -------------------------- John D. Pittenger, Chief Financial Officer EX-99.2 5 c.txt EXHIBIT 99.2 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. WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL WE WILL REQUIRE TO FUND OUR OPERATIONS AND WE MAY BE UNABLE TO RESTRUCTURE OUR DEBT FACILITIES. Financing Requirements The current sector and economic environment in which the Company operates has adversely affected the Company's ability to attract new customers and expand services provided to existing customers. During the first half of 2002, the telecommunications industry experienced a series of negative events that has caused many potential customers to delay or reduce their purchases. Due to these factors, the Company's operating results have not met its previous estimates and, as a result, the Company will need to raise additional capital early in the fourth quarter of 2002. In addition, as a result of these factors, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements (described below) under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company would be in default and the lenders under these facilities would have the right to demand immediate payment of amounts outstanding under these facilities. In addition, our vendor would no longer be required to advance us additional funds under the Vendor Financing Facility. The Company has retained a financial advisor, Miller Buckfire Lewis & Co., LLC, to assist in developing a plan to amend, restructure or refinance its existing financing facilities and to raise additional capital. There can be no assurance that additional financing will be available, or that the Company will be able to amend, restructure or refinance its financing facilities. In addition, any additional financing, if obtained, may result in substantial dilution to the Company's common stockholders. The inability of the Company to raise the needed additional capital would have a material adverse effect on the operations and business of the Company. If the Company is unable to raise additional funds and satisfactorily amend, restructure or refinance its financing facilities, the Company would need to curtail some or all of its operations and may need to seek protection under the Federal bankruptcy laws. Reclassification of Debt The Company's covenants under its debt and vendor financing facilities (see Note 3 to the unaudited condensed consolidated financial statements) contemplate quarterly increases in the Company's operating results in fiscal 2002 compared with 2001. Among other things, these covenants, as amended, require significant increases 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 ability to execute its business plan and improve its operating results. However, notwithstanding the Company' efforts to remain in compliance by, among other things, curtailing expenses, the Company currently believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. If this occurs, the Company will be in default and the lenders would have the right to demand immediate payment of amounts outstanding under these facilities. Accordingly, obligations under the Company's debt and vendor financing agreements have been classified as current liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2002. Basis of Presentation The accompanying unaudited condensed consolidated 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 the fair presentation have been included. Operating results for the three and six months ended June 30, 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 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2002, the Company has experienced recurring losses from continuing operations and has negative working capital, and, as discussed above, requires additional capital to sustain operations and believes it is probable it will not be in compliance with certain of the covenant requirements under its debt and vendor financing facilities during the next 12 months. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Recoverability of Long-Lived Assets If the Company is required to make changes to its business plan to meet the covenants under its debt and vendor financing facilities, or if present negative economic trends continue, the Company would be required to re- evaluate the recoverability of its long-lived assets. The recoverability of our long-lived assets may also be affected by the continued downward pressure on our stock price and the evaluation of our business plans during the capital raising process. Depending on the outcome of these evaluations, the Company could be required to record impairment charges in future periods (see Note 2 to the unaudited condensed consolidated financial statements). 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 June 30, 2002, we had approximately $325.8 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, 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. 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 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 29.9% of the voting power of our outstanding capital stock. Robert J. Fabbricatore, our Chairman and Chief Executive Officer, controls approximately 10.0% 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' 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-----