-----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, St4kvcwjLO0SZjcBkcZCmG3YJSc5FhreAGeIrFVq7gS/1WSxEdhPoGML0lIff4Es Wcyn3O9e9jTFG84UMIZhbg== 0000927016-99-001792.txt : 19990505 0000927016-99-001792.hdr.sgml : 19990505 ACCESSION NUMBER: 0000927016-99-001792 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTC COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000764841 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 042731202 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-77709 FILM NUMBER: 99610179 BUSINESS ADDRESS: STREET 1: 360 SECOND AVE CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 7814668080 MAIL ADDRESS: STREET 1: 360 SECOND AVENUE CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER TELEPHONE CORP DATE OF NAME CHANGE: 19920703 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on May 4, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ Form S-1 REGISTRATION STATEMENT under THE SECURITIES ACT OF 1933 CTC COMMUNICATIONS CORP. (Exact Name of Registrant as Specified in Its Charter) MASSACHUSETTS 4812 04-2731202 (State or Other (Primary Standard Industrial (I.R.S. Employer Jurisdiction Classification Code Number) Identification No.) of Incorporation or Organization) CTC Communications Corp. 360 Second Avenue Waltham, Massachusetts 02451 Telephone: (781) 466-8080 (Address, including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------ Robert J. Fabbricatore Chief Executive Officer CTC Communications Corp. 360 Second Avenue Waltham, Massachusetts 02451 Telephone: (781) 466-8080 (Name, Address including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------ Copies to: Mary E. Weber, Esq. John D. Watson, Jr., Esq. Ropes & Gray Latham & Watkins One International Place 1001 Pennsylvania Avenue, N.W., Boston, Massachusetts 02110-2624 Suite 1300 (617) 951-7000 Washington, D.C. 20004 (202) 637-2200 ------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. ------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] 333- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] 333- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
Proposed Proposed Maximum Amount Maximum Aggregate Amount of Title of Each Class of to be Offering Price Offering Registration Securities to be Registered Registered(1) Per Share(2) Price(2) Fee - ----------------------------------------------------------------------------------- Common Stock, $.01 Par Value................. 2,875,000 shs. $19.0625 $54,804,688 $15,236 - ----------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------
(1) Includes 375,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. See "Underwriting." (2) Estimated solely for purposes of determining the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low prices for the common stock of CTC Communications Corp. on April 27, 1999. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 4, 1999 2,500,000 Shares CTC Communications Corp. Common Stock -------- We are selling 2,500,000 shares of common stock. The underwriters have an option to purchase a maximum of 375,000 additional shares to cover over-allotments of shares. Our common stock is quoted on the Nasdaq National Market under the symbol "CPTL." On May 3, 1999, the last reported sale price for our common stock on the Nasdaq National Market was $19.50. Investing in the common stock involves risks. See "Risk Factors" on page 6.
Underwriting Price to Discounts and Proceeds Public Commissions to CTC -------- ------------- -------- Per Share................................. $ $ $ Total..................................... $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston_______________________________________Lehman Brothers The date of this prospectus is , 1999. ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 13 Price Range of Common Stock and Dividend Policy.......................... 13 Capitalization........................................................... 14 Selected Financial Data.................................................. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 16 Business................................................................. 21 Management............................................................... 33 Principal Stockholders................................................... 38
Page ---- Certain Relationships and Related Transactions............................. 40 Description of Senior Facilities........................................... 40 Holding Company Reorganization............................................. 42 Description of Capital Stock............................................... 43 Underwriting............................................................... 46 Notice to Canadian Residents............................................... 48 Legal Matters.............................................................. 49 Experts.................................................................... 49 Where You Can Find More Information........................................ 49 Financial Statements....................................................... F-1
------------ You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. PROSPECTUS SUMMARY This summary only highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Unless we indicate otherwise, information in this prospectus assumes the underwriters will not exercise their over-allotment option. Overview of Our Business We are a rapidly growing integrated communications provider, or ICP, with 15 years of telecommunications marketing, sales and service experience. We offer voice and data services to predominantly medium-sized business customers who seek greater bandwidth, integrated telecommunications solutions and improved levels of service. We have a large, experienced sales force consisting of 163 sales people supported by 95 network consultants. These personnel are located close to our customers in 25 sales branches primarily in New England and New York. We are currently moving to a facilities-based platform by deploying a state-of-the-art, all packet-switched network based on advanced internet protocol, or IP, and asynchronous transfer mode, or ATM, architecture. In May 1999, we will begin beta-testing of our network with some of our customers. By late summer, we expect to begin providing commercial service and billing customers on our network. We became an ICP in January 1998. Prior to that, we were the largest independent sales agent for NYNEX Corp. (now Bell Atlantic). At the end of 1997, before leaving the Bell Atlantic 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 March 31, 1999, after only 15 months as an ICP, we were serving over 9,000 customers and had over 142,000 access line equivalents, or ALEs, in service. For the quarter ended March 31, 1999, we generated approximately $ million of revenues representing over $ million on an annualized basis. The first phase of our network includes 22 Cisco Systems, Inc. IP+ATM switches and two fully redundant network operations centers. We are interconnecting these facilities with leased fiber optic transmission capacity from Level 3 Communications, LLC and NorthEast Optic Network, Inc., or NEON to form three self-healing SONET rings. Cisco has designated our network as a Cisco Powered Network(TM), indicating that Cisco has reviewed and approved our network design. We intend to access our customer locations through a variety of broadband technologies, including digital subscriber line, or DSL, service, leased T-1s, wireless technologies and fiber optic facilities, as available. We will offer dedicated long distance and data services over our network. We believe that these services represent approximately 70% of our target customers' fixed line telecommunications spending. The remaining 30% represents local dial tone services which we currently obtain from other carriers. We plan to incorporate local dial tone service into our packet-switching architecture when that technology matures. We focus on designing and selling data services. As of March 31, 1999, data services represented approximately 20% of our total ALEs in service. We have substantial expertise selling complex data circuits including frame relay, point-to-point dedicated DS-3 and DS-1 data links, ISDN, ATM and dedicated internet services. Over the last four years we sold digital data services to more than 6,600 customer sites and designed and implemented more than 600 wide area networks, or WANs. Our Market Opportunity The market potential for ICPs is large and growing. According to FCC data, in 1997, the total market for U.S. retail telecommunications services was approximately $187 billion. Data services, including internet, frame relay and ATM services, represent one of the fastest growing segments of the telecommunications market. Industry reports estimate that from 1997 to 2002, internet services revenues will increase from $7.5 billion to $29.7 billion and frame relay and ATM services revenues will increase from $2.9 billion to $7.6 billion. We are deploying our data-centric network to capitalize on this market opportunity. 1 Our target market, the Northeastern and Mid-Atlantic region, represents an attractive opportunity for us because it has a high concentration of telecommunications traffic. According to FCC data, New York and New England have an estimated 7.3 million local business access lines, which generated retail telecommunications revenues of approximately $24.4 billion. As we expand our business in the remaining portions of the New York-Washington, D.C. corridor, our addressable market will increase by an estimated 8.4 million business access lines, which generated approximately $26.3 billion in retail telecommunications revenues. We are currently targeting the medium-sized business segment of our markets. We estimate this segment represents over 50% of the total business access lines in our target markets. Our Competitive Strengths Our goal is to be the leading ICP for medium-sized business customers in our target markets. We believe that the following competitive strengths position us well to achieve this goal: . Over 15 years of telecommunications marketing, sales and service experience. . Over 250 experienced sales people and network consultants providing personalized sales and customer care. . A capital-efficient and scalable, all packet-switched network, capable of providing advanced IP and ATM services. . Significant experience designing and selling sophisticated data services. . A broad range of voice and data services incorporated on a single bill. . A comprehensive, fully integrated billing and operational support systems, or OSS. . The ability to expand using our proven operating model for branch offices, sales process, customer service and personnel training. Holding Company Reorganization Shortly after the closing of this offering, we expect to complete a reorganization into a holding company structure. In this reorganization, we will become a wholly owned subsidiary of CTC Communications Group, Inc. CTC Communications Group, Inc. is a Delaware corporation formed by us for this purpose and has no other business. All of our issued and outstanding common and preferred stock, including the common stock offered in this prospectus, will be converted into the same number of shares of common and preferred stock of CTC Communications Group, Inc. -------- Our principal executive offices are located at 360 Second Avenue, Waltham, Massachusetts 02451, our telephone number is (800) 883-6000 and our internet website address on the world wide web is www.ctcnet.com. The contents of our website are not part of this prospectus. In this prospectus we refer to CTC Communications Corp. and its subsidiary collectively as "CTC," "we" and "us." 2 The Offering Common stock offered................ 2,500,000 shares Common stock to be outstanding after this offering................. 12,852,498 shares Over-allotment option............... 375,000 shares Use of proceeds..................... For general corporate purposes, including capital expenditures, working capital and operating losses associated with the continued deployment of our network, further penetration of our existing region and expansion into new markets throughout the New York--Washington, D.C. corridor. Nasdaq National Market symbol....... CPTL The shares of common stock to be outstanding after the offering are stated as of April 30, 1999. The shares of common stock to be outstanding exclude: . 3,615,809 shares of common stock issuable upon exercise of stock options at exercise prices between $1.10 and $20 per share; . 1,288,071 shares of common stock issuable upon exercise of warrants at exercise prices between $6.75 and $11.81 per share; and . 1,463,240 shares of common stock issuable upon conversion of Series A redeemable convertible preferred stock, or Series A preferred stock. See "Capitalization," "Management," and "Description of Capital Stock." 3 Summary Financial and Operating Data You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. Gross profit is not meaningful, n/m, for the fiscal year end March 31, 1998 and prior periods because our revenues for these periods consisted primarily of agency commissions, while costs associated with agency revenues were included primarily in selling, general and administrative expenses. EBITDA consists of income (loss) before interest, income taxes, depreciation and amortization and other income and expense. We have provided EBITDA because it is a measure of financial performance commonly used in the telecommunications industry. Other companies may calculate it differently from us. EBITDA is not a measurement of financial performance under generally accepted accounting principles. EBITDA should not be considered an alternative to net income (loss) as a measure of performance or to cash flow as a measure of liquidity.
Nine Months Fiscal Year ended March 31, ended December 31, ----------------------------- ------------------ 1996 1997 1998 1997 1998 --------- --------- --------- ------------------ (dollars in thousands) Statement of Operations Data Agency revenues............ $ 25,492 $ 29,195 $ 24,775 $ 24,582 $ -- Telecommunications revenues.................. 5,383 11,095 16,172 10,078 46,376 --------- --------- --------- -------- --------- Total revenues........... 30,875 40,290 40,947 34,660 46,376 Cost of telecommunications revenues.................. 4,242 8,709 14,038 8,095 40,426 --------- --------- --------- -------- --------- Gross profit............... n/m n/m n/m n/m 5,950 Selling, general and administrative expenses... 20,009 23,820 31,492 21,370 36,800 --------- --------- --------- -------- --------- Income (loss) from operations................ 6,624 7,761 (4,583) 5,195 (30,850) Net income (loss).......... 4,094 4,683 (2,884) 3,124 (30,912) Other Financial Data EBITDA (loss).............. $ 7,285 $ 8,504 $ (3,165) $ 5,945 $ (27,150) Capital expenditures, in- cluding equipment under capital leases............ 759 1,222 4,765 4,556 22,262 Depreciation and amortization.............. 660 743 1,418 750 3,699
The as adjusted balance sheet data below reflects the receipt of net proceeds of this offering of $45,468,750, based upon an assumed public offering price of $19.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses.
As of December 31, 1998 -------------------------- Historical As Adjusted ----------- ------------ (dollars in thousands) Balance Sheet Data Cash and cash equivalents.......................... $ 2,597 $ 48,066 Total assets....................................... 67,529 112,998 Total long-term debt, including current portion.... 41,942 41,942 Series A redeemable convertible preferred stock.... 12,562 12,562 Stockholders' equity (deficit)..................... (18,405) 27,064
4 Summary Quarterly Financial and Operating Data Access line equivalents, or ALEs, represent the sum of the number of voice circuits in service plus the data bandwidth purchased by our customers divided by 64kbps, the capacity necessary to carry one voice channel.
Fiscal Quarter ended ---------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 --------- -------- ------------- ------------ (dollars in thousands) Statement of Operations Data Telecommunications revenues.... $ 6,288 $12,836 $14,516 $19,025 Cost of telecommunications revenues...................... 5,944 11,614 12,383 16,429 Gross profit................... 344 1,222 2,133 2,596 Selling, general and administrative expenses....... 10,122 9,495 13,002 14,304 Loss from operations........... (9,778) (8,273) (10,869) (11,708) Net loss....................... (6,008) (7,931) (10,984) (11,997) Other Financial Data EBITDA (loss).................. $(9,110) $(7,718) $(9,735) $(9,697) Capital expenditures including equipment under capital leases........................ 1,552 1,015 4,851 16,396 Depreciation and amortization.. 668 555 1,134 1,749 Operating Data Net ALEs provisioned in the quarter....................... 17,637 22,548 24,209 38,878 Cumulative ALEs in service at the end of the quarter........ 17,637 40,185 64,394 103,272
5 RISK FACTORS Investing in our common stock involves risk. You should carefully consider the risks and uncertainties described below before deciding to purchase common stock. These risks and uncertainties are not the only ones we face or which may adversely affect our business. If any of the following risks or uncertainties actually occur, our business, financial condition or results of operations could be materially adversely affected. In this event, the trading price of our common stock could decline, and you could lose all or part of your investment. Our prospects are difficult to evaluate because most of our historical revenues resulted from a business strategy we are no longer pursuing. Although we have sold integrated telecommunications services for over 15 years, we only began offering local services as an ICP under our own brand name in January 1998. We sold local telephone services as an agent for Bell Atlantic until December 1997. Because we have terminated our agency relationship with Bell Atlantic, we no longer receive agency revenues. Therefore, we can only provide you limited historical operating and financial information about our current business strategy for you to evaluate. We expect to incur negative cash flows and operating losses for a significant period of time. For the nine months ended December 31, 1998 we incurred operating losses of approximately $30.8 million, net losses of approximately $30.9 million and negative cash flow from operating and investing activities of approximately $39.0 million. 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 several years. We cannot assure you that we will achieve and sustain profitability or positive net cash flow. We cannot assure you that we will successfully execute our facilities-based, ICP business plan. If we fail to execute our strategy in a timely or effective manner we may be unable to successfully compete in our markets. Our business strategy is complex and requires that we successfully complete many tasks, a number of which must be completed simultaneously, including: . deploy, operate and maintain our network; . attract and retain customers; . attract and retain skilled employees; . expand our sales presence in existing and new markets; . develop and provide enhanced data services; and . ultimately, incorporate local dial tone into our network. If we are unable to effectively coordinate the implementation of these multiple tasks effectively, our business is likely to suffer. Implementing a facilities-based strategy is subject to technological and other uncertainties. The packet-switched design of our network is novel and has not been widely deployed. The network may not 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, and without this capability we will not be able to provide on our network all of our target customers' fixed line telecommunications services. Our ability to provide enhanced connectivity to our network and to provide local dial tone services will require the negotiation of interconnection agreements with incumbent local exchange carriers, or ILECs. This 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 necessary interconnection agreements. Also, we cannot be sure that our customers will choose to purchase telecommunications services over our network. 6 We have limited experience deploying, operating and maintaining our own network. Currently we are not providing any services over our network to any customers. We are still deploying the initial phase of our network and we have limited experience operating and maintaining telecommunications networks. We cannot assure you that we will effectively deploy, operate or maintain our network. We may not be able to deploy our network within the time frame we expect, and once the network is deployed we may encounter unanticipated difficulties in operating and maintaining it. Our high leverage creates financial and operating risk that could limit the growth of our business. We have a significant amount of indebtedness. As of March 31, 1999, we had approximately $ million of total indebtedness outstanding. We expect to seek substantial additional 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 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 the payment of principal and interest on our indebtedness and not for other purposes. We will need to refinance our existing indebtedness and may not generate sufficient cash flow from operations to pay future indebtedness. We expect we will not generate sufficient cash flow from operations to repay our existing credit and vendor facilities, and it is likely that we will need to refinance this indebtedness when it comes due. Also, we cannot assure you that our business will generate sufficient cash flow from operations or that alternative sources of cash flow will be available to us in amounts sufficient to pay other future indebtedness or to fund our other needs. We will need to generate cash in the future to make scheduled payments on and refinance our indebtedness and to fund planned capital expenditures, operating losses and our other needs. Our ability to generate cash will greatly depend on: . our completing the buildout of our network timely and cost-effectively; . the acceptance by the market of, and the demand for, our services; and . our future operating performance. Each of these elements may be affected by various factors that we cannot control, including industry, general economic, financial, competitive, legislative, regulatory and other factors. If we cannot generate sufficient cash flow from operations, we may need to refinance all or some of our indebtedness, sell assets, delay capital expenditures or sell additional capital stock. If we sell additional capital stock, your interest in us will be diluted. We cannot assure you that we will be able to refinance any of our indebtedness on reasonable terms, or at all. We also cannot assure you that we will be able to effect any other needed action on satisfactory terms, or at all. We may be unable to obtain the additional capital we will require to fund our operations and finance our growth on terms acceptable to us or at all. We will need significant additional capital to fund our business plan. We expect to seek additional financing to further fund our business plan as soon as practicable. The timing of these efforts will depend on market conditions. We cannot assure you that additional funding will be available to us when we need it or at all. If we are unable to obtain financing when we need it, we may delay or abandon our development and expansion plans. That could have a material adverse effect on our business, results of operations and financial 7 condition. The actual timing and amount of our capital requirements may be materially affected by various factors, including the timing and actual cost of the network, the timing and cost of our expansion into new markets, the extent of competition and pricing of telecommunications services by others in our markets, the demand by customers for our services, technological change and potential acquisitions. Our market is highly competitive, and we may not be able to compete effectively; many of our competitors have greater 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 and telephony service providers. We will face competition for the provision of integrated telecommunications services as well for the individual service components that comprise our integrated services. The number of competitors able to provide integrated telecommunication services has increased as a result of regulatory changes and industry consolidation. We expect that the incumbent local exchange carriers ultimately will also be able to provide integrated services. Many of our competitors are larger and better capitalized than we are. Also, many of our competitors are incumbent providers with long standing relationships with their customers and greater name recognition. See "Business--Competition." The failure of our information systems to produce accurate and prompt billing and to process customer orders could materially adversely affect our business. The accurate and prompt billing of our customers is essential to our operations and future profitability. The deployment of our network will place additional demands on our information systems. We cannot assure you that our information systems will perform how we expect. Also, if our business grows as we plan, we cannot assure you that our billing and management systems will be sufficient to provide us with accurate and efficient billing and other necessary processing capabilities. We may not identify all of our information and processing needs (including issues related to the Year 2000) and may not upgrade our information systems as needed. Either of these could materially adversely affect our business, results of operations and financial condition. If we do not receive timely and accurate call data records from our suppliers, our billing and collection activities could be adversely affected. Our billing and collection activities are dependent upon our suppliers providing us accurate call data records. If we do not receive accurate call data records in a timely manner, our business, results of operations and financial condition could be materially adversely affected. 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. We cannot assure you that disputes with suppliers will not arise or that such disputes will be resolved in our favor. Our ability to serve our customers depends upon the reliability of the networks, services and equipment of third party providers. We do not currently provide any services over our network. We depend almost entirely on facilities-based carriers for the switching and transmission of 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 will also rely on others for fiber optic backbone transmission facilities, including Level 3 and NEON, for our network. 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. These services are subject to physical damage, power loss, capacity 8 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 reputation. Either of these could have a material adverse effect on our business, results of operations and financial condition. We have engaged a network services integrator to design, engineer and manage the buildout of our network in our existing markets. If the network integrator is not able to perform these functions, we may experience delays or additional costs in providing services and building the network. The failure of our network equipment to operate as anticipated or the inability of equipment suppliers, including Cisco, to timely supply such equipment could materially and adversely affect our business, results of operations and financial condition. Our operating results could be adversely affected by increases in customer attrition rates. We cannot assure you that our customers will continue to purchase local, long distance, data or other services from us. Because we have been operating as an ICP 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. Increases in customer attrition rates could have a material adverse effect on our business, results of operations and financial condition. If we fail to manage our growth, our business could be impaired. 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. We will also need to continually enhance our information systems. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition. Our success will depend on a limited number of key personnel who could be difficult to replace as well as on our ability to hire other skilled personnel. 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. We cannot be sure that we will be able to attract and retain the additional employees we need to implement our business strategy. Our inability to hire and retain such personnel could have a material adverse effect on our business, results of operations and financial condition. 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. See "Business-Government Regulation." With the passage of the Telecommunications Act in 1996, the regulation of our services has been subject to numerous administrative proceedings at the federal and state level, litigation in federal and state courts, and legislation in federal and state legislatures. We cannot predict the outcome of the various proceedings, litigation, and legislation or whether and to what extent they may adversely affect our business or operations. We believe the current trend toward relaxed regulatory oversight and competition will benefit us. Our competitors, however, may benefit from this trend to a greater extent than we will. If that occurs, our business may be adversely affected. 9 Rapid technological changes in the telecommunications industry could render our services obsolete faster than we expect or could require us to spend more to develop our network than we currently anticipate. The telecommunications industry is subject to rapid and significant changes in technology. We cannot predict the effect that changes in technology will have on our business. Any changes could have a material adverse effect on our business, operating results and financial condition. Advances in technology could lead to more entities becoming facilities-based ICPs. We believe that our long-term success will increasingly depend on our ability to offer advanced services and to anticipate or adapt to evolving industry standards. We cannot be sure that: . we will be able to offer the services our customers require; . our services will not be economically or technically outmoded by current or future competitive technologies; . our network or our information systems will not become obsolete; . we will have sufficient resources to develop or acquire new technologies or introduce new services that we need to effectively compete; or . the cost of the network will decline as rapidly as the costs of our competitors' infrastructures. We may incur significant costs and our business could suffer if our systems and network, or the systems of our suppliers and vendors, do not properly process date information after December 31, 1999. Currently, many computer systems and software products are coded to accept only two digit, rather than four digit, entries in the date code field. Date- sensitive software or hardware coded in this manner may not be able to distinguish a year that begins with a "20" instead of a "19," and programs that perform arithmetic operations, make comparisons or sort date fields may not yield correct results with the input of a Year 2000 date. This Year 2000 problem could cause miscalculations or system failures that could affect our operations. We cannot assure you that we have successfully identified all Year 2000 problems with our information systems and network. We also cannot assure you that we will be able to implement any necessary corrective actions in a timely manner. Our failure to successfully identify and remediate Year 2000 problems in critical systems could have a material adverse effect on our business, results of operations and financial condition. Also, if the systems of other companies that provide us services or with whom our systems interconnect are not Year 2000 compliant, our business, operating results and financial condition could be materially adversely affected. The Year 2000 issue is discussed at greater length in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." We may pursue acquisitions which would create risks to our business. We may pursue strategic acquisitions as we expand. We currently have no definitive agreement with respect to any acquisition. Acquisitions may increase our risks because we may: . experience difficulties integrating acquired operations and personnel into our operations; . disrupt our ongoing business; . divert resources and management time; . be unable to maintain uniform standards, controls, procedures and policies; and . enter markets or businesses in which we have little or no experience. We cannot assure you that we will be able to obtain any additional financing needed to finance potential acquisitions. If we do make any acquisition, the acquired business might not perform as we expected. 10 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. After this offering, our officers and directors and parties related to them will control approximately 42% of our outstanding voting stock. Robert J. Fabbricatore, our Chairman and Chief Executive Officer, will control approximately 21% of our outstanding voting capital stock. Therefore, the officers and directors will be able to significantly influence any matter requiring shareholder approval. In addition, Mr. Fabbricatore and some of his affiliates have agreed to vote shares they control to elect to our board up to two persons designated by the holders of a majority of our Series A preferred stock. Our stock price is likely to be volatile. The trading price of our common stock is likely to be volatile. The stock market in general, and the market for technology and telecommunications companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. Other factors that could cause the market price of our common stock to fluctuate substantially include: . announcements of developments related to our business, or that of our competitors, our industry group or our customers; . fluctuations in our results of operations; . hiring or departure of key personnel; . a shortfall in our results compared to analysts' expectations and changes in analysts' recommendations or projections; . sales of substantial amounts of our equity securities into the marketplace; . regulatory developments affecting the telecommunications industry or data services; and . general conditions in the telecommunications industry or the economy as a whole. The market price of our common stock could be affected by the substantial number of shares that are eligible for future sale. After this offering is completed, 12,852,498 shares of common stock will be issued and outstanding, assuming no exercise of the underwriters' over- allotment option. We cannot be sure what effect, if any, future sales of shares or the availability of shares for future sale will have on the market price of the common stock. The market price of our common stock could drop due to sales of a large number of shares in the market after this offering or the perception that sales of large numbers of shares could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. Over 90% of the shares of common stock outstanding immediately after this offering will be freely tradeable under the Securities Act, subject to compliance with Rule 144 under the Securities Act. On the consummation of our reorganization all of CTC Communications Group, Inc.'s shares will be freely tradeable, also subject to these restrictions. In connection with this offering, our officers and directors and some of our stockholders will be required not to sell any shares of common stock for a period of 90 days after the date of this prospectus without the written consent of Credit Suisse First Boston Corporation. We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock Provisions of our articles of organization and bylaws and Massachusetts law, and, after our reorganization into a holding company structure, CTC Communications Group, Inc.'s certificate of incorporation and bylaws and the provisions of Delaware law, could make it more difficult for a third party to acquire control of CTC even if a change in control would be beneficial to our stockholders. These provisions may negatively affect the price of our common stock and may discourage third parties from bidding for CTC. In addition, our board of directors may issue, without stockholder approval, shares of preferred stock with terms set by the board. In 11 addition to delaying or preventing an acquisition, the issuance of a substantial number of preferred shares could depress the price of the common stock. See "Description of Capital Stock--Preferred Stock." Forward looking statements are inherently uncertain Certain statements about us and our industry under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus are "forward-looking statements." These forward- looking statements include, but are not limited to, statements about our plans, objectives, expectations, intentions and assumptions and other statements in this prospectus that are not historical facts. When used in this prospectus, the words "estimate," "project," "believe," "anticipate," "intend," "plan," "expect" and similar expressions are generally intended to identify forward- looking statements. Because these forward-looking statements involve risks and uncertainties, including those described in this "Risk Factors" section, actual results could differ materially from those expressed or implied by these forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect new information, future events or otherwise. 12 USE OF PROCEEDS We will receive net proceeds of approximately $45.5 million from the sale of 2,500,000 shares of common stock at an assumed public offering price of $19.50 per share, after deducting the underwriting discounts and commissions and estimated offering expenses we will owe. This amount would be approximately $52.4 million if the underwriters fully exercise their over-allotment option. We intend to use these proceeds for general corporate purposes including capital expenditures, working capital and operating losses associated with the continued deployment of our network, further penetration of our existing region and expansion into new markets throughout the New York--Washington, D.C. corridor. Until we apply the net proceeds as described above, we intend to either invest the net proceeds of this offering in short-term, interest-bearing instruments and other investment-grade securities or repay the revolving portion of our credit facility. Advances under our credit facility bear interest at 1.75% over the prime rate. The credit facility matures on September 1, 2001. We used advances under this credit facility for general corporate purposes. See "Description of Senior Credit Facilities." PRICE RANGE OF COMMON STOCK Our common stock is listed on the Nasdaq National Market under the symbol "CPTL." Following is the range of high and low trading prices on the Nasdaq National Market for the common stock for the periods indicated.
Price Range ------------- High Low ------ ------ Calendar Year 1997 Second Quarter.............................................. $10.00 $ 6.88 Third Quarter............................................... $ 9.75 $ 7.06 Fourth Quarter.............................................. $15.94 $ 8.00 Calendar Year 1998 First Quarter............................................... $14.94 $ 5.13 Second Quarter.............................................. $ 9.88 $ 6.50 Third Quarter............................................... $ 8.50 $ 4.75 Fourth Quarter.............................................. $ 9.00 $ 4.00 Calendar Year 1999 First Quarter............................................... $17.50 $ 8.38 Second Quarter (through May 3, 1999)........................ $24.00 $12.19
The last sale price of the common stock on the Nasdaq National Market on May 3, 1999 was $19.50. DIVIDEND POLICY We have never paid cash dividends on our common stock and we have no plans to do so in the foreseeable future. We intend to retain earnings, if any, to develop and expand our business. In addition, the terms of the credit and vendor facilities and the Series A preferred stock restrict our ability to pay cash dividends on our common stock. We also expect the terms of agreements governing any future indebtedness to restrict our ability to pay cash dividends. 13 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998 on an actual basis and as adjusted to reflect the sale of 2,500,000, shares of common stock offered hereby at a public offering price of $19.50 per share, and after deducting underwriting discounts and commissions and estimated offering expenses. This information should be read in conjunction with our financial statements and notes appearing elsewhere in this prospectus. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of December 31, 1998 ------------------------- As Actual Adjusted ----------- ------------ (dollars in thousands) Cash and cash equivalents............................. $ 2,597 $ 48,066 =========== =========== Long-term debt, including current portion: Notes payable....................................... $ 35,958 $ 35,958 Obligations under capital leases.................... 5,984 5,984 ----------- ----------- Total long-term debt.............................. 41,942 41,942 Series A redeemable convertible preferred stock....... $12,562 $ 12,562 Stockholders' Equity: Common stock (1).................................... 103 128 Additional paid-in capital.......................... 6,960 52,404 Deferred compensation............................... (239) (239) Retained earnings (deficit)......................... (25,063) (25,063) ----------- ----------- Subtotal.......................................... (18,239) 27,230 Amounts due from stockholders....................... (166) (166) ----------- ----------- Total stockholders' equity (deficit).............. (18,405) 27,064 ----------- ----------- Total capitalization............................ $ 36,099 $ 81,568 =========== ===========
- -------- (1) Consists of common stock, $.01 par value per share: 25,000,000 shares authorized, 10,291,111 outstanding at December 31, 1998 and 12,791,111 outstanding, as adjusted. Does not include 3,131,894 shares of common stock issuable upon exercise of outstanding stock options; 1,422,013 shares of common stock issuable upon conversion of the Series A preferred stock or 1,163,300 shares of common stock issuable upon the exercise of the outstanding warrants at exercise prices between $6.75 and $9.00 per share. 14 SELECTED FINANCIAL DATA The following selected financial data for the five years ended March 31, 1998 are derived from our financial statements which have been audited by Ernst & Young LLP, independent auditors. The financial data for the nine month periods ended December 31, 1998 and 1997 are derived from our unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial position and the results of operations for these periods. Operating results for the nine months ended December 31, 1998 are not necessarily indicative of the results that you may expect for the entire year ending March 31, 1999. You should read the following financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes. All earnings per share and weighted average share information included in the accompanying financial statements have been restated to reflect the 25% stock split effected in fiscal year ended March 31, 1995, and the three-for-two stock split and the two-for-one stock split effected in fiscal year ended March 31, 1996. Gross profit is not meaningful, n/m, for the fiscal year end March 31, 1998 and prior periods because our revenues for these periods consisted primarily of agency commissions, while costs associated with agency revenues were included primarily in selling, general and administrative expenses. EBITDA consists of income (loss) before interest, income taxes, depreciation and amortization and other income and expense. We have provided EBITDA because it is a measure of financial performance commonly used in the telecommunications industry. Other companies may calculate it differently from us. EBITDA is not a measurement of financial performance under generally accepted accounting principles. EBITDA should not be considered an alternative to net income (loss) as a measure of performance or to cash flow as a measure of liquidity.
Nine Months, Fiscal Year ended March 31, ended December 31, ------------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1997 1998 ---------- ---------- ---------- ---------- ---------- --------- --------- (dollars in thousands, except per share information) Statement of Operations Data Agency revenues......... $ 14,483 $ 18,898 $ 25,492 $ 29,195 $ 24,775 $ 24,582 $ -- Telecommunications revenues............... 462 3,038 5,383 11,095 16,172 10,078 46,376 ---------- ---------- ---------- ---------- ---------- -------- --------- Total revenues....... 14,945 21,936 30,875 40,290 40,947 34,660 46,376 Cost of telecommunications revenue................ 369 2,451 4,242 8,709 14,038 8,095 40,426 ---------- ---------- ---------- ---------- ---------- -------- --------- Gross profit............ n/m n/m n/m n/m n/m n/m 5,950 Selling, general and administrative expenses............... 14,484 17,319 20,009 23,820 31,492 21,370 36,800 ---------- ---------- ---------- ---------- ---------- -------- --------- Income (loss) from operations............. 92 2,166 6,624 7,761 (4,583) 5,195 (30,850) Net income (loss)....... 75 1,472 4,094 4,683 (2,884) 3,124 (30,912) Earnings (loss) per share Basic.................. 0.01 0.18 0.43 0.49 (.29) .32 (3.15) Diluted................ 0.01 0.17 0.38 0.43 (.29) .29 (3.15) Other Financial Data EBITDA (loss)........... $ 853 $ 2,822 $ 7,285 $ 8,504 $ (3,165) $ 5,945 $ (27,150) Capital expenditures, including equipment un- der capital leases..... 234 599 759 1,222 4,765 4,556 22,262 Depreciation and amortization........... 761 656 660 743 1,418 750 3,699 Net cash provided (used) by operating activities............. (378) 1,580 2,192 3,572 (7,951) (2,700) (21,555)
As of As of March 31, December 31, ------------------------------------- ------------ 1994 1995 1996 1997 1998 1998 ------ ------ ------- ------- ------- ------------ (dollars in thousands) Balance Sheet Data Cash and cash equivalents.. $1,239 $2,391 $ 3,942 $ 6,406 $ 2,168 $ 2,597 Total assets............... 5,399 7,726 12,509 20,186 30,967 67,529 Total long-term debt, including current portion .......................... -- -- -- -- 9,673 41,942 Series A redeemable convertible preferred stock..................... -- -- -- -- -- 12,562 Stockholders' equity (deficit)................. 3,871 5,526 9,495 14,292 11,580 (18,405)
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the financial statements and notes included elsewhere in this prospectus. Overview Historically, we have generated agency revenues and telecommunications revenues. Agency revenues consist of commissions we earned as an agent of Bell Atlantic and other Regional Bell Operating Companies, or RBOCs, and long distance providers. Telecommunications revenues are generated by our sale of local, long distance, frame relay, internet access and other communications services. For the fiscal year ended March 31, 1998, agency commissions accounted for approximately 60% of our revenues, with telecommunications revenues accounting for the other 40%. As a result of our transition to an ICP strategy in December 1997, agency commissions earned after that date are not material. Our financial information for periods ending on or before December 31, 1997 primarily reflects our operations as an agent for Bell Atlantic. Because of our transition to an ICP strategy and our network buildout, most of the financial information for these periods does not reflect our current business and is not comparable to results for subsequent periods. A common basis for measurement of an ICP's progress is the growth in access line equivalents, or ALEs. ALEs represent the sum of the number of voice circuits in service plus the data bandwidth purchased by our customers divided by 64kbps, the capacity necessary to carry one voice channel. Results of Operations Results of Operations--Nine Months Ended December 31, 1998 Compared to the Nine Months Ended December 31, 1997. Total revenues for the nine months ended December 31, 1998 were $46,376,000, an increase of 34% from $34,660,000 for the same period of the preceding year. The results for the nine months ended December 31, 1998 reflect our operations as an ICP. The results for the nine months ended December 31, 1997 primarily reflect our operations as an agent for Bell Atlantic. Because substantially all revenues since January 1, 1998 have resulted from operations as an ICP, comparisons between the two periods are not relevant. During the quarter ended December 31, 1998, we provisioned 38,878 net ALEs. That brought our total ALEs in service to 103,272 for our first year as an ICP. Net ALEs provisioned during the quarter ended December 31, 1998 represented a 61% increase over net ALEs provisioned during the quarter ended September 30, 1998. We experienced the strongest growth in data ALEs. Data ALEs increased by approximately 67% from the quarter ended September 1998 to 19,638, or 19% of total ALEs as of December 31, 1998. For the nine months ended December 31, 1998, costs of telecommunications revenues were $40,426,000, compared to $8,095,000 for the same period of the preceding fiscal year. As a percentage of telecommunications revenues, cost of telecommunications revenues was 86% for the quarter ended December 1998, compared to 85% for the quarter ended September 1998. The decrease in gross margin is due primarily to our agency revenue declining as a percentage of total revenue. Excluding the effects of the non-resale revenue, the gross margin due to resale revenue remained unchanged from the quarter ended September 1998. For the nine months ended December 31, 1998, selling, general and administrative expenses were $36,800,000, as compared to $21,370,000 for the same period of the preceding fiscal year, or an increase of 72%. This increase was due to the opening of additional branch sales offices during the nine months ended 16 December 31, 1998 and the associated increased number of sales and service employees hired in connection with the transition to our ICP strategy. As of December 31, 1998, we employed 389 people including 172 account executives and 95 network consultants in 25 sales branches throughout New England and New York. Selling, general and administrative expenses also increased for the nine month period ended December 31, 1998 due to operating expenses associated with the network buildout, as well as an additional $2,600,000 of depreciation expense year-to-date associated with investments in the network. The final significant component of this increase is legal and regulatory expenses. Legal expenses in prosecuting an action against Bell Atlantic in federal court and various state regulatory proceedings, together with the expenses incurred in obtaining certification as a reseller in additional states, were $3,444,000 for the nine months ended December 31, 1998. See "Business-Legal Proceedings." Interest and other expense increased to $2,389,000 for the nine months ended December 31, 1998, as compared to interest and other income of $118,000 for the nine months ended December 31, 1997. The increase is due to increased borrowings to fund our operating losses and to fund the deployment of our network, the fees associated with our credit facility and vendor facility, and the amortization of the interest expense associated with warrants issued to the lenders under the credit facility. The benefit for income taxes, which is limited to refunds available on a loss carryback basis, has been recognized ratably as a percentage of our estimated pre-tax loss over each of the four quarters of the fiscal year. The effective rate of the benefit may vary with changes in management's estimates. Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997 The results for the fiscal year ended March 31, 1998 reflect our decision to leave the Bell Atlantic agency program in December 1997 and our commencement of operations as an ICP. This decision adversely affected revenues and expenses to a certain extent in the third quarter as we prepared for this transition and significantly affected revenues in the fourth quarter after the transition had been effected. Total revenues of $40,947,000 for fiscal 1998 were essentially flat as compared to $40,290,000 for the fiscal year ended March 31, 1997. Agency revenues decreased 15% to $24,775,000 for fiscal 1998 from $29,195,000 in fiscal 1997, primarily as a result of fourth quarter revenues of only $194,000, as compared to $8,354,000 for the same period of fiscal 1997. This decrease reflects the fact that we left the Bell Atlantic agency program in December 1997, and thus no Bell Atlantic agency revenues were reported in the fourth quarter of fiscal 1998. Telecommunications revenues increased 46% to $16,172,000 for fiscal 1998 from $11,095,000 for fiscal 1997. This increase reflects the increased sales of long distance, internet access, and frame relay data services as well as the commencement of our sale of local telecommunications services as an ICP in the fourth quarter of fiscal 1998. Although local telecommunications sales increased during the fourth quarter, they were significantly less than we expected as a result of the imposition of the temporary restraining order in connection with the Bell Atlantic litigation in February 1998, which required us to sell these local services only to new customers, resulting in a longer sales cycle. This temporary restraining order was dissolved in August 1998. Costs of telecommunications revenues increased 61% to $14,039,000 for fiscal 1998 from $8,709,000 for fiscal 1997. As a percentage of telecommunications revenues, cost of telecommunications revenues was 87% for fiscal 1998 as compared to 78% for fiscal 1997. This overall increase was due primarily to increased sales of telecommunications services and increased costs for those services sold. Due largely to the initiation of local telecommunications sales in the fourth fiscal quarter, cost of telecommunications revenues for this period increased 127% to $5,944,000 from $2,615,000 for the same period in fiscal 1997. These increases as a percentage of revenues were attributable to fixed costs associated with the sale of local telecommunications services, lower long distance rates extended to customers in advance of rate decreases from our long distance supplier, increased costs associated with adding new customers and services, and costs associated with phasing out our debit card program. Selling, general and administrative expenses increased 32% to $31,492,000 in fiscal 1998 from $23,820,000 in fiscal 1997. This increase was a result of the increased number of sales and service employees hired in connection with the transition to our ICP strategy, increased payments of commission and bonuses, 17 increased corporate and administrative expenses, increased depreciation associated with greater capital expenditures, expenses related to new branch openings and a $1,200,000 charge for estimated costs to be incurred in connection with our litigation with Bell Atlantic. Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996 Total revenues for fiscal 1997 increased 30% to $40,290,000 as compared to $30,876,000 for the fiscal year ended March 31, 1996. Agency revenues increased 15% to $29,195,000 in fiscal 1997 compared to $25,493,000 for fiscal 1996 due to the addition of new customers, increased sales to existing customers and the addition of new services to our portfolio. Effective January 1996, NYNEX (now Bell Atlantic) reduced some fees and commissions payable under its 1996 agency agreement with us. As a result, although unit sales of Centrex and Data Products, two NYNEX products, increased 30% and 66%, respectively, revenues as stated above, increased only 15%. Telecommunications revenues increased 106% to $11,095,000 for fiscal 1997 from $5,383,000 for fiscal 1996. This increase can be attributed to the addition of new customers to the service, as well as the introduction of new products, primarily internet access. Selling, general and administrative expenses increased 19% to $23,820,000 for fiscal 1997 from $20,009,000 for fiscal 1996. As a percentage of revenues, these expenses were 59% for fiscal 1997, compared to 65% for fiscal 1996. The increase in selling, general and administrative expenses is attributable to the increase in variable sales commission and bonus expenses incurred in connection with the substantial increase in revenues. In addition, we increased the number of sales offices, particularly in the Northeast, hired additional sales executives, expanded the facilities at several of our existing sales branches and made additional investments in our information systems in fiscal 1997. Net income increased to $4,683,000 in fiscal 1997 from $4,094,000 in fiscal 1996, as a result of revenue growth primarily in the Northeast, combined with a continuing effort to control operating expenses. Quarterly Financial Information The following table sets forth certain statements of operations data for the four quarters since the transition to our ICP strategy. This information is from our unaudited financial statements. You should read this information in conjunction with the financial statements and related notes included elsewhere in this prospectus. The operating results for any quarter are not necessarily indicative of results for any future period.
Fiscal Quarter ended ---------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 --------- -------- ------------- ------------ (dollars in thousands) Statement of Operations Data Telecommunications revenues.... $ 6,288 $12,836 $14,516 $19,025 Cost of telecommunications rev- enues......................... 5,944 11,614 12,383 16,429 Gross profit................... 344 1,222 2,133 2,596 Selling, general and adminis- trative expenses.............. 10,122 9,495 13,002 14,304 Loss from operations........... (9,778) (8,273) (10,869) (11,708) Net loss....................... (6,008) (7,931) (10,984) (11,997) Other Financial Data EBITDA (loss).................. $(9,110) $(7,718) $(9,735) $(9,697) Capital expenditures including equipment under capital leases........................ 1,552 1,015 4,851 16,396 Depreciation and amortization.. 668 555 1,134 1,749 Operating Data Net ALEs provisioned in the quarter....................... 17,637 22,548 24,209 38,878 Cumulative ALEs in service at the end of the quarter........ 17,637 40,185 64,394 103,272
18 Liquidity and Capital Resources Until March 1998, we had funded our working capital and operating expenditures primarily from cash flow from operations. Since April 1998, we have funded our transition to an ICP strategy, expansion of our sales branches and sales force, operating losses and the deployment of our network by raising additional capital. In April 1998, we completed a $12 million private placement of Series A convertible preferred stock and warrants to Spectrum Equity Investors II, L.P. Also, on June 30, 1998, we received a commitment from Spectrum to purchase, at our option, an additional $5 million of preferred stock on the same terms and conditions as the Series A convertible preferred stock, which option extends until June 30, 1999. We do not expect to exercise this option. On September 1, 1998, we entered into a senior secured credit facility with Goldman Sachs Credit Partners and Fleet National Bank. Under the terms of this senior secured credit facility, the lenders have provided a three-year credit facility to us consisting of revolving loans in the aggregate amount of up to $75 million. Under our senior secured credit facility we may borrow $15 million unconditionally and an additional $60 million based on trailing 120 days accounts receivable collections, reducing to the trailing 90 days accounts receivable collections by March 31, 2000. As of December 31, 1998, we had availability of $36 million and of which we had borrowed approximately $33 million under this senior secured credit facility. On October 14, 1998, we entered into an agreement with Cisco Systems Capital Corporation, or Cisco Capital, for up to $25 million of vendor financing. Under the terms of the agreement, we have agreed to a three-year, $25 million volume purchase commitment of Cisco equipment and services and Cisco Capital has agreed to advance funds as these purchases occur. Up to $10 million of the vendor facility can be utilized for costs associated with the integration of Cisco equipment and related peripherals. Under the terms of the vendor facility, we are required to pay interest on funds advanced under the facility at an annual rate of 12.5%. As of December 31, 1998, we had borrowed $2.7 million under the vendor facility. Since September 30, 1998, we have entered into various lease and vendor financing agreements which provide for the acquisition of up to $16.2 million of equipment and software. As of December 31, 1998, the aggregate amount borrowed under these agreements was approximately $4.6 million. In order to provide liquidity, we entered into a loan agreement dated as of March 15, 1999 with Toronto Dominion (Texas), Inc. to provide an unsecured standby credit facility for up to $30 million for capital expenditures and other general corporate purposes. This facility will terminate upon the closing of this offering. As we continue to deploy our network, further penetrate our existing region and expand into new markets throughout the Boston--Washington, D.C. corridor, we will need significant additional capital. We believe that the estimated net proceeds of this offering, together with cash on hand, the proceeds of our lease and vendor financing arrangements and the amounts we expect to be available under our credit and vendor facilities will be sufficient to fund our capital requirements for at least the next 12 months. During this period we will seek to raise additional capital through the issuance of debt and possibly equity securities, the timing of which will depend on market conditions, and which could occur in the near future. We may also seek to raise additional capital through vendor financing, equipment lease financing and bank loans. We cannot assure you that additional financing will be available on terms acceptable to us when we need it. The agreements governing our existing indebtedness limit our ability to obtain debt financing. If we are unable to obtain financing when we need it, we may delay or abandon our development and expansion plans. That could have a material adverse effect on our business, results of operations and financial condition. The actual timing and amount of our capital requirements may be materially affected by various factors, including the timing and actual cost of the network, the timing and cost of our expansion into new markets, the extent of competition and pricing of telecommunications services by others in our markets, the demand by customers for our services, technological change and potential acquisitions. 19 On February 24, 1999, we settled our lawsuit against Bell Atlantic Corp. Under the terms of the settlement agreement we received cash and will receive other consideration to satisfy claims of commissions we earned while we were an agent for Bell Atlantic. Both parties have agreed to keep the specific terms of the settlement confidential. Although we believe that the terms of the settlement will permit us to actively expand our customer base and increase our revenues and improve our margins from the sale of communications products and services, there is no assurance that we will do so. We do not expect to incur any additional material costs related to this matter subsequent to March 31, 1999. Working capital at December 31, 1998 was $5,156,000 compared to $11,342,000 at March 31, 1998, a decrease of 55%, due to an increase in accounts payable resulting from approximately $8,000,000 of fixed assets purchased during the quarter that were not yet funded under our vendor facility. These assets were funded during the fourth quarter of fiscal 1999, reducing accounts payable and increasing notes payable by $8,000,000. This was partially offset by a reclassification of $1,834,000 deferred income taxes from non-current assets to current assets. Cash balances at December 31, 1998 and March 31, 1998 totaled approximately $2,597,000 and $2,167,000, respectively. Year 2000 Compliance Our State of Readiness We have evaluated the effect of the Year 2000 problem on our information systems. We are implementing plans to permit our systems and applications to effectively process information in order to support ongoing operations in the Year 2000 and beyond. We believe our information technology, or IT, and non-IT systems will be Year 2000 compliant by the end of 1999. In connection with the deployment of our new network, we have designed a new database architecture for our computer systems which we expect will be Year 2000 compliant. We expect installation of the network and related software to be completed in the summer of 1999 and testing of the system, including its Year 2000 compliance, commenced in May 1999. While we expect that all significant IT-related systems will be Year 2000 compliant by mid-1999, we cannot assure you that all Year 2000 problems in the new system will be identified or that the necessary corrective actions will be completed in a timely manner. We have requested certification from our significant vendors and suppliers demonstrating their Year 2000 compliance. Approximately 60% of vendors and suppliers have delivered these certifications. We anticipate that we will receive additional certifications. We intend to continue to identify critical vendors and suppliers and communicate with them about their plans and progress in addressing Year 2000 problems. We cannot assure you that the systems of these vendors and suppliers will be timely converted. We also cannot assure you that any failure of their systems to be Year 2000 compliant will not adversely affect our operations. Our Costs of Year 2000 Remediation We have not incurred material costs related specifically to Year 2000 issues and do not expect to in the future. However, we cannot assure you that the costs associated with Year 2000 problems will not be greater than we anticipate. Our Year 2000 Risk Based on the efforts described above, we currently believe that our systems will be Year 2000 compliant in a timely manner. We have completed the process of identifying Year 2000 issues in our IT and non-IT systems and expect to complete any remediation efforts by the summer of 1999. Our Contingency Plans We plan by mid-year 1999 to develop contingency plans to be implemented in the event planned solutions prove ineffective in solving Year 2000 compliance. If it becomes necessary for us to implement a contingency plan, such plan may not avoid a material Year 2000 issue. 20 BUSINESS Overview We are a rapidly growing ICP with 15 years of telecommunications marketing, sales and service experience. We offer voice and data services to predominantly medium-sized business customers who seek greater bandwidth, integrated telecommunications solutions and improved levels of service. We have a large, experienced sales force consisting of 163 sales people supported by 95 network consultants. These personnel are located close to our customers in 25 sales branches primarily in New England and New York. We are currently moving to a facilities-based platform by deploying a state-of-the-art, all packet-switched network based on advanced internet protocol, or IP, and asynchronous transfer mode, or ATM, architecture. In May 1999, we will begin beta-testing of our network with some of our customers. By late summer, we expect to begin providing commercial service and billing customers on our network. We became an ICP in January 1998. Prior to that, we were the largest independent sales agent for NYNEX Corp. (now Bell Atlantic). At the end of 1997, before leaving the Bell Atlantic 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 March 31, 1999, after only 15 months as an ICP, we were serving over 9,000 customers and had over 142,000 ALEs in service. For the quarter ended March 31, 1999, we generated approximately $ million of revenues representing over $ million on an annualized basis. Our Market Opportunity The market potential for ICPs is large and growing. According to FCC data, in 1997, the total market for U.S. retail telecommunications services was approximately $187 billion. Data services, including internet, frame relay and ATM services, represent one of the fastest growing segments of the telecommunications market. Industry reports estimate that from 1997 to 2002, internet services revenues will increase from $7.5 billion to $29.7 billion and frame relay and ATM services revenue will increase from $2.9 billion to $7.6 billion. We believe that our network will enable us to capitalize on the rapid growth in demand for internet services, private networks and other broadband data services. In particular, we will provide ATM and frame relay services on our own network. These are two of the fastest growing data services. Market studies estimate that from 1997 to 2001, ATM and frame relay service revenues in the U.S. will increase at compound annual growth rates of 68% and 37%, respectively. Our target market, the Northeastern and Mid-Atlantic region, represents an attractive opportunity for us because it has a high concentration of telecommunications traffic. According to FCC data, New York and New England have an estimated 7.3 million local business access lines, which generated retail telecommunications revenues of approximately $24.4 billion. As we expand our business in the remaining portions of the New York-Washington, D.C. corridor, our addressable market will increase by an estimated 8.4 million business access lines, which generated approximately $26.3 billion in retail telecommunications revenues. We are currently targeting the medium-sized business segment of our markets. We estimate this segment represents over 50% of the total business access lines in our target markets. Our Competitive Strengths Our goal is to be the leading ICP for medium-sized business customers in our target markets. We believe that the following competitive strengths position us well to achieve this goal: . Over 15 years of telecommunications marketing, sales and service experience. We have sold local telecommunications services as agent since 1984 and have sold long distance and data services 21 under our own brand name since 1994. During this period, we successfully introduced ISDN, frame relay, ATM and other new services in response to technological change. Collectively, our nine-person senior management team has over 200 years of telecommunications experience. Six members of this team have worked together at CTC for more than 10 years. . Over 250 experienced sales people and network consultants providing personalized sales and customer care. Our sales and service teams consist of a sales executive and a network consultant assigned to each customer. This provides a single, responsive point of contact for all of our customer's service and billing inquiries. Our sales and service teams seek to develop a long-term relationship with customers. We believe that our focus on customer care and our integration of sales and service create higher levels of customer satisfaction. We expect this will lead to better referral and retention rates. . A capital-efficient and scalable, all packet-switched network, capable of providing advanced IP and ATM services. We believe that our state-of- the-art packet-switched network strategy is superior to a circuit- switched strategy for several reasons: . our network requires approximately 50-60% less capital and significantly less time to deploy than a circuit-switched network; . our network is based on open architecture standards and will allow us to adapt to future technological developments and network innovations; . we believe our network will enable us to provide a more advanced and differentiated service offering than other local exchange carriers can provide over their legacy voice switches; and . we believe our network will be significantly more cost efficient for ongoing operations and maintenance. . Significant experience designing and selling sophisticated data services. We have substantial expertise designing, selling and implementing sophisticated data services including frame relay, point- to-point dedicated DS-3 and DS-1 data links, ISDN, ATM and dedicated internet services. Over the last four years, we have sold digital data services to more than 6,600 customer sites, designed and implemented more than 600 wide area data networks and assisted customers in transitioning from point-to-point networks to more advanced frame relay and ATM networks. . A broad range of voice and data services incorporated on a single bill. As an ICP, we provide our customers with the convenience of a single source and a single bill for all of their telecommunications services. We believe that our ability to deliver a single source solution to our target market is a key element in building our customer base. We also believe this will allow us to increase our share of customers' telecommunications billings and will promote customer retention. . A comprehensive, fully integrated billing and operational support systems, or OSS. Over the past decade we have used our extensive experience with the provisioning systems used by ILECs to develop our comprehensive information systems. Our systems fully integrate and automate all aspects of our business, including marketing, provisioning, trouble management, billing and customer service. This integration facilitates accurate and timely customer care and billing. The system also allows us to provide our customers with a single, integrated bill for multiple services. Our customers can download information about their accounts directly to their own systems through online, near real- time access via the internet. Our information systems electronically interface with most of our major suppliers. In late 1998, we became one of the first competitive local exchange carriers to complete a full EDI interface with Bell Atlantic. This allows our systems to connect directly with those of Bell Atlantic. We believe that our information systems are a primary reason for our success in provisioning a high volume of access lines during our first five quarters as an ICP. . The ability to expand using our proven operating model for branch offices, sales process, customer service and personnel training. Over the last five years, we have developed a successful and replicable approach to branch expansion. We believe that our standardized approach to opening new 22 branches, our uniform approach to sales and service and our extensive training of new hires will enable us to expand without compromising our solutions-oriented, customer-centric culture. New branch offices are fully integrated with our information systems from the outset. This allows our corporate headquarters to maintain control of quality and productivity across our branch offices while enabling each branch office to operate as an autonomous local sales and service organization. Our Services We offer the following services: . Local Telephone Services. We offer connections between customers' telecommunications equipment and the local telephone network, which we currently lease from the ILECs. For large customers or customers with specific requirements, we integrate customer-owned private branch exchange, or PBX, systems with analog or digital trunks. We also provide all associated call processing features as well as dedicated private lines for both voice and data applications. . Long Distance Telephone Services. We offer a full range of domestic (interLATA and intraLATA) and international long distance services, including "1+" outbound calling, inbound toll free service, 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 dedicated and switched high speed digital data services. Dedicated services include digital data services, DS-1 (T-1), Fiber Distributed Data Interface and DS-3 products. Switched or virtual digital services include Integrated Services Digital Network, or ISDN, frame relay and ATM products. . Internet Services. We offer dedicated high speed internet access and services via digital data services, frame relay, T-1 and T-3 connections. In addition, we offer switched digital access to the internet via ISDN. We provide the necessary communications hardware, configuration support and other support services on a 24-hour, 7-day a week basis. . Wholesale Services to Internet Service Providers. We provide a full array of local services to internet service providers, or ISPs, including telephone numbers and switched and dedicated access to the internet. . Future Service Offerings. Following deployment of the network, we may offer the following additional services: systems integration, consulting and network monitoring services, customized virtual private networks and other data and voice network products. Our Integrated Communications Network We began deploying the first phase of our state-of-the-art, packet-switched network in January 1999. We believe our network will enable us to improve margins, enhance network and service quality and broaden our range of product offerings. The network is an advanced IP and ATM-based network, using Cisco BPX(R) and MGX(TM) IP+ATM wide-area switches. Our network will deliver enhanced access services such as traditional dedicated services, frame relay, IP, video and circuit emulation transport services. We believe that our network will ultimately enable us to deliver voice and data services across a single multi- service dedicated connection. We also expect our network to lower customers' overall telecommunications costs and stimulate demand for new bandwidth intensive services. The first phase of our network includes 22 Cisco IP+ATM switches and two fully redundant network operation centers. We are interconnecting these facilities with leased fiber optic transmission capacity from Level 3 and NEON. The initial transmission infrastructure will consist of three self-healing SONET-based, fiber 23 optic rings covering the southern, western and eastern New England regions. This advanced SONET technology permits full circuit redundancy and route diversity. It will also allow us to take advantage of available technology such as dense wave digital multiplexing, or DWDM, to meet increasing customer demands for reliable, high bandwidth voice, data and video connectivity. We have also arranged to co-locate our switching hubs in Level 3 and NEON buildings along selected fiber routes. We intend to access our customer locations through a variety of broadband technologies, including DSL service, leased T-1, wireless technologies and fiber optic facilities, as available. Initially, we will offer dedicated long distance and data services over our network. We believe that these services represent approximately 70% of our target customers' fixed line telecommunications spending. The remaining 30% represents local dial tone services which we currently obtain from other carriers. We plan to incorporate local dial tone service into our packet-switching architecture when that technology matures. Our network strategy to incorporate local dial tone functionality at a later stage will allow us to simplify the transitioning of existing customers on-net because a disconnection from the incumbent local exchange carrier and reconnection to our network will not be required. To transition our customers on-net, we will simply be required to reprogram our customer's PBX and/or wide area network routers to direct long distance and data traffic to our network. This strategy will also allow our customers to retain their existing phone numbers as well as have the built-in redundancy of the separate physical connection to the incumbent local exchange carrier. At a later stage, using telephone number portability which we expect to be available throughout our territory, we will be able to more easily transition our customers' local dial tone service onto our network. The network will include the following data services: point-to-point private line, frame relay, ATM, internet access, virtual private network services for on-net data traffic and network-to-network interface points to other data carrier networks and internet service providers. The network will initially include the following voice services: dedicated long distance and corporate intranet services. We expect that the network will handle the full range of voice services when we integrate local dial tone capabilities into our network. Sales and Customer Care We market telecommunications services by developing long-term business relationships with our customers and offering them comprehensive management of their telecommunications requirements. Each of our customers is assigned a local dedicated team consisting of a sales executive and a network consultant. This team provides a single point of contact for our customer's needs. This team works together with the customer to design, implement and maintain an integrated telecommunications solution. This team also reviews and updates the customer's services on a regular basis. We believe that providing localized, high quality customer care promotes continued sales of new services and reduces customer churn. Sales and Service Infrastructure. Our branches are currently staffed with over 300 individuals, representing approximately 80% of our employees. As of April 15, 1999, there were 163 sales executives, 95 network consultants, 26 branch/regional managers and 15 service managers located in 25 sales branches serving markets in Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. Customer Sales and Service Model. At their first meeting with a prospective customer, our sales executives analyze the customer's current telecommunications usage and costs. Sales executives then outline the range of services and potential savings we offer and make recommendations to optimize the customer's current network. Sales executives also discuss the benefits of our comprehensive customer care program and develop account telemanagement plans designed to balance network expense and utility. Sales executives and network consultants continue to review the customer's telecommunications usage and requirements and update the customer's suite of services and network design. We believe the relationship-intensive approach of assigning sales executives and network consultants to each customer account results in high customer satisfaction and retention rates. 24 Our sales executives regularly participate in training programs on subjects such as solution-oriented sales, comprehensive customer care, network design and other technical features of our services. We seek to motivate and retain our sales executives through extensive training and a commission structure that supports our relationship oriented sales and service policies. Customer Care. Our network consultants are trained in our service offerings and are responsible for customer care. Network consultants are located in each of our sales branches and are assigned directly to individual customer accounts in direct support of the sales executives. Our localized, multi-step customer care process provides an ongoing and comprehensive service program to our customers. This process ranges from long-term consultative planning to day-to- day handling of service issues. Our customer care program is designed to provide prompt action in response to customer inquiries and complaints. The local sales branches are staffed 11 hours a day, 5 days a week. At other times, incoming calls automatically roll over to a central customer care center which is staffed 24 hours a day, 7 days a week. We believe that our network consultants are motivated to provide the highest level of customer care because a significant portion of their compensation is based on customer retention and satisfaction. Our Information Systems Our information systems include five central applications which fully integrate our sales and account management, customer care, provisioning, billing and financial processes. Automation of each of these processes is designed for high transaction volumes, accurate throughput, timely installation, accurate billing feeds and quality customer service. Data entered in one application is generally exported into all other applications. Each branch office is served by a LAN connected via frame relay to the central processor. Our employees have online access to our information systems from their branch desktops or docking stations. We also have an electronic interface to most of our major suppliers. When a sales executive places an order for one of these suppliers, our information systems electronically direct it to the appropriate supplier and monitors any delays in provisioning the order. Once the order is provisioned, our information systems automatically remove it from the in-process order file, update the customer's service inventory and network configuration, initiate billing, post the sales executive's commission and update our financial reports. Our information systems include the following applications: . Account and Sales Management. Our account management application is the hub of our information systems. It stores all of our customer-related information, such as location detail, contact information, transaction history and account profile. Our account management application also automatically exports data to our customized sales application. Our sales application is a fully-integrated database that provides sales personnel with access to information for pricing services, customized sales proposals, customer correspondence, sales performance, referencing methods and procedures, service descriptions, competitive information and historical profiles of our current and prospective customers. These historical profiles include details of installed services, recent transactions and billing history. Our sales system can be used both on- and off-line. All entries made while off-line are automatically updated to the central processor and all relevant data is simultaneously exported to the other central applications each time a salesperson connects to the network. . Customer Care. Our network consultants use our account care application to review installed services, make additions, changes and deletions to accounts, initiate and track repair and service work and review past billing for any customer. This closed loop application provides automatic follow up and records all transactions in a customer history file. Service orders and repair requests input in our account care application are automatically exported into our provisioning application. . Provisioning. We generally direct customer orders through our provisioning application electronically to our major suppliers. We track these orders through our account care application from 25 initiation through completion. If any delay in provisioning occurs, the proactive nature of this application alerts the sales executive or network consultants who can take corrective action and notify the customer of the delay. Once the order has been filled the information is automatically fed to our billing application. . Billing and Customer Interface. Our billing application allows us to provide our customers a single bill for all the services we provide. Our billing application also allows the customer to review historic bill detail, perform customized usage analyses and download information directly to their own accounting applications. Using a secure Web-based application called ItelliVIEW, our customers have near real-time online access to our billing application. Customer billing statements are also available on CD ROM, diskette or paper. Paper statements generated by our billing application offer our customers different telemanagement formats. . Financial. Data from our billing application is automatically exported to our financial application. Our financial application tracks and prepares reports on sales activity, commissions, branch operations, branch profitability and cash flows. The financial application also compiles this data for our periodic financial reports. In addition, this application provides internal controls for revenue tracking and costing. The integrated nature of our information systems allows us to operate each branch as a separate profit and loss center. We are actively upgrading our information systems to a three-tiered client/server architecture in order to support our network. We have selected Oracle's relational database for the first tier, which is our data repository and warehouse. We will vertically integrate our second tier business applications described above with the data repository using a messaging product from TIBCO Corporation. Third tier users, such as customers, vendors, partners and internal users, will access the second tier business applications using either UNIX, Windows 95 or standard browsers. We expect that this three-tiered architecture will allow us to grow and expand our business, replace and upgrade business applications without impacting other applications and provide us with reliable data. Competition 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 and telephony service providers. We will face competition for the provision of integrated telecommunications services as well for the individual service components that comprise our integrated services. Many of these competitors are larger and better capitalized than we are. Also, many of our competitors are incumbent providers, with long standing relationships with their customers and greater name recognition. In addition, the continuing trend toward business combinations and alliances in the telecommunications industry may create significant new competitors. Examples of some of these alliances include: Bell Atlantic's proposed acquisition of GTE, SBC's proposed merger with Ameritech, AT&T's acquisition of TCI and proposed acquisition of Media One, Global Crossing's proposed acquisition of Frontier Corp. and SBC's acquisition of SNET. Many of these combined entities have or will have resources far greater than ours. These combined entities may provide a bundled package of telecommunications products that is in direct competition with our products. These combined entities may be capable of offering these products sooner and at more competitive rates than we can. Competition for Provision of Integrated Telecommunications Services. The number of competitors able to provide integrated telecommunications services has increased because of the current regulatory trend toward fostering competition and the continued consolidation of telecommunications service providers. Many facilities-based ICPs and long distance carriers have committed substantial resources to building their own networks or to purchasing carriers with complementary facilities. Through these strategies, a facilities-based provider can offer single source local, long distance and data services similar to those that we will offer. The alternative strategies available to these competitors may provide them with greater flexibility and a lower cost structure. 26 Once the RBOCs are allowed to offer in-region long distance services under the terms of Section 271 of the Telecommunications Act, they will be in a position to offer local and long distance services similar to the services we offer. No RBOC is currently permitted to provide inter-LATA services for calls originating in their region. We cannot assure you that this will continue to be the case. The FCC must approve RBOC provision of in-region interLATA long distance services and can only do so upon finding that the RBOC has complied with the 14-point checklist outlined in Section 271 of the Telecommunications Act. This 14-point checklist is designed to ensure that RBOC competitors have the ability to provide local telephone services in competition with the RBOC. The FCC has not yet found that any RBOC has complied with the 14-point checklist. Although the Telecommunications Act and other federal and state regulatory initiatives will provide us with new business opportunities, as competition increases regulators are likely to provide the ILECs with more pricing flexibility. Our revenues may be adversely affected if the ILECs elect to lower their rates and sustain these lower rates over time. We believe that we may be able to offset the effect of lower rates by offering new services to our target customers, but we cannot assure you that this will occur. In addition, if future regulatory decisions give ILECs increased pricing flexibility or other regulatory relief, such decisions could have a material adverse effect on our business. Competition for Provision of Local Exchange Services. In the local exchange market, ILECs, including RBOCs, continue to hold near-monopoly positions. We also face competition or prospective competition from one or more ICPs, and from other competitive providers, including non-facilities-based providers. Many of these competitors are larger and better capitalized than we are. Some carriers have entered into interconnection agreements with ILECs and either have begun, or in the near future likely will begin, offering local exchange service in each of our markets. Further, as of February 8, 1999, the largest long distance carriers were permitted to bundle local and long distance services. This removes one of our competitive advantages. Other entities that currently offer or are potentially capable of offering switched services include cable television companies, electric utilities, other long distance carriers, microwave carriers, and large customers who build private networks. Wireless telephone system operators are also competitors in the provision of local services. Cellular, personal communications service, and other commercial mobile radio services providers may offer wireless services to fixed locations, rather than just to mobile customers. This ability to provide fixed as well as mobile services will enable wireless providers to offer wireless local loop service and other services to fixed locations (e.g., office and apartment buildings) in direct competition with us and other providers of traditional fixed telephone service. In addition, the FCC recently auctioned substantial blocks of spectrum for fixed use including local exchange services. We expect exploitation of this spectrum to increase competition in the local market. The World Trade Organization recently concluded an agreement that could result in additional competitors entering the U.S. local and long-distance markets. Under the WTO agreement, the United States committed to open telecommunications markets to foreign-owned carriers. The FCC has adopted streamlined procedures for processing market entry applications from foreign carriers, making it easier for such carriers to compete in the U.S. We cannot predict whether foreign-owned carriers will enter our markets as a result of the WTO agreement. Competition for Provision of Long Distance Services. The long distance market is significantly more competitive than the local exchange market. In the long distance market numerous entities compete for the same customers. In addition, customers frequently change long distance providers in response to lower rates or promotional incentives by competitors. This results in a high average rate of customer loss, or churn, in the long distance market. Prices in the long distance market have declined significantly in recent years and are expected to continue to decline. Competition in this market will further increase once RBOCs are permitted to offer interLATA long distance services. 27 Data and Internet Services. The market for high speed data services and access to the internet is highly competitive. We expect competition in this market to continue to intensify. Our competitors in this market will include ISPs and other telecommunications companies, including large IXCs and RBOCs. Many of these competitors have greater financial, technological and marketing resources than those available to us. Recently, various RBOCs have filed petitions with the FCC requesting regulatory relief in connection with the provision of their own data services, including DSL services. In response to these petitions, the FCC issued a decision that data services generally are telecommunications services that, when provided by ILECs, are subject to the unbundling, resale, and other independent local exchange carrier obligations prescribed in Section 251 of the Telecommunications Act. Petitions have been filed with the FCC asking them to reconsider this decision. The FCC also has initiated a proceeding to determine whether independent local exchange carriers will be able to escape their Section 251 obligations by providing data services through "truly" separate affiliates, whether the FCC will require ILECs to unbundle their DSL equipment and resell DSL services, and whether the FCC will grant RBOCs interLATA relief for the provision of data services. We cannot predict the effect that this proceeding will have on our ability to obtain facilities and services from ILECs and on the competition that we will face from ILECs in the data services market. Government Regulation The local and long distance telephony services and, to a lesser extent, the data services we provide are regulated by federal, state, and, to some extent, local government authorities. The FCC has jurisdiction over all telecommunications common carriers to the extent they provide interstate or international communications services. Each state regulatory commission has jurisdiction over the same carriers with respect to the provision of intrastate communications services. Local governments sometimes impose franchise or licensing requirements on telecommunications carriers and regulate construction activities involving public rights-of-way. Changes to the regulations imposed by any of these regulators could have a material adverse effect on our business, operating results and financial condition. In recent years, the regulation of the telecommunications industry has been in a state of flux as the United States Congress and various state legislatures have passed laws seeking to foster greater competition in telecommunications markets. The FCC and state utility commissions have adopted many new rules to implement this legislation and encourage competition. These changes, which are still incomplete, have created new opportunities and challenges for us and our competitors. The following summary of regulatory developments and legislation is not intended to describe all present and proposed federal, state and local regulations and legislation affecting the telecommunications industry. Some of these and other existing federal and state regulations are the subject of judicial proceedings, legislative hearings and administrative proposals which could change, in varying degree, the manner in which this industry operates. We cannot predict the outcome of these proceedings, or their impact on the telecommunications industry at this time. Federal Regulation We are currently not subject to price cap or rate of return regulation at the federal level and are not currently required to obtain FCC authorization for the installation, acquisition or operation of our domestic interexchange network facilities. However, we must comply with the requirements of common carriage under the Communications Act. We are subject to the general requirement that our charges and terms for our telecommunications services be "just and reasonable" and that we not make any "unjust or unreasonable discrimination" in our charges or terms. The FCC has jurisdiction to act upon complaints against any common carrier for failure to comply with its statutory obligations. Comprehensive amendments to the Communications Act were made by the Telecommunications Act, which was signed into law on February 8, 1996. The Telecommunications Act effected changes in regulation at both the federal and state levels that affect virtually every segment of the telecommunications industry. The stated purpose of the Telecommunications Act is to promote competition in all areas of telecommunications. While it may take years for the industry to feel the full impact of the Telecommunications Act, it is already clear that the legislation provides us with new opportunities and challenges. 28 The Telecommunications Act greatly expands the interconnection requirements on the incumbent local exchange carriers, or ILECs. The Telecommunications Act requires the ILECs to: . provide physical collocation, which allows companies such as us and other competitive local exchange carriers, or CLECs, to install and maintain their own network termination equipment in ILEC central offices, and virtual collocation only if requested or if physical collocation is demonstrated to be technically infeasible; . unbundle components of their local service networks so that other providers of local service can compete for a wide range of local services customers; and . establish "wholesale" rates for their services to promote resale by CLECs. In addition, all local exchange carriers, or LECs, must: . establish number portability, which will allow a customer to retain its existing phone number if it switches from the LEC to a competitive local service provider; . provide nondiscriminatory access to telephone poles, ducts, conduits and rights-of-way. . compensate other LECs on a reciprocal basis for traffic originated on one LEC and terminated on the other LEC. The FCC is charged with establishing national guidelines to implement certain portions of the Telecommunications Act. The FCC issued its interconnection order on August 8, 1996. On July 18, 1997, however, the United States Court of Appeals for the Eighth Circuit issued a decision vacating the FCC's pricing rules, as well as certain other portions of the FCC's interconnection rules, on the grounds that the FCC had improperly intruded into matters reserved for state jurisdiction. On January 25, 1999, the Supreme Court largely reversed the Eighth Circuit's order, holding that the FCC has general jurisdiction to implement the local competition provisions of the Telecommunications Act. In so doing, the Supreme Court stated that the FCC has authority to set pricing guidelines for unbundled network elements, to prevent ILECs from disaggregating existing combinations of network elements, and to establish "pick and choose" rules regarding interconnection agreements. "Pick and choose" rules would permit a carrier seeking interconnection to "pick and choose" among the terms of service from other interconnection agreements between the ILECs and other CLECs. This action reestablishes the validity of many of the FCC rules vacated by the Eighth Circuit. Although the Supreme Court affirmed the FCC's authority to develop pricing guidelines, the Supreme Court did not evaluate the specific pricing methodology adopted by the FCC and has remanded the case to the Eighth Circuit for further consideration. Thus, while the Supreme Court resolved many issues, including the FCC's jurisdictional authority, other issues remain subject to further consideration by the courts and the FCC. We cannot predict the ultimate disposition of those matters. We also cannot predict the possible impact of this decision, including the portion dealing with unbundled network elements, on existing interconnection agreements between ILECs and CLECs or on agreements that may be negotiated in the future. Although most of the FCC rules that the Supreme Court was considering were upheld, the Court vacated the FCC's rule that identifies the unbundled network elements that ILECs must provide to CLECs. The FCC recently initiated a new proceeding to reexamine whether it will identify which unbundled network elements ILECs must provide, and, if so, how to identify those elements. It is unclear how the FCC will decide this issue or the effect that the FCC's decision will have on our business or operations. The FCC recently adopted new rules designed to make it easier and less expensive for CLECs to obtain collocation at ILEC central offices by, among other things, restricting the ILECs' ability to prevent certain types of equipment from being collocated and requiring ILECs to offer alternative collocation arrangements to CLECs. The FCC also initiated a new proceeding to address line sharing, which, if implemented, would allow CLECs to offer data services over the same line that a consumer uses for voice services without the CLEC having to provide the voice service. While we expect that the FCC's new collocation rules will be beneficial to us, we cannot be certain that these new rules will be implemented in a favorable manner. Moreover, ILECs or 29 other parties may ask the FCC to reconsider some or all of its new collocation rules, or may appeal these rules in federal court. We cannot predict the outcome of these actions or the effect they may have on our business. Under the Communications Act, ILECs have an obligation to negotiate with us in good faith to enter into interconnection agreements. We will need interconnection agreements to provide enhanced connectivity to our network and to provide local dial tone services. If we cannot reach agreement, either side may petition the applicable state commission to arbitrate remaining disagreements. These arbitration proceedings can last up to 9 months. Moreover, state commission approval of any interconnection agreement resulting from negotiation or arbitration is required, and any party may appeal an adverse decision by the state commission to federal district court. The potential cost in resources and delay from this process could harm our ability to compete in certain markets, and there is no guarantee that a state commission would resolve disputes, including pricing disputes in our favor. Moreover, as explained above, the FCC rules governing pricing standards for access to the networks of the traditional telephone companies are currently being challenged in federal court. If the courts overturn the FCC's pricing rules, the FCC may adopt a new pricing methodology that would require us to pay a higher price to traditional telephone companies for interconnection. This could have a detrimental effect on our business. The Telecommunications Act permits RBOCs to provide long distance services outside their local service regions immediately, and will permit them to provide in-region long distance service upon demonstrating to the FCC and state regulatory agencies that they have adhered to the Telecommunication Act's 14- point competitive checklist. Some RBOCs have filed applications with various state public utility commissions and the FCC seeking approval to offer in- region interLATA service. Some states have denied these applications while others have approved them. However, to date, the FCC has denied each of the RBOC's applications brought before it because it found that the RBOC had not sufficiently made its local network available to competitors. We anticipate that a number of RBOCs will file additional applications in 1999. In May 1997, the FCC released an order establishing a significantly expanded universal service regime to subsidize the cost of telecommunications service to high cost areas, as well as to low-income customers and qualifying schools, libraries, and rural health care providers. Providers of interstate telecommunications services, like us, as well as certain other entities, must pay for these programs. We are also eligible to receive funding from these programs if we meet certain requirements, but we are not currently planning to do so. Our share of the payments into these subsidy funds will be based on our share of certain defined telecommunications end-user revenues. Currently, the FCC is assessing such payments on the basis of a provider's revenue for the previous year. Various states are also in the process of implementing their own universal service programs. We are currently unable to quantify the amount of subsidy payments that we will be required to make and the effect that these required payments will have on our financial condition. Moreover, the FCC's universal service rules remain subject to judicial appeal and further FCC review. Additional changes to the universal service program could increase our costs. On November 1, 1996, the FCC issued an order that required nondominant interexchange carriers, like us, to cease filing tariffs for our domestic interexchange services. The order required mandatory detariffing and gave carriers nine months to withdraw federal tariffs and move to contractual relationships with their customers. This order subsequently was stayed by a federal appeals court, and it is unclear at this time whether the detariffing order will be implemented. In June 1997, the FCC issued another order stating that non-dominant LECs, like us, could withdraw their tariffs for interstate access services provided to long distance carriers. The FCC continues to require that carriers obtain authority to provide service between the United States and foreign points and file tariffs for international service. If the FCC's orders become effective, nondominant interstate services providers will no longer be able to rely on the filing of tariffs with the FCC as a means of providing notice to customers of prices, terms and conditions under which they offer their interstate services. If we cancel our FCC tariffs as a result of the FCC's orders, we will need to implement replacement contracts which could result in substantial administrative expenses. 30 In March 1999, the FCC adopted further rules that, while still maintaining mandatory detariffing, nonetheless require long distance carriers to make specific public disclosures on the carriers' Internet websites of their rates, terms and conditions for domestic interstate services. The effective date for these rules is also delayed until a court decision on the appeal of the FCC's detariffing order. Recently, the FCC has determined that both dedicated access and dial-up calls from a customer to an Internet service provider ("ISP") are interstate, not local, calls, and, therefore, are subject to the FCC's jurisdiction. The FCC has initiated a proceeding to determine the effect that this regulatory classification will have on the obligation of a LEC to pay reciprocal compensation for dial-up calls to ISPs that originate on one LEC network and terminate on another LEC network. In addition, one RBOC has petitioned the FCC for a ruling that telephone-to-telephone calls made over the Internet are subject to regulation as a telecommunications service under the Communications Act. Although the FCC has suggested that such Internet-based telephone-to- telephone calls may be considered a telecommunications service, it has not reached a final decision on that issue. We cannot predict the effect that the FCC's resolution of these issues will have on our business. In August 1997, the FCC issued rules transferring responsibility for administering and assigning local telephone numbers from the RBOCs and a few other LECs to a neutral entity in each geographic region in the United States. In August 1996, the FCC issued new numbering regulations that prohibit states from creating new area codes that could unfairly hinder local exchange carriers by requiring their customers to use 10 digit dialing while existing independent local exchange carrier customers use 7 digit dialing. These regulations also prohibit ILECs which are still administering central office numbers pending selection of the neutral administrator from charging "code opening" fees to competitors unless they charge the same fee to all carriers including themselves. In addition, each carrier is required to contribute to the cost of numbering administration through a formula based on net telecommunications revenues. In July 1996, the FCC released rules requiring all LECs to have the capability to permit both residential and business consumers to retain their telephone numbers when switching from one local service provider to another, known as "number portability." A customer's choice of local or long distance telecommunications company is encoded in a customer record, which is used to route the customer's calls so that the customer is served and billed by the desired company. A user may change service providers at any time, but the FCC and some states regulate this process and require that specific procedures be followed. When these procedures are not followed, particularly if the change is unauthorized or fraudulent, the process is known as "slamming." Slamming is such a significant problem that it was addressed in detail by Congress in the Telecommunications Act, by some state legislatures, and by the FCC in recent orders. The FCC has levied substantial fines for slamming. The risk of financial damage and business reputation from slamming is significant. Even one slamming complaint could cause extensive litigation expenses for us. The FCC recently decided to apply its slamming rules (which originally covered only long distance) to local service as well. State Regulation To the extent that we provide telecommunications services which originate and terminate in the same state, we are subject to the jurisdiction of that state's public service commission. As our local service business and product lines expand, we will offer more intrastate service and become increasingly subject to state regulation. The Telecommunications Act maintains the authority of individual state utility commissions to preside over rate and other proceedings, as discussed above, and impose their own regulation of local exchange and interexchange services so long as such regulation is not inconsistent with the requirements of the Telecommunications Act. For instance, states may impose tariff and filing requirements, consumer protection measures and obligations to contribute to universal service, and other funds. We are subject to requirements in some states to obtain prior approval for, or notify the state commission of, any transfers of control, sales of assets, corporate reorganizations, issuances of stock or debt instruments 31 and related transactions. Although we believe such authorizations could be obtained in due course, there can be no assurance that the FCC or state commissions would grant CTC authority to complete any of these transactions. We have state regulatory authority to provide competitive local exchange services and interexchange services in nine states. We also have state regulatory authority to provide interexchange services in approximately 31 additional states. In some states, in which we have or have had de minimis intrastate interexchange revenues, we have not obtained authorization to provide such interexchange services or have allowed such authorization to lapse. We have either subsequently obtained, or are in the process of applying to obtain, the appropriate authorization in these states. The Telecommunications Act generally preempts state statutes and regulations that restrict the provision of competitive local services. States, however, may still restrict competition in some rural areas. As a result of this preemption, we will be free to provide the full range of local, long distance, and data services in any state. While this action greatly increases our potential for growth, it also increases the amount of competition to which we may be subject. Local Government Regulation We may be required to obtain from municipal authorities street opening and construction permits to install our facilities in some cities. In some of the areas where we provide service, we are subject to municipal franchise requirements requiring us to pay license or franchise fees either on a percentage of gross revenue, flat fee or other basis. The Telecommunications Act requires municipalities to charge nondiscriminatory fees to all telecommunications providers, but it is uncertain how quickly this requirement will be implemented by particular municipalities in which we operate or plan to operate or whether it will be implemented without a legal challenge. Properties We are headquartered in leased space in Waltham, Massachusetts. We intend to relocate our headquarters in the spring of 1999 and have entered into a new lease for space at 220 Bear Hill Road in Waltham, Massachusetts. We will continue to occupy the leased space at 360 Second Avenue for other purposes. We also lease one office in California, two in Connecticut, eight in Massachusetts, two in Maine, one in New Hampshire, nine in New York, one in Maryland and one in Vermont. Although we believe that our leased facilities are adequate at this time, we expect to lease a significant number of additional sales facilities in connection with our planned expansion in existing markets and into new markets. Legal Proceedings In December 1997, the Company terminated its agency contract and filed suit against Bell Atlantic for, among other things, breach of contract, including the failure of Bell Atlantic's retail division to pay agency commissions owed to the Company. This litigation was settled on February 24, 1999. Under the terms of the settlement, the Company will receive cash and other consideration. Both parties have agreed to keep the specific terms of the settlement confidential. We are otherwise party to suits and regulatory proceedings arising in the normal course of business which we believe are not material individually or in the aggregate. Employees As of April 30, 1999, CTC employed 385 persons. None of our employees are represented by a collective bargaining agreement. 32 MANAGEMENT Executive Officers, Directors and Significant Employees Our executive officers and directors, and their ages as of May 3, 1999, are as follows:
Name Age Current Office Held ---- --- ------------------- Robert J. Fabbricatore.. 56 Chairman and Chief Executive Officer Steven P. Milton........ 45 President and Chief Operating Officer John D. Pittenger....... 45 Executive Vice President, Chief Financial Officer and Treasurer David E. Mahan.......... 57 Vice President--Marketing and Strategic Planning Michael H. Donnellan.... 45 Vice President--Operations Thomas Fabbricatore..... 40 Vice President--Marketing Anthony D. Vermette..... 38 Vice President--Sales Frederick Kunzi......... 47 Vice President and Chief Technology Officer Jeffrey C. Lavin........ 43 Vice President--Corporate Development Katherine D. Courage.... 41 Director Henry Hermann........... 57 Director Kevin J. Maroni......... 36 Director J. Richard Murphy....... 54 Director Robert A. Nicholson..... 31 Director Carl Redfield........... 51 Director Richard J. Santagati.... 55 Director Ralph C. Sillari........ 44 Director
Robert J. Fabbricatore, a founder of CTC and a director since its inception in 1980, became Chairman of the Board of Directors in March 1983 and served as President from October 1993 to August 1995. Robert J. Fabbricatore is the brother of Thomas Fabbricatore, Vice President--Marketing. Steven P. Milton has been employed by CTC since 1984 and has served as President and Chief Operating Officer since August 1995. Prior to that, he held various positions within CTC including Branch Manager, District Manager, Regional Manager and Vice President--Sales and Marketing. John D. Pittenger has served as Chief Financial Officer since April 14, 1999, as Executive Vice President--Finance and Administration since April 1998 and as Treasurer and Clerk of CTC since August 1989. Mr. Pittenger served as Vice President--Finance from 1991 until April 1998, and as Chief Financial Officer from 1989 to April 1998. David E. Mahan joined CTC in October 1995 as Vice President--Marketing and Strategic Planning. Prior to joining CTC, Mr. Mahan held a number of senior management level positions with NYNEX, including Vice President--Sales Channel Management from 1993 to 1995. Michael H. Donnellan has been employed by CTC since 1988 in a number of positions. He was named Vice President--Operations in 1995. Thomas Fabbricatore joined CTC in 1982. He was named Vice President-- Regulatory and Electronic Media in 1991, and was named Vice President-- Marketing in November 1998. Thomas Fabbricatore is the brother of Robert J. Fabbricatore. Anthony D. Vermette has been employed by CTC in a variety of positions since 1987. Mr. Vermette was named Vice President--Sales in 1996. Frederick Kunzi joined CTC as a Vice President and Chief Technology Officer in September 1998. Mr. Kunzi has over 25 years experience in information technology. From 1985 to September 1998, he was employed by Digital Equipment Corporation, most recently as Senior Manager, Global Network Services where he was responsible for Digital's worldwide enterprise network infrastructure. 33 Jeffrey C. Lavin joined CTC in June 1998 as Vice President--Corporate Development. Mr. Lavin has 19 years of sales and operational management experience in the telecommunications industry. From December 1996 to May 1998, Mr. Lavin was Vice President of Sales, Americas/Asia Pacific for NovaSoft Systems, Inc., a software development corporation. From 1979 to 1996, Mr. Lavin was employed by Comlink Incorporated, a communication network integrator, most recently as Senior Vice President. Following the acquisition of Comlink in 1996 by Williams Communications, Mr. Lavin served as Vice President and General Manager of Network Systems Integration. Katherine D. Courage became a director of CTC in April 1999. Ms. Courage is a managing director in the Global Telecommunications and Media Group in the Investment Banking Department of Credit Suisse First Boston, one of the underwriters of this offering. Prior to joining Credit Suisse First Boston in September 1996, Ms. Courage worked at Salomon Brothers Inc for ten years where she was a managing director in the Global Telecommunications Group. Ms. Courage also worked at Merrill Lynch & Co. in the corporate finance department. Ms. Courage currently serves as a director of NorthEast Optic Network, Inc. and Lightpath Technologies, Inc. Henry Hermann became a director of CTC in September 1996. Since November 1997, he has operated Hermann Companies, a financial services company. Mr. Hermann is registered as an Investment Advisor with the State of Texas, a Chartered Financial Analyst and, as an independent contractor, offers general securities through SWS Financial. In 1997, he was employed by Kuhns Brothers & Company, Inc., as a principal and Executive Vice President. For the previous nine years, he was employed by WR Lazard, Laidlaw and Luther, Inc., a securities brokerage firm, as Vice President, Securities Analyst and Portfolio Manager. Mr. Hermann has been an NASD Board of Arbitrators Member since 1991. Kevin J. Maroni became a director of CTC in April 1998 as one of the two designees of the Series A preferred stockholders. Mr. Maroni is a general partner of Spectrum which he joined in 1994. Spectrum is a leading private equity fund which manages $1 billion of capital for investment in the communications and media industries. Prior to joining Spectrum, he worked at Time Warner Telecommunications and Harvard Management Company. Mr. Maroni is a director of PathNet, Inc., Formus Communications, Inc., WNP Communications, Inc. and American Cellular Corp. J. Richard Murphy became a director of CTC in August 1995. Mr. Murphy has been the director of the Corporate Advisory Group of Moody, Cavanaugh and Company, LLP, a North Andover, Massachusetts public accounting firm, since April 1996. Mr. Murphy was an officer, director and principal stockholder from 1990 to 1995 of Arlington Data Corporation, a systems integration company located in Amesbury, Massachusetts; from 1992 to 1996 of Arlington Data Consultants, Inc., a company engaged in the installation and maintenance of computer systems and hardware; and from 1994 to 1996 of Computer Emporium, Inc., a company engaged in processing parking violations for municipalities. In June 1996, Arlington Data Corporation filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Robert A. Nicholson is one of the two designees of the Series A preferred stockholders and became a director of CTC in November 1998. Mr. Nicholson joined Spectrum in 1995 as a Vice President and became a partner in July 1998. From 1990 to 1993, Mr. Nicholson was an Associate Consultant and then Consultant at Bain & Company, a leading strategy consulting firm, where he was responsible for strategy and operations projects in the communications industry. Mr. Nicholson currently serves as a Director of Navitar Communications Group, Inc., a Canadian competitive local exchange carrier. Carl Redfield became a director of CTC in January 1999. He has been Senior Vice President, Manufacturing and Logistics of Cisco since February 1997. From September 1993 to February 1997 he was Vice President of Manufacturing. Mr. Redfield also is a director of VA Research Inc. and Paragon Electronics Inc. Richard J. Santagati became a director of CTC in September 1991. He has been the President of Merrimack College in North Andover, Massachusetts since 1994. From March 1992 to February 1994, 34 Mr. Santagati was the Chairman of the Board, Chief Executive Officer and President of Artel Communications Corp., a publicly held data communications firm located in Hudson, Massachusetts. Mr. Santagati also serves as a director of Celerity Solutions, Inc., a software company. Ralph C. Sillari became a director of CTC in October 1997. Since 1991, Mr. Sillari has been employed by Fleet National Bank where he is currently an Executive Vice President in the Business and Entrepreneurial Services Division. We currently have nine members on our board of directors: three Class I Directors (Messrs. Hermann, Sillari and Redfield), three Class II Directors (Messrs. Murphy and Santagati and Ms. Courage) and three Class III Directors (Messrs. Fabbricatore, Maroni and Nicholson). The terms of the Class I, Class II and Class III directors expire upon the election and qualification of their successors at the annual meetings of stockholders held following the end of fiscal years 2001, 1999 and 2000, respectively. Director Compensation Non-employee directors receive an annual retainer of $10,000. On February 17, 1999, we granted Messrs. Sillari, Murphy and Hermann options to purchase 10,000 shares of our common stock. We also granted Messrs. Nicholson, Maroni and Santagati options to purchase 20,000 shares of our common stock. All of the above options were at a purchase price of $10.125 per share. At the same time we granted Robert Fabbricatore options to purchase 50,000 shares of our common stock at a purchase price of $11.1375, 50,000 shares at a purchase price of $15.00 per share and 50,000 shares at a purchase price of $20.00 per share. On January 19, 1999, we granted Mr. Redfield an option to purchase 40,000 shares of our common stock at a purchase price of $11.25 per share. On April 5, 1999, we granted Ms. Courage an option to purchase 40,000 shares of our common stock at a purchase price of $12.375 per share. Committees of the Board of Directors Our board of directors has established an audit committee, a compensation committee and a nominating committee. The audit committee consists of Messrs. Murphy and Hermann. The audit committee is responsible for reviewing the internal accounting controls of CTC, meeting and conferring with our independent auditors and reviewing the results of the accountants' auditing engagement. The compensation committee consists of Messrs. Maroni, Santagati and Murphy. The compensation committee establishes compensation and benefits for our senior executives. The committee also determines the number and terms of stock options granted to employees, directors and consultants under our stock option plans. The nominating committee consists of Messrs. Santagati, Murphy and Sillari. The nominating committee recommends candidates for nomination to the board of directors. The committee also reviews and makes recommendations regarding compensation for non-employee directors. Voting Agreement Pursuant to a voting agreement between Robert J. Fabbricatore and certain of his affiliates and Spectrum, Mr. Fabbricatore and certain of his affiliates agreed to vote at each annual or special meeting at which directors of CTC are to be elected all of the shares of common stock held by them in favor of two persons designated by a majority of the outstanding shares of Series A preferred stock as nominees for directors, subject to certain limitations based on the number of shares of Series A preferred stock outstanding at any time. As of April 27, 1999, Spectrum owned 657,555 of the 666,666 shares, or 98.6%, of the Series A preferred stock outstanding. Kevin J. Maroni and Robert A. Nicholson, partners of Spectrum and designees of the Series A preferred stockholders, are Class III directors of CTC. 35 Executive Compensation The following table provides summary information concerning compensation of our Chief Executive Officer and each of the four other most highly paid executive officers (the "Named Executive Officers") during the fiscal year ended March 31, 1999: Summary Compensation Table
Annual Compensation Long Term Compensation -------------------- --------------------------- Fiscal Securities Year Ended Annual Underlying All Other March 31, Salary Bonus Options (#)(1) Compensation ---------- ---------- --------- -------------- ------------ Robert J. Fabbricatore,.......... 1999 $ 240,000 $ 78,000 150,000 $20,900(/2/) Chairman and Chief 1998 240,000 60,000 150,000 19,550(/2/) Executive Officer 1997 240,000 60,000 -- 18,075(/2/) Steven C. Jones,........ 1999 150,000 75,000 -- 3,375(/3/) Executive Vice President, 1998 12,500 -- 300,000 -- Chief Financial Officer and 1997 -- -- -- -- Director of Corporate Development(/4/) Steven P. Milton,....... 1999 150,000 54,500 100,000 5,625(/3/) President and Chief 1998 100,000 40,000 150,000 4,200(/3/) Operating Officer 1997 100,000 40,000 -- 4,075(/3/) David E. Mahan,......... 1999 110,000 52,000 20,000 4,440(/3/) Vice President-- 1998 100,000 40,000 260,000 4,075(/3/) Marketing and Strategic Planning 1997 100,000 40,000 -- 4,075(/3/) John D. Pittenger,...... 1999 100,000 62,000 36,000 4,860(/3/) Executive Vice President-- 1998 90,000 36,000 80,000 3,900(/3/) Finance and Administration, 1997 86,100 34,000 -- 3,437(/3/) Treasurer and Clerk
- -------- (1) On March 20, 1998 we repriced all previously granted options that had an exercise price in excess of $7.19 per share. The 1998 information includes 75,000, 75,000, 130,000 and 40,000 shares underlying options previously granted to Messrs. Fabbricatore, Milton, Mahan and Pittenger that were canceled as a result of the repricing. (2) Includes 50% matching contributions in the amounts of $4,800, $4,750 and $4,500 in 1999, 1998 and 1997 to the CTC Communications Corp. 401(k) Savings Plan. Also included is the actuarial benefit on the "split-dollar" life insurance policy for the benefit of Mr. Fabbricatore in the amounts of $16,100, $14,800 and $13,575 in 1999, 1998 and 1997. (3) Includes 50% matching contributions to the CTC Communications Corp. 401(k) Savings Plan. (4) Mr. Jones began working for CTC on February 27, 1998 and resigned on April 21, 1999. Does not include $135,879 of severance benefits that we paid to Mr. Jones after March 31, 1999. 36 Option Grants in Last Fiscal Year The following table sets forth the aggregate number of stock options granted to each of the Named Executive Officers during the fiscal year ended March 31, 1999. Options are exercisable for our common stock, par value $.01 per share. No options were granted to Mr. Jones in the last fiscal year.
Potential Realizable Number of Percent of Value at Assumed Securities Total Options Annual Rate of Underlying Granted to Exercise Stock Price Options Employees in Price Expiration Appreciation for Granted (#) Fiscal Year ($/Share) Date Option Term ----------- ------------- --------- ---------- ---------------------- 5% 10% ---------- ---------- Robert J. Fabbricatore.. 50,000 4.2% 20.00 2/17/2003 (353,882) (184,679) 50,000 4.2% 15.00 2/17/2003 (103,882) 65,321 50,000 4.2% 11.138 2/17/2003 89,243 258,446 Steven P. Milton........ 33,000 3% 20.00 2/17/2003 (233,562) (122,996) 33,000 3% 15.00 2/17/2003 (68,562) 43,112 34,000 3% 10.125 2/17/2003 95,110 210,168 David E. Mahan.......... 20,000 2% 10.125 2/17/2003 55,947 123,628 John D. Pittenger....... 36,000 3% 10.125 2/17/2003 100,705 222,531
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth information concerning the exercise of options by the Named Executive Officers during the fiscal year ended March 31, 1999 and the March 31, 1999 aggregate value of unexercised options held by each of the Named Executive Officers.
Number of Securities Value of Unexercised Underlying Unexercised in-the-Money Options Options at Fiscal at Fiscal Year End ($) Year-End (#)(1) (1)(2) Shares ----------------------- ----------------------- acquired on Value Exercisable/ Exercisable/ exercise(#) Realized ($) Unexercisable Unexercisable ----------- ------------ ----------------------- ----------------------- Robert J. Fabbricatore.. -- -- 89,806 168,750 445,384 266,625 Steven C. Jones(/3/).... -- -- 150,000 150,000 796,875 796,875 Steven P. Milton........ -- -- 79,750 131,250 501,482 312,019 David E. Mahan.......... -- -- 100,000 100,000 605,265 474,645 John D. Pittenger....... -- -- 58,000 57,000 420,096 216,360
- -------- (1) All shares and amounts, as necessary, have been adjusted to reflect the 25% common stock dividend effected in March 1995, the three-for-two stock split effected in July 1995 and the two-for-one stock split effected in October 1995. (2) Assumes a fair market value of the Common Stock at March 31, 1999 of $12.375 per share. (3) In connection with Mr. Jones resignation in April 1999, we vested an additional 37,500 options and extended the exercise period of his vested options until April 21, 2004. 37 PRINCIPAL STOCKHOLDERS Common Stock The following table sets forth information as of April 27, 1999 with respect to the beneficial ownership of our common stock by: . each person known by us to beneficially own more than 5% of the outstanding shares of our common stock; . our directors and our Named Executive Officers; and . all executive officers and directors as a group. Based on the information furnished by the beneficial owners of the common stock listed below, we believe that each such stockholder exercises sole voting and investment power with respect to the shares beneficially owned.
Beneficial Ownership -------------------- Before the After the Name Number Offering Offering ---- --------- ---------- --------- Robert J. Fabbricatore(/1/)...................... 2,830,870 27.1% 21.8% Spectrum Equity Investors II, L.P.(/2/).......... 1,629,292 13.6% 11.3% Kevin J. Maroni(/2/)(/3/)........................ 1,634,292 13.6% 11.3% Robert A. Nicholson(/2/)(/4/).................... 1,635,373 13.6% 11.3% Goldman, Sachs & Co.(/5/)........................ 662,600 6.0% 4.9% Henry Hermann(/6/)............................... 225,755 2.2% 1.8% Richard J. Santagati(/7/)........................ 96,000 * * Carl Redfield(/8/)............................... 24,000 * * J. Richard Murphy(/9/)........................... 25,167 * * Ralph C. Sillari(/10/)........................... 6,334 * * Katherine D. Courage(/11/)....................... 10,000 * * Steven P. Milton(/12/)........................... 480,848 4.6% 3.7% David E. Mahan(/13/)............................. 187,100 1.8% 1.4% John D. Pittenger(/14/).......................... 263,588 2.5% 2.0% Steven C. Jones(/15/)............................ 237,500 2.3% 1.8% All directors and executive officers as a group (16 persons)(/16/).......... 6,571,082 50.9% 42.6%
- -------- * Less than 1%. (1) Includes 62,498 shares owned by Mr. Fabbricatore as trustee of a trust for his children and 1,133,239 shares as a general partner of a family partnership; also includes 108,556 shares issuable upon exercise of options exercisable within 60 days of April 27, 1999. Mr. Fabbricatore's address is c/o CTC Communications Corp., 360 Second Avenue, Waltham, Massachusetts 02451. (2) Includes 187,066 shares issuable upon the exercise of warrants exercisable within 60 days of April 27, 1999 and 1,442,226 shares issuable upon conversion of Series A preferred stock as of April 27, 1999. As partners of Spectrum Equity Investors II, L.P., Mr. Maroni, Mr. Nicholson, William Collatos and Brion B. Applegate may be deemed to be beneficial owners of the shares owned by Spectrum. The address of Spectrum and its partners is One International Place, 29th Floor, Boston, Massachusetts 02110. (3) Includes 5,000 shares issuable to Mr. Maroni upon the exercise of options exercisable within 60 days of April 27, 1999. (4) Includes 83 shares issuable to Mr. Nicholson upon the exercise of warrants and 5,000 shares issuable upon the exercise of options exercisable within 60 days of April 27, 1999, and 998 shares issuable upon conversion of Series A preferred stock as of April 27, 1999. (5) Consists of 662,600 shares issuable upon exercise of a warrant exercisable within 60 days of April 27, 1999. The address of Goldman, Sachs & Co. is 85 Broad St., New York, NY 10004. 38 (6) Includes 9,750 shares held by Mr. Hermann's spouse and 20,167 shares issuable upon the exercise of options exercisable within 60 days of April 27, 1999. (7) Includes 21,000 shares issuable to Mr. Santagati upon the exercise of options exercisable within 60 days of April 27, 1999. (8) Includes 10,000 shares issuable to Mr. Redfield upon the exercise of options exercisable within 60 days of April 27, 1999. (9) Includes 24,167 shares issuable to Mr. Murphy upon the exercise of options exercisable within 60 days of April 27, 1999. (10) Includes 5,834 shares issuable to Mr. Sillari upon the exercise of options exercisable within 60 days of April 27, 1999. (11) Consists of 10,000 shares issuable to Ms. Courage upon the exercise of options exercisable within 60 days of April 27, 1999. (12) Includes 4,500 shares owned by Mr. Milton as trustee of a trust for his children and 89,916 shares issuable upon the exercise of options exercisable within 60 days of April 27, 1999. (13) Includes 120,000 shares issuable to Mr. Mahan upon the exercise of options exercisable within 60 days of April 27, 1999. (14) Includes 65,000 shares issuable to Mr. Pittenger upon the exercise of options exercisable within 60 days of April 27, 1999. (15) Includes 187,500 shares issuable to Mr. Jones upon the exercise of options exercisable within 60 days of April 27, 1999. (16) Represents directors and executive officers as of April 27, 1999 and includes the shares described in footnotes (1) through (4) and (6) through (14) above. Preferred Stock As of April 30, 1999, Spectrum Equity Investors II, L.P., owned 657,555 shares, or 98.6%, of the Series A preferred stock outstanding. 39 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We lease from a trust, of which Robert J. Fabbricatore, our Chairman and Chief Executive Officer, is a beneficiary, office space in Springfield, Massachusetts. Until March 1, 1999 we also leased from another trust, of which Robert J. Fabbricatore is a beneficiary, office space in southern New Hampshire. Rental payments under the leases totaled approximately $392,000 for the last three fiscal years. We sublease part of our Waltham facility at our cost to Comm-Tract Corp., a company in which Mr. Fabbricatore is a principal stockholder. Sublease income totaled $306,125 for the last three fiscal years. We also contract with Comm-Tract Corp. for the installation of telephone lines and for the service and maintenance of equipment marketed by CTC. During the last three fiscal years, Comm-Tract Corp. provided us with services, inventory and equipment totaling $829,481. We believe that the payments to the trusts and Comm-Tract Corp. are comparable to the costs for such services, inventory and equipment, and for rentals of similar facilities, which we would be required to pay to unaffiliated individuals in arms-length transactions. Carl Redfield, one of our directors, is an executive officer of Cisco. We have purchased, and expect to continue purchasing, most of our network equipment from Cisco. Also, we have entered into a vendor facility with Cisco Capital, an affiliate of Cisco. See "Description of Senior Secured Facilities". Ralph Sillari, one of our directors, is an Executive Vice President of Fleet National Bank. We have entered into a senior secured credit facility with Fleet National Bank. See "Description of Senior Secured Facilities." Katherine D. Courage, one of our directors, is a Managing Director of Credit Suisse First Boston, one of the underwriters of this offering. Ms. Courage is also a director of NEON. We have commitments with NEON for the provision of leased transmission facilities. DESCRIPTION OF SENIOR SECURED FACILITIES Fleet/Goldman Credit Facility As of September 1, 1998, we entered into a senior secured credit facility with Goldman Sachs Credit Partners, L.P., or GSCP, and Fleet National Bank, or Fleet. GSCP and Fleet provided us with a three-year senior secured credit facility consisting of revolving loans in the aggregate amount of up to $75 million. Advances under the facility bear interest at 1.75% over the prime rate. Advances under the facility are secured by a first priority perfected security interest on all of our assets, except that we have the ability to exclude assets we acquire through purchase money financing. In addition, we are required to pay a commitment fee of 0.5% per annum on any unused amounts under the facility. We are also required to pay a monthly line fee of $150,000 per month. In connection with this credit facility we issued to Goldman Sachs & Co. warrants to purchase 662,600 shares of our common stock and to Fleet National Bank warrants to purchase 311,812 shares of our common stock. We may borrow $15 million unconditionally and $60 million based on trailing 120 days accounts receivable collections, reducing to the trailing 90 days of collections by March 31, 2000. If we wish to prepay the loan during the first 18 months we must pay a prepayment penalty of 2% of the aggregate amount of the facility. As of March 31, 1999, we had borrowed $36,100,000 under this credit facility. Under this credit facility, we have agreed, among other things, to maintain minimum quarterly net revenues, to achieve minimum EBITDA targets for rolling six-month periods measured at the end of each fiscal quarter and to achieve a minimum quarterly target of provisioned ALEs. We have also agreed that we will not, without the prior written consent of the lenders, with various exceptions: . create, incur or assume any secured indebtedness, . create, incur or assume any liens, . enter into any merger, consolidation, reorganization, recapitalization or reclassification of our stock, . sell, lease, assign, transfer or otherwise dispose of any of our assets, 40 . declare or pay any cash dividends or purchase, acquire or redeem any of our stock, . make, acquire or incur any liabilities in connection with the acquisition of any entity or the acquisition of all or substantially all of the assets of any entity, . make capital expenditures in excess of $32 million for the period from September 1, 1998 to March 31, 2000 and $87 million for the period from April 1, 2000 through September 1, 2001. Events of default under this credit facility include: . failure to make payments on the loan, . failure to observe various covenants, . insolvency proceedings, . the filing of any governmental liens in an amount exceeding $2 million, . the filing of any judgment liens in an amount exceeding $2 million, . default on a material agreement with obligations exceeding $2 million, . payment of any subordinated indebtedness, except as specifically permitted, . any material misrepresentation or misstatement in any warranty or representation, . the limitation or termination of any guaranty, or . the occurrence of a change of control, except in connection with the reorganization. Cisco Capital Vendor Facility On October 14, 1998, we entered into a three-year vendor facility for up to $25 million with Cisco Capital. We have agreed to a three year, $25 million total volume purchase commitment of Cisco equipment and services. Cisco Capital has agreed to advance funds as these purchases occur. We can also use the facility for working capital costs associated with the integration and operation of Cisco solutions and related peripherals. Under the terms of the vendor facility and an intercreditor agreement between Cisco Capital and GSCP, we have agreed to give Cisco Capital a senior security interest in all products Cisco provides to us or other products purchased with the proceeds of the first $15 million advanced under the facility and a subordinate security interest in all of our other assets. We are required to repay 5% of the outstanding amount of the first $15 million of indebtedness advanced under the facility at the end of each of the ninth, tenth and eleventh quarterly periods during the term of the facility. We are required to pay interest on funds advanced under the facility at an annual rate of 12.5%. In addition to other amounts, we are also required to pay a commitment fee of .50% per annum on any unused amounts under the facility. This vendor facility limits or restricts, except as permitted under our senior secured credit facility and other than other various exceptions, our ability to: merge with or acquire all of the assets of any entity; sell or dispose of assets; purchase or otherwise acquire the capital stock or assets of any person, or extend any credit to any person; declare or pay any cash dividends; or redeem or purchase any capital stock. This vendor facility also limits or restricts, among other things, our ability to: incur additional indebtedness; amend, modify or waive some provisions of our senior secured facility; voluntarily repay any subordinated debt; or amend or modify any document or instrument governing subordinated debt. Events of default under the vendor facility include: . failure to make payments on the loan, . any representation or warranty is incorrect when made or deemed made, . failure to perform or observe our covenants, . insolvency proceedings, . failure to pay any amounts due or observe any covenants under our senior secured facility or other indebtedness in an amount over $2 million which failure results in the acceleration of such indebtedness, 41 . failure to pay under, or be in breach of, any other agreement with Cisco, Cisco Capital, or their subsidiaries, . failure of any guarantor to perform or observe any covenant contained in any guaranty, . any event of default in any other loan documents as defined therein, . revocation of any consent, authorization or other approval necessary to enable us to borrow under the vendor facility, . the occurrence of a change of control, as defined therein, . any payment of indebtedness subordinated to the vendor facility, except as expressly permitted, . the entrance of various judgments against us. HOLDING COMPANY REORGANIZATION Shortly after the closing of this offering, we expect to complete a reorganization into a holding company structure. As a result of the reorganization, we will become a wholly owned subsidiary of CTC Communications Group, Inc. CTC Communications Group, Inc. is a Delaware corporation formed by us for this purpose and has no other business. We will complete the merger by causing CTC-Newco, a subsidiary of CTC Communications Group, Inc. organized for this purpose, to merge into us. All of our issued and outstanding common and preferred stock will be converted into the same number of shares of common and preferred stock of CTC Communications Group, Inc. CTC Communications Group, Inc.'s business will initially consist of owning all of our common stock. We will continue to carry on our existing business. Our directors and some executive officers will continue as directors and executive officers of CTC Communications Group, Inc. Following the reorganization, CTC Communications Group, Inc., will pledge our shares to the lenders under the credit facility with GSCP and Fleet. 42 DESCRIPTION OF CAPITAL STOCK The following summary describes the material terms of our capital stock. However, you should refer to the actual terms of the capital stock contained in our amended and restated articles of organization, the certificate of designation for the Series A preferred stock, and our amended and restated by- laws. The authorized capital stock of the Company consists of 25,000,000 shares of common stock and 1,000,000 shares of preferred stock. The common stock has a par value of $.01 per share and the preferred stock has a par value of $1.00 per share. We have designated 666,666 shares of our preferred stock as Series A convertible preferred stock. As of April 30, 1999, there were 10,352,498 shares of our common stock outstanding, and after the offering there will be 12,852,498 shares outstanding. Our common stock was held by 366 stockholders of record. As of April 30, 1999, options to purchase 3,615,809 shares of our common stock were outstanding. As of April 30, 1999 666,666 shares of our Series A preferred stock were outstanding. We also have warrants to purchase common stock outstanding as described below. Common Stock The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders. After the payment of any required preferential amounts to the holders of any outstanding preferred stock, holders of common stock are entitled to receive dividends that may be declared by the board of directors. In the event of the liquidation, dissolution or winding up of CTC, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the payment of any required preferential amounts to the holders of any outstanding preferred stock. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. Preferred Stock Each share of our Series A preferred stock accrues a dividend in an amount equal to an annual rate of 9% of the $18.00 per share purchase price per annum compounding every six months. This dividend is payable upon redemption, liquidation or conversion of the Series A preferred stock. The holders of a majority of the Series A preferred stock may elect to cause us to redeem the Series A preferred stock after April 9, 2003. Upon any liquidation, dissolution or winding up of CTC, holders of the Series A preferred stock will be entitled to receive the payment of a preferential amount, before any distribution or payment is made with respect to any junior class of our capital stock. The preference amount payable for each share of our Series A preferred stock will be an amount in cash equal to the greater of: the purchase price plus all accrued dividends through the date of payment, or the purchase price plus all accrued dividends plus an acceleration of the dividend due through April 9, 2003. Prior to any liquidation, dissolution or winding up of CTC, the Series A preferred stock will automatically convert into common stock if the liquidation amount is less than the amount the holder of Series A preferred stock would have received had the holder converted to common stock. The Series A preferred stock can be converted into common stock. In addition, we have the right to convert the Series A preferred stock under some circumstances. On the date of issuance, the 666,666 shares of Series A preferred stock were convertible into 1,333,333 shares of our common stock. The number of shares of common stock into which the Series A preferred stock can be converted increases by an amount equal to the accrued dividend divided by $9.00. The number of shares of common stock also adjusts on some issuances of common stock, or securities convertible into or exercisable for common stock, that would dilute the economic interest of the holders of the Series A preferred stock. Holders of the Series A preferred stock are entitled to a number of votes equal to the lesser of (1) the whole number of shares of common stock they would receive if they converted their Series A preferred stock plus the number of warrants they hold that were issued with the preferred stock and (2) the number of shares of Series A preferred stock they hold multiplied by 2.476. Except 43 as required by law or the certificate of designation, the holders of Series A preferred stock vote with the holders of the common stock as a single class. Our board of directors may issue the 333,334 shares of authorized but unissued preferred stock from time to time in one or more series. The rights, preferences, privileges and restrictions of the different series may be determined by our board of directors without any further vote or action by the stockholders. Accordingly, our board of directors, without stockholder approval, can issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of common stock. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control. Warrants In connection with the issuance of the Series A preferred stock we issued warrants to purchase an aggregate of 133,333 shares of common stock. As of April 30, 1999, we also had outstanding other warrants to purchase an aggregate of 1,154,738 shares of common stock at exercise prices from $6.75 to $11.8125 per share. Registration Rights Under the terms of a registration rights agreement with the purchasers of the Series A preferred stock, those purchasers can request that we register their sale of the shares of common stock issuable upon exercise of the warrants or upon conversion of the Series A preferred stock under the Securities Act. Toronto Dominion, Relational Funding Corporation, GSCP and Fleet have similar registration rights under the terms of warrants we issued to them. Certain Provisions of our Charter and Bylaws Our charter and bylaws may prevent, discourage or delay any change in the control of CTC and may make it more difficult to remove our board and management. Our board has the authority to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to effect a change in control of CTC. Our bylaws provide for three classes of directors serving for staggered three-year terms. Our directors can be removed only for cause and only by either a vote of not less than a majority of the total number of votes of our outstanding capital stock entitled to elect directors, or by the vote of a majority of the directors. These provisions could also impede the success of any attempt to acquire control of CTC. Our bylaws establish procedures for stockholders to nominate directors or bring other matters to a vote by our stockholders at a meeting, including advance notice procedures. In general, we must receive notice at least 60 and no more than 90 days prior to the meeting. This notice must contain specified information concerning the stockholder submitting the proposal. Such procedures also authorize regulation of the order of business and conduct of stockholder meetings, the authority of the presiding officer and attendance at such meetings. These provisions can be amended only by a majority of the directors or by a majority of votes of our outstanding capital stock at a meeting held for the purpose of considering the amendment. The provisions could make it more difficult for a third party to acquire control of our board. In addition, these provisions could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, a majority of our outstanding voting stock and may make more difficult or discourage a takeover of CTC. Massachusetts Anti-Takeover Laws We are subject to the Massachusetts Business Combination Statute. This statute prohibits a publicly-held Massachusetts corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time of the transaction in which the person became an interested stockholder, unless: . prior to such time, the board of directors of the corporation approves either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, 44 . upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 90% of the outstanding voting stock (excluding shares held by persons who are both directors and officers of the corporation and employee stock plans), or . on or after the consummation date, the business combination is approved by the board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" generally includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is generally a person who, together with affiliates and associates, owns, or within three years, owned, 5% or more of the corporation's voting stock. Our bylaws provide that Chapter 110D of the Massachusetts General Laws does not apply to us. However, our board may in the future amend the bylaws to become subject to the statute. In general, if Chapter 110D were applicable to us, any person or entity that acquired 20% or more of our outstanding voting stock could not vote that stock unless authorized by our other stockholders. Our board is permitted under Massachusetts law to consider noneconomic factors, such as employee welfare, suppliers, creditors, customers, the economy of the state, region and nation, community and societal consideration and long- term and short-term corporate and stockholder interests when considering business combinations as defined in the Business Combination Statute. Limitation of Liability of Directors and Indemnification of Directors and Officers Our charter provides that our directors will not be personally liable for monetary damages to us or our stockholders for breach of fiduciary duty as a director, except for liability for any breach of the director's duty of loyalty to us or our stockholders, for acts or omissions not in good faith, for acts or omissions involving intentional misconduct or a knowing violation of law or for any transaction from which the director derived an improper benefit. Our bylaws provide that our directors and officers will be indemnified against liabilities that arise from their service as directors and officers. Transfer Agent and Registrar Boston EquiServe L.P. is the transfer agent and registrar for the common stock. 45 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation and Lehman Brothers Inc. are acting as representatives, the following respective numbers of shares of common stock:
Underwriters Number of Shares ------------ ---------------- Credit Suisse First Boston Corporation...................... Lehman Brothers Inc......................................... --------- Total..................................................... 2,500,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering of the common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 375,000 additional shares at the public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation that we will pay the underwriters and the expenses we will pay:
Total ----------------------------- Without With Per Share Over-Allotment Over-Allotment --------- -------------- -------------- Underwriting discounts and commissions paid by us........................... $ $ $ Expenses payable by us................ $ $ $
We, our officers and directors and certain other stockholders have agreed that we will not offer, sell, contract to sell, announce our intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to any additional shares of our common stock or securities convertible into or exchangeable or exercisable for any of our common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 90 days after the date of this prospectus with various exceptions. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and "passive" market making in accordance with Regulation M under the Securities Exchange Act of 1934. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. 46 . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. . In "passive" market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to certain limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discounted at any time. Katherine D. Courage, a Managing Director of Credit Suisse First Boston Corporation, is one of our directors. 47 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of the common stock are effected. Accordingly, any resale of common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom such purchase confirmation is received that (1) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (2) where required by law, that such purchaser is purchasing as principal and not as agent, and (3) such purchaser has reviewed the text above under "Resale Restrictions." Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from CTC. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of common stock for investment by the purchaser under relevant Canadian legislation. 48 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for CTC by Ropes & Gray, Boston, Massachusetts, and for the underwriters by Latham & Watkins, Washington, D.C. EXPERTS The financial statements of CTC at March 31, 1998 and 1997, and for each of the three years in the period ended March 31, 1998, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the common stock offered under this prospectus. This prospectus does not contain all of the information contained in the registration statement and the exhibits and schedules to the registration statement. Some items are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information about CTC and the common stock offered under this prospectus, you should review the registration statement and the exhibits and schedules filed as a part of the registration statement. Descriptions of contracts or other documents referred to in this prospectus are not necessarily complete. If the contract or other document is filed as an exhibit to the registration statement, you should review that contract or document. You should be aware that when we discuss these contracts or documents in the prospectus we are assuming that you will read the exhibits to the registration statement for a more complete understanding of the contract or documents. We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, we file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information filed by us can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following regional offices of the Securities and Exchange Commission: 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained by mail from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material may also be accessed electronically by means of the Securities and Exchange Commission's home page on the internet at http://www.sec.gov. 49 CTC COMMUNICATIONS CORP. INDEX TO FINANCIAL STATEMENTS Audited Financial Statements Report of Independent Auditors........................................... F-2 Balance Sheets as of March 31, 1998 and 1997............................. F-3 Statements of Operations for the years ended March 31, 1998, 1997 and 1996.................................................................... F-4 Statements of Stockholders' Equity for the years ended March 31, 1998, 1997 and 1996........................................................... F-5 Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996.................................................................... F-6 Notes to Financial Statements............................................ F-7 Unaudited Financial Statements Condensed Balance Sheets as of December 31, 1998 and March 31, 1998...... F-22 Condensed Statements of Operations for the nine months ended December 31, 1998 and 1997........................................................... F-23 Condensed Statements of Cash Flows for the nine months ended December 31, 1998 and 1997........................................................... F-24 Notes to Condensed Financial Statements.................................. F-25
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors CTC Communications Corp. We have audited the accompanying balance sheets of CTC Communications Corp., as of March 31, 1998 and 1997, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CTC Communications Corp. at March 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts May 28, 1998, except for Note 1, as to which the date is July 15, 1998 F-2 CTC COMMUNICATIONS CORP. BALANCE SHEETS
March 31 ------------------------ 1998 1997 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents.......................... $ 2,167,930 $ 6,405,670 Accounts receivable, less allowance for doubtful accounts of $492,000 in 1998 and $377,000 in 1997.............................................. 17,288,183 10,904,820 Prepaid expenses and other current assets.......... 791,736 447,441 Amounts due from officers and employees............ 84,754 46,112 Income tax receivable.............................. 2,152,579 ----------- ----------- Total current assets............................. 22,485,182 17,804,043 EQUIPMENT: Equipment.......................................... 13,376,970 7,268,372 Accumulated depreciation........................... (6,837,683) (5,565,650) ----------- ----------- 6,539,287 1,702,722 Deferred income taxes................................ 1,834,000 566,000 Other assets......................................... 108,885 113,685 ----------- ----------- $30,967,354 $20,186,450 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses.............. $ 8,958,476 $ 3,238,416 Accrued income taxes............................... 225,948 Accrued salaries and related taxes................. 756,159 2,423,825 Deferred revenue................................... 6,588 Current portion of obligations under capital leases............................................ 231,796 Current portion of note payable to bank............ 1,196,400 ----------- ----------- Total current liabilities........................ 11,142,831 5,894,777 Obligations under capital leases, net of current portion............................................. 1,114,277 Note payable to bank, net of current portion......... 7,130,671 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series Preferred Stock--par value $1.00 per share; authorized 1,000,000 shares, none outstanding..... Common Stock, par value $.01 per share; authorized 25,000,000 shares, issued 9,980,661 and 9,629,407 shares in 1998 and 1997, respectively............. 99,806 96,294 Additional paid-in capital......................... 5,245,704 4,758,454 Deferred compensation.............................. (318,410) Retained earnings.................................. 6,688,300 9,572,750 ----------- ----------- 11,715,400 14,427,498 Amounts due from stockholders...................... (135,825) (135,825) ----------- ----------- 11,579,575 14,291,673 ----------- ----------- $30,967,354 $20,186,450 =========== ===========
See accompanying notes. F-3 CTC COMMUNICATIONS CORP. STATEMENTS OF OPERATIONS
Year Ended March 31 -------------------------------------- 1998 1997 1996 ------------ ----------- ----------- REVENUES: Agency.............................. $ 24,775,420 $29,195,261 $25,492,511 Telecommunications.................. 16,171,716 11,094,838 5,383,414 ------------ ----------- ----------- 40,947,136 40,290,099 30,875,925 COSTS AND EXPENSES: Cost of telecommunications revenues........................... 14,038,565 8,709,122 4,241,575 Selling, general and administrative expenses........................... 31,491,963 23,819,714 20,009,432 ------------ ----------- ----------- 45,530,528 32,528,836 24,251,007 ------------ ----------- ----------- Income (loss) from operations......... (4,583,392) 7,761,263 6,624,918 OTHER: Interest income..................... 145,012 201,369 195,979 Interest expense.................... (106,465) (17,753) (604) Other............................... 174,395 15,052 9,631 ------------ ----------- ----------- 212,942 198,668 205,006 ------------ ----------- ----------- Earnings (loss) before income taxes... (4,370,450) 7,959,931 6,829,924 Provision (benefit) for income taxes.. (1,486,000) 3,277,000 2,736,000 ------------ ----------- ----------- Net income (loss)..................... $(2,884,450) $ 4,682,931 $ 4,093,924 ============ =========== =========== EARNINGS (LOSS) PER COMMON SHARE: Basic............................... $ (0.29) $ 0.49 $ 0.43 ============ =========== =========== Diluted............................. $ (0.29) $ 0.43 $ 0.38 ============ =========== =========== SHARES USED IN COMPUTING EARNINGS (LOSS) PER COMMON SHARE: Basic............................... 9,886,000 9,600,000 9,446,000 ============ =========== =========== Diluted............................. 9,886,000 10,773,000 10,712,000 ============ =========== ===========
See accompanying notes. F-4 CTC COMMUNICATIONS CORP. STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Amounts -------------------- Paid-In Deferred Retained Treasury Due From Shares Par Value Capital Compensation Earnings Stock Stockholders Total --------- --------- ---------- ------------ ----------- --------- ------------ ----------- Balance at March 31, 1995................... 3,124,437 $31,244 $4,871,302 $ 796,734 $ (13,860) $(159,825) $ 5,525,595 Issuance of stock pursuant to employee stock purchase plan... 9,082 91 58,153 58,244 Exercise of employee stock options......... 197,143 1,971 121,053 123,024 Acquisition of treasury stock................. (329,125) (329,125) Retirement of treasury stock................. (25,454) (254) (342,731) 342,985 Settlement of amounts due from stockholders.......... 24,000 24,000 Issuance of stock upon 3 for 2 stock split... 1,560,742 15,607 (15,607) (839) (839) Issuance of stock upon 2 for 1 stock split... 4,718,172 47,182 (47,182) Net income............. 4,093,924 4,093,924 --------- ------- ---------- --------- ----------- --------- --------- ----------- Balance at March 31, 1996................... 9,584,122 95,841 4,644,988 4,889,819 0 (135,825) 9,494,823 Issuance of stock pursuant to employee stock purchase plan... 8,714 87 70,088 70,175 Exercise of employee stock options......... 36,571 366 43,378 43,744 Net income............. 4,682,931 4,682,931 --------- ------- ---------- --------- ----------- --------- --------- ----------- Balance at March 31, 1997................... 9,629,407 96,294 4,758,454 9,572,750 0 (135,825) 14,291,673 Issuance of stock pursuant to employee stock purchase plan... 9,844 98 71,662 71,760 Exercise of employee stock options......... 376,387 3,764 347,222 350,986 Acquisition of treasury stock................. (271,072) (271,072) Retirement of treasury stock................. (34,977) (350) (270,722) 271,072 Deferred compensation.. 339,088 $(318,410) 20,678 Net loss............... (2,884,450) (2,884,450) --------- ------- ---------- --------- ----------- --------- --------- ----------- Balance at March 31, 1998................... 9,980,661 $99,806 $5,245,704 $(318,410) $ 6,688,300 0 $(135,825) $11,579,575 ========= ======= ========== ========= =========== ========= ========= ===========
See accompanying notes. F-5 CTC COMMUNICATIONS CORP. STATEMENTS OF CASH FLOWS
Year Ended March 31 ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Net income (loss)...................... $(2,884,450) $ 4,682,931 $ 4,093,924 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........ 1,417,866 742,895 660,338 Provision for doubtful accounts...... 1,421,000 316,669 61,763 Deferred income taxes................ (1,268,000) (289,000) (124,000) Stock compensation expense........... 20,678 Gain on sale of fixed asset.......... (143,333) Changes in operating assets and liabilities: Accounts receivable................ (7,804,363) (4,664,260) (2,979,772) Other current assets............... (382,937) (123,789) (231,642) Income tax receivable.............. (2,152,579) 21,125 (21,125) Other assets....................... 4,800 4,800 (90,200) Accounts payable, accrued expenses, accrued salaries and related taxes............................. 4,052,394 2,657,149 1,103,061 Accrued income taxes............... (225,948) 225,948 (281,569) Deferred revenue and other......... (6,588) (2,714) 1,128 ----------- ----------- ----------- Net cash provided by (used in) operating activities............ (7,951,460) 3,571,754 2,191,906 INVESTING ACTIVITY Additions to equipment, net............ (4,765,025) (1,221,879) (759,204) ----------- ----------- ----------- Net cash used in investing activity.... (4,765,025) (1,221,879) (759,204) FINANCING ACTIVITIES Proceeds from issuance of common stock... 151,674 113,919 119,467 Borrowings under note payable to bank, net of repayments....................... 8,327,071 Cash paid for fractional shares in connection with stock splits............ (839) ----------- ----------- ----------- Net cash provided by financing activities.............................. 8,478,745 113,919 118,628 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents............................. (4,237,740) 2,463,794 1,551,330 Cash and cash equivalents at beginning of year.................................... 6,405,670 3,941,876 2,390,546 ----------- ----------- ----------- Cash and cash equivalents at end of year.................................... $ 2,167,930 $ 6,405,670 $ 3,941,876 =========== =========== ===========
See accompanying notes. F-6 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS March 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company CTC Communications Corp. (the Company) is an integrated communications provider (ICP), which offers local, long distance, Internet access, Frame Relay and other data services under its own brand name on a single integrated bill. The Company serves small to medium-sized business customers in seven Northeastern states. Prior to becoming an ICP in January 1998, the Company was a sales agent for Bell Atlantic Corp. (Bell Atlantic) and other telecommunications providers selling local telecommunications services as an agent since 1984. The Company has also offered long distance and data services under its own brand name since 1994. In late 1998, the Company plans to begin deploying a data-centric network in its existing markets. The Company has obtained a commitment for an interim credit facility (the Interim Facility) from its current lender. The Interim Facility, which would mature on June 30, 1999, would provide secured revolving loans of up to $20 million to refinance the Company's existing credit facility (the Credit Facility), to fund capital expenditures and significant operating losses expected to be incurred in connection with the Company's transition to an ICP strategy and for general corporate purposes. The commitment, which is subject to certain conditions, extends to September 30, 1998. To satisfy one of those conditions, the Company has received a commitment from Spectrum Equity Investors, II, L.P. ("Spectrum") to purchase $5 million of Preferred Stock which extends until June 30, 1999 (the Interim Spectrum Financing). The Company believes that the Interim Facility and the Interim Spectrum Financing, if required, together with cash on hand would be sufficient to refinance the Credit Facility and to fund the Company's existing operations for at least the next 12 months. However, CTC would be required to delay its proposed geographic expansion and deployment of facilities or to obtain additional financing within the next 6 months. The implementation of the Company's business plan to further penetrate its existing markets as an ICP, deploy the ICN in its existing markets, expand its sales presence into six additional states in the Boston-Washington DC corridor and enhance the CTC Information System and the repayment of the Credit Facility will require the Company to raise significant capital. The Company has been seeking and is actively engaged in the negotiation of commitments with alternative sources of long-term financing to fund its business plans. Although the Company is highly optimistic that it will be successful in obtaining such financing based upon its negotiations, there can be no assurance that the Company will be able to consummate financing in the amount, on the terms and on the schedule required to implement the Company's business plan, if at all. Agency revenues derived from commissions received from Bell Atlantic represented 48%, 63% and 69% of the Company's total revenues in 1998, 1997 and 1996, respectively. Accounts receivable from Bell Atlantic amounted to 63% and 70% of total accounts receivable at March 31, 1998 and 1997, respectively. See Note 2. Cash and Cash Equivalents The Company considers highly liquid investments with maturities of less than three months at the date of acquisition as cash equivalents. Equipment Equipment is stated on the basis of cost. Depreciation, including amortization of capitalized leases, is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. F-7 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) Revenue Recognition Telecommunications revenues are recognized as the usage accrues on the network. Agency revenues are recognized when ordered and, if commissions are based on usage, revenues are recognized as earned. Provisions for cancellations are made at the time revenue is recognized and actual experience, prior to the developments described in Note 2, has consistently been within management's estimates. Income Taxes The Company provides for income taxes under the liability method prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at each year end. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Accounting Pronouncements In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. Both SFAS 130 and SFAS 131 are effective for fiscal years beginning after December 15, 1997. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's financial statements. Earnings Per Share In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. Risks and Uncertainties Concentration of Credit Risk Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents and trade receivables. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these instruments. Significant Estimates and Assumptions The financial statements have been prepared in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management affect the Company's provision for doubtful accounts, cancellation of orders and certain accrued expenses. Actual results could differ from those estimates. F-8 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) Accounting for Stock Issued to Employees The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of the grant (110% of the fair market value for owners of 20% or more of the Company's Common Stock). The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 2. BELL ATLANTIC LITIGATION In December 1997, the Company terminated its agency contract and filed suit against Bell Atlantic for breaches of contract, including the failure of Bell Atlantic's retail division to pay $14 million in agency commissions (approximately $12 million at March 31, 1998) owed to the Company. The Company also asserted violations by Bell Atlantic of antitrust laws and the Telecommunications Act. The Company intends to pursue this suit vigorously. Although the Company believes the collection of the agency commissions sought in the suit is probable, there can be no assurance that the Company will be successful in collecting those commissions. If the Company fails to collect any of the agency commissions sought or if their collection becomes less than probable, the Company would be required to write off the amounts reflected in its financial statements that it is unable to collect or for which collection becomes less than probable. Delay in collection of, or the write-off of, the agency commissions sought may adversely affect the Company. 3. RELATED-PARTY TRANSACTIONS The installation of telephone systems is generally subcontracted to a company controlled by the Chairman of the Company. Amounts paid to this subcontractor which are based on fair market value amounted to $1,723, $28,217 and $1,089 in 1998, 1997 and 1996, respectively. Additionally, inventory and equipment purchased from this subcontractor at fair market value amounted to $231,052, $68,973 and $39,791 in 1998, 1997 and 1996, respectively. The Company leases office space from trusts in which the Chairman is a beneficiary. Rent expense for these facilities aggregated $132,656, $132,656 and $133,949 in 1998, 1997 and 1996, respectively. These office space leases expire in fiscal 1998. The Company subleases a part of its corporate facility to a company controlled by the Chairman of the Company. Terms of the sublease are identical with those included in the Company's lease. Sublease income totaled $119,416, $80,416 and $73,417 in 1998, 1997 and 1996, respectively. 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
March 31 --------------------- 1998 1997 ---------- ---------- Trade accounts payable................................ $5,778,048 $2,015,409 Accrued cost of telecommunications revenue.......... 888,031 790,039 Bell Atlantic litigation............................ 1,200,000 Other............................................... 1,092,397 432,968 ---------- ---------- $8,958,476 $3,238,416 ========== ==========
F-9 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) 5. NOTE PAYABLE TO BANK In November 1997, the Company replaced its existing $5,000,000 revolving line of credit agreement with a bank credit facility consisting of $15,000,000 revolving line of credit, a $5,000,000 equipment line of credit, and a $5,000,000 working capital line of credit. The revolving line of credit bears interest at Libor plus 1.5% to 3.00%, or prime rate plus up to 0.5%, depending on certain coverage ratios of the Company and expires in September, 2000. The equipment and working capital lines of credit bear interest at Libor plus 1.75% to 3.25%, or prime rate plus up to 1%, depending on certain leverage ratios of the Company and expire in September 2000. At March 31, 1998, $1,339,000 and $4,018,000 was available for borrowing under the revolving line of credit, and the equipment line of credit, respectively, and no amounts were available for borrowing under the working capital line of credit. As of March 31, 1998, the Company was not in compliance with certain covenants under its bank credit facility as a result of the Company's fourth quarter net loss of approximately $6 million. The bank has waived such covenant noncompliance under the Facility until September 30, 1998. See Note 1. Note payable to bank consisted of the following at March 31, 1998: Revolving line of credit due September 1, 2000................. $2,345,071 Equipment line of credit due in annual principal installments of $196,400 through January 2003 (7.44% at March 31, 1998).. 982,000 Working capital line of credit due in annual principal payments of $1,000,000 through March 2003 (7.44% at March 31, 1998)................................................... 5,000,000 ----------- 8,327,071 Less: current portion........................................ (1,196,400) ----------- $ 7,130,671 ===========
Maturities of long-term debt are the following at March 31: 1999............................................................ $1,196,400 2000............................................................ 1,196,400 2001............................................................ 3,541,471 2002............................................................ 1,196,400 2003............................................................ 1,196,400
The bank has a security interest in and lien on all of the tangible and intangible personal property and fixtures of the Company, including all accounts receivable and equipment. F-10 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) 6. LEASES The Company leases office facilities under long-term lease agreements classified as operating leases. The following is a schedule of future minimum lease payments, net of sublease income, for operating leases as of March 31, 1998:
Operating Sublease Leases Income Net ---------- --------- ---------- Year ending March 31: 1999...................................... $1,399,383 $(107,766) $1,291,617 2000...................................... 1,098,624 (109,898) 988,726 2001...................................... 1,010,819 (111,420) 899,399 2002...................................... 937,665 (111,420) 826,245 2003...................................... 671,930 (111,420) 560,510 ---------- --------- ---------- Net future minimum lease payments.......... $5,118,421 $(551,924) $4,566,497 ========== ========= ==========
Rental expense for operating leases amounted to $1,121,916, $1,001,919 and $673,321 in 1998, 1997 and 1996, respectively. Sublease income amounted to $119,416, $90,016 and $82,217 in 1998, 1997 and 1996, respectively. The Company leases equipment under capital leases. At March 31, 1998, the Company has capitalized leased equipment totaling $1,346,073 with related accumulated amortization of $134,607. The following is a schedule by year of future minimum lease payments due under capital leases, together with the present value of the minimum lease payments as of March 31, 1998: Year ending March 31: 1999............................................................ $ 300,308 2000............................................................ 300,308 2001............................................................ 300,308 2002............................................................ 300,308 2003............................................................ 300,308 Thereafter...................................................... 25,026 ---------- 1,526,566 Less amount representing interest................................ (180,493) ---------- Present value of minimum lease payments.......................... 1,346,073 Less current portion of obligations under capital leases......... (231,796) ---------- Obligations under capital leases................................. $1,114,277 ==========
7. TELECOMMUNICATIONS AGREEMENTS On January 15, 1996, the Company entered into a four-year nonexclusive agreement with a long-distance service provider for the right to provide long distance service to its customers at prices affected by volume attainment levels during the term of the agreement. The Company is not obligated to purchase any minimum levels of usage over the term of the agreement, but rates may be adjusted due to the failure of achieving certain volume commitments. These provisions had no effect on the financial statements for the years ended March 31, 1998, 1997 and 1996. F-11 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) On October 20, 1994, the Company entered into a three-year non-exclusive agreement with a long-distance service provider for the right to provide long distance service to its customers at fixed prices by service during the term of the agreement. On October 11, 1996, the Company entered into an amendment to the agreement which extended the term of the agreement by five years from the date of the amendment. Over such extension period, the Company shall be liable for a minimum aggregate usage commitment of $25 million. Furthermore, the rates set forth under the aforementioned amendment may be adjusted due to the failure of meeting certain periodic volume commitments. Due to existing and expected usage, these provisions had no effect on the financial statements for the years ended March 31, 1998 and 1997. Prior to the execution of the agreements described above, and through March 31, 1998, the Company also provided long distance service to customers under an informal non-exclusive arrangement with another long distance service provider. The Company is not obligated to purchase any minimum level of usage on the network, and there are no other performance obligations. 8. STOCKHOLDERS' EQUITY Common Stock On July 13, 1995, the Board of Directors declared a 3 for 2 stock split in the form of a dividend payable to shareholders of record on July 25, 1995. A total of 1,560,742 shares of common stock were issued and $839 in cash was paid for fractional share amounts. On October 10, 1995, the Board of Directors declared a 2 for 1 stock split in the form of a dividend payable to shareholders of record on October 23, 1995. A total of 4,718,172 shares of common stock were issued. Preferred Stock The dividends, liquidation preference, voting rights and other rights of each series of preferred stock, when issued, are to be designated by the Board of Directors prior to issuance. 9. BENEFIT PLANS Defined Contribution Plan The Company maintains a defined contribution plan (401(k) plan) covering all employees who meet certain eligibility requirements. Participants may make contributions to the plan up to 15% of their compensation (as defined) up to the maximum established by law. The Company may make a matching contribution of an amount to be determined by the Board of Directors, but subject to a maximum of 6% of compensation contributed by each participant. Company contributions vest ratably over three years. Company contributions to the plan were $310,788, $230,079 and $210,063 in 1998, 1997 and 1996, respectively. Administrative costs paid by the Company were $5,960, $1,275 and $7,982 in 1998, 1997 and 1996, respectively. Employee Stock Purchase Plan The Company has an employee stock purchase plan (the ESPP) which enables participating employees to purchase Company shares at 85% of the lower of the market prices prevailing on the valuation dates as defined in the ESPP. Individuals can contribute up to 5% of their base salary. The Company made no contributions to the ESPP during the three years in the period ended March 31, 1998. Indicated below is a summary of shares F-12 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) of common stock purchased by the ESPP. All share and per share amounts indicated below have been presented to reflect the stock dividend and stock splits described above. In July 1997 and February 1998, the ESPP purchased 5,438 shares at $6.48 per share and 4,406 shares at $8.29 per share, respectively. In July 1996 and February 1997, the ESPP purchased 2,998 shares at $11.05 per share and 5,716 shares at $6.48 per share, respectively. In July 1995 and January 1996, the ESPP purchased 7,011 shares at $3.26 per share and 2,345 shares at $11.05 per share, respectively. Stock Option Plans Under the terms of its 1993 Stock Option Plan and 1996 Stock Option Plan (collectively, the Plans), the Company may grant stock options for the purchase of Common Stock to all employees, directors and consultants. The Plans generally provide that the exercise price for an incentive stock option (which may only be granted to employees) will be fixed by a committee of the Board of Directors but will not be less than 100% (110% for 10% stockholders) of the fair market value per share on the date of grant. Nonqualified options may also be granted under the Plans to directors, employees and consultants. Nonqualified options under the 1993 Plan may be granted at an exercise price of no less than 85% (110% for 10% stockholders) of the fair market value per share on the date of grant and under the 1996 Plan may be granted with an exercise price less than, equal to or greater than the fair market value per share on the date of the grant. No options have a term of more than ten years and options to 10% stockholders may not have a term of more than five years. In the event of termination of employment, other than by reason of death, disability or with the written consent of the Company, all options granted to employees are terminated. Vesting is determined by the Board of Directors. On March 20, 1998, the Board of Directors approved the repricing of 1,175,500 options with a new exercise price of $7.19 ($7.91 for 10% stockholders). Stock-Based Compensation Pro forma information regarding net income (loss) and earnings (loss) per common share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options and shares issued pursuant to the ESPP under the fair value method of that Statement. The fair value for these options and shares issued pursuant to the ESPP were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Options ESPP ------------------- ------------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ----- ----- ----- Expected life (years)............. 2.96 3.98 3.49 0.50 0.50 0.50 Interest rate..................... 5.93% 6.28% 6.12% 5.43% 5.4% 6.48% Volatility........................ 85.14 87.88 87.88 64.67 93.03 80.93 Dividend yield.................... 0.00 0.00 0.00 0.00 0.00 0.00
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the F-13 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income (loss) and earnings (loss) per common share are as follows:
1998 1997 1996 ----------- ---------- ---------- Pro forma net income (loss)............. $(4,973,000) $4,094,000 $3,550,000 Pro forma earnings (loss) per common share.................................. $ (0.50) $ 0.39 $ 0.34
The effects on 1996, 1997 and 1998 pro forma net income (loss) and earnings (loss) per common share of expensing the estimated fair value of stock options and shares issued pursuant to the ESPP are not necessarily representative of the effects on reporting the results of operations for future years as the periods presented include only one, two and three years of option grants under the Company's plans. A summary of the Company's stock option activity, and related information for the years ended March 31 follows:
1998 1997 1996 --------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- --------- --------- --------- --------- --------- Outstanding at beginning of year................ 1,953,112 $4.3651 1,995,878 $4.01 1,526,850 $1.45 Options granted....... 2,791,000 7.1249 280,539 9.67 1,000,250 8.06 Options terminated.... (1,402,718) 8.3647 (286,734) 7.54 (290,689) 2.37 Options exercised..... (376,387) .9326 (36,571) 1.20 (240,533) 0.51 ---------- --------- --------- Outstanding at end of year................... 2,965,007 $5.5037 1,953,112 $4.36 1,995,878 $4.01 ========== ========= ========= Exercisable at end of year................... 698,250 772,282 613,824 ========== ========= ========= Weighted-average fair value of options granted during the year................... $ 4.01 $ 6.43 $ 5.09 ========== ========= =========
F-14 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table presents weighted-average price and life information about significant option groups outstanding at March 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------- -------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price --------------- ----------- ---------------- -------------- ----------- -------------- $0.25 187,500 0.1 years $0.25 187,500 $0.25 0.53 - 86,397 0.6 years 0.534 86,397 0.534 0.90 - 1.10 207,854 1.5 years 1.10 147,261 1.10 2.70 - 2.98 257,056 2.0 years 2.7444 189,792 2.7449 6.00 - 7.06 1,041,700 6.4 years 6.4411 10,500 6.1607 7.19 1,100,500 4.2 years 7.188 76,800 7.1880 7.91 75,000 4.1 years 7.9068 0 0 $8.69 9,000 2.7 years 8.688 0 0 --------- ------- 2,965,007 698,250 ========= =======
10. EARNINGS (LOSS) PER COMMON SHARE The following sets forth the computations of basic and diluted earnings (loss) per common share.
1998 1997 1996 ----------- ----------- ----------- NUMERATOR: Net income (loss) (numerator for basic and diluted earnings (loss) per common share)................ $(2,884,450) $ 4,682,931 $ 4,093,924 DENOMINATOR: Denominator for basic earnings (loss) per common share-weighted average shares................... 9,886,000 9,600,000 9,446,000 Effect of employee stock options.. 1,173,000 1,266,000 ----------- ----------- ----------- Denominator for diluted earnings (loss) per common share.......... 9,886,000 10,773,000 10,712,000 =========== =========== =========== Basic earnings (loss) per common share.............................. $ (0.29) $ 0.49 $ 0.43 =========== =========== =========== Diluted earnings (loss) per common share.............................. $ (0.29) $ 0.43 $ 0.38 =========== =========== =========== 11. INCOME TAXES The provision (benefit) for income taxes consisted of the following: 1998 1997 1996 ----------- ----------- ----------- CURRENT: Federal........................... $ (218,000) $ 2,660,000 $ 2,135,000 State............................. 906,000 725,000 ----------- ----------- ----------- (218,000) 3,566,000 2,860,000 Deferred tax benefit................ (1,268,000) (289,000) (124,000) ----------- ----------- ----------- $(1,486,000) $ 3,277,000 $ 2,736,000 =========== =========== ===========
F-15 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) Significant components of the Company's deferred tax liabilities and assets as of March 31, are as follows:
1998 1997 ---------- -------- DEFERRED TAX ASSETS: Depreciation......................................... $ 64,000 $191,000 Accruals and allowances.............................. 1,751,000 445,000 Net operating state loss carryforward................ 96,000 ---------- -------- Total deferred tax asset............................... 1,911,000 636,000 DEFERRED TAX LIABILITY: Prepaid expenses..................................... (38,000) (31,000) Cash surrender value of life insurance policy........ (39,000) (39,000) ---------- -------- Total deferred tax liability........................... (77,000) (70,000) ---------- -------- Net deferred tax asset................................. $1,834,000 $566,000 ========== ========
The income tax expense is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows:
1998 1997 1996 ----------- ---------- ---------- Tax at U.S. statutory rate............. $(1,486,000) $2,706,000 $2,322,000 State income taxes, net of federal ben- efit.................................. 552,000 466,000 Other.................................. 19,000 (52,000) ----------- ---------- ---------- $(1,486,000) $3,277,000 $2,736,000 =========== ========== ==========
Income taxes paid in 1998, 1997 and 1996 amounted to $2,160,527, $3,319,000 and $3,163,000, respectively. 12. SUPPLEMENTAL CASH FLOW INFORMATION In March 1996, the Company received shares of common stock with an aggregate fair market value of $251,771 in lieu of cash for settlement of amounts due from an officer. These shares and the related amount were accounted for as treasury stock and were subsequently retired. In September 1995, the Company received shares of common stock with an aggregate fair market value of $25,039 in lieu of cash for settlement of amount due from a non-employee of $24,000 plus accrued interest of $1,039. These shares and the related amount were accounted for as treasury stock and were subsequently retired. During fiscal 1998 and 1996, and in connection with the exercise of employee stock options, the Company received shares of common stock with an aggregate fair market value of $271,072 and $52,315 in lieu of cash upon the exercise of these options. These shares and the related amount were accounted for as treasury stock and were subsequently retired. These noncash transactions have been excluded from the statements of cash flows for the years ended March 31, 1998 and 1996. 13. SUBSEQUENT EVENTS In April 1998, the Company privately placed $12 million of Series A Convertible Preferred Stock (Series A Preferred Stock) and warrants to purchase Common Stock with Spectrum Equity Investors II, L.P. and other F-16 CTC COMMUNICATIONS CORP. NOTES TO FINANCIAL STATEMENTS--(Continued) private investors. The Series A Preferred Stock may be redeemed at the option of the holders of a majority of the Series A Preferred Stock at any time on or after the earlier of (i) April 9, 2010 and (ii) the date 180 days after the maturity date of any debt financing consummated on or before October 9, 1998 yielding proceeds of at least $75 million. The Series A Preferred Stock is convertible into shares of Common Stock. On the date of issuance, the shares of Series A Preferred Stock were convertible into 1,333,333 shares of the Company's Common Stock, which conversion ratio is subject to certain adjustments. The warrants entitle the holder thereof to purchase one share of Common Stock at an exercise price of $9.00 per share. The warrants expire on April 10, 2003. See also Note 1. 14. QUARTERLY INFORMATION (Unaudited) A summary of operating results for the quarterly periods in the two years ended March 31, 1998 is set forth below:
Quarter Ended ------------------------------------------------------------- June 30 September 30 December 31 March 31 Total ----------- ------------ ----------- ----------- ----------- Year ended March 31, 1998 Total revenues........ $11,658,954 $11,845,097 $11,155,646 $ 6,287,439 $40,947,136 Gross profit.......... 9,216,118 9,132,848 8,215,645 343,960 26,908,571 Earnings (loss)....... 1,374,000 1,244,000 506,000 (6,008,450) (2,884,450) Earnings (loss) per common share--basic.. $ 0.14 $ 0.13 $ 0.05 $ (0.60) $ (0.29) Earnings (loss) per common share-- diluted.............. $ 0.13 $ 0.12 $ 0.05 $ (0.60) $ (0.29) Year ended March 31, 1997 Total revenues........ $ 9,007,461 $ 9,617,068 $10,193,787 $11,471,783 $40,290,099 Gross profit.......... 7,325,606 7,463,843 7,932,162 8,859,366 31,580,977 Earnings.............. 1,194,186 1,048,828 1,159,000 1,280,917 4,682,931 Earnings per common share--basic......... $ 0.12 $ 0.11 $ 0.12 $ 0.13 $ 0.49 Earnings per common share--diluted....... $ 0.11 $ 0.10 $ 0.11 $ 0.12 $ 0.43
Fiscal year 1997 and the first two quarters of fiscal year 1998 earnings per common share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, Earnings per Share. F-17 CTC COMMUNICATIONS CORP. CONDENSED BALANCE SHEETS Unaudited
December 31, March 31, 1998 1998 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................ $ 2,597,116 $ 2,167,930 Accounts receivable, net......................... 26,462,861 17,288,183 Prepaid expenses and other current assets........ 8,839,184 3,029,069 ------------ ----------- Total Current Assets........................... 37,899,161 22,485,182 Furniture, Fixtures and Equipment.................. 35,638,801 13,376,970 Less accumulated depreciation...................... (10,197,683) (6,837,683) ------------ ----------- Total Equipment................................ 25,441,118 6,539,287 Deferred income taxes.............................. 0 1,834,000 Other assets, principally at December 31, 1998..... 4,188,531 108,885 ------------ ----------- Total Assets................................... $ 67,528,810 $30,967,354 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses............ $ 29,088,014 $ 8,958,476 Accrued salaries and related taxes............... 2,342,299 756,159 Current portion of obligations under capital leases.......................................... 1,312,621 231,796 Current portion of note payable to bank.......... 0 1,196,400 ------------ ----------- Total Current Liabilities...................... 32,742,934 11,142,831 Obligations under capital leases, net of current portion........................................... 4,671,226 1,114,277 Notes payable, net of current portion.............. 35,958,287 7,130,671 Series A redeemable convertible preferred stock.... 12,561,573 0 STOCKHOLDERS' EQUITY (DEFICIT): Common stock..................................... 102,911 99,806 Additional paid in capital....................... 6,960,212 5,245,704 Deferred Compensation............................ (238,910) (318,410) Retained-earnings (deficit)...................... (25,063,598) 6,688,300 ------------ ----------- (18,239,385) 11,715,400 Amounts due from stockholders...................... (165,825) (135,825) ------------ ----------- Total Stockholders' Equity (Deficit)............. (18,405,210) 11,579,575 ------------ ----------- Total Liabilities and Stockholders' Equity (Deficit)....................................... $ 67,528,810 $30,967,354 ============ ===========
The accompanying notes are an integral part of these financial statements. F-18 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended -------------------------- December 31, December 31, 1998 1997 ------------ ------------ Telecommunications revenues......................... $ 46,376,407 $10,078,325 Commission revenues................................. 0 24,581,370 ------------ ----------- Total revenues...................................... 46,376,407 34,659,695 Costs and expenses: Cost of telecommunications revenues............... 40,425,994 8,095,086 Selling, general and administrative expenses...... 36,799,882 21,370,033 ------------ ----------- 77,225,876 29,465,119 ------------ ----------- Income (loss) from operations....................... (30,849,469) 5,194,576 Other: Interest income................................... 183,237 126,212 Interest expense.................................. (2,608,890) (22,135) Other............................................. 36,473 14,348 ------------ ----------- (2,389,180) 118,425 ------------ ----------- Income (loss) before income taxes................... (33,238,649) 5,313,001 Provision (benefit) for income taxes................ (2,327,000) 2,189,000 ------------ ----------- Net income (loss)................................... $(30,911,649) $ 3,124,001 ============ =========== Net income (loss) per common share: Basic............................................. $ (3.15) $ 0.32 ============ =========== Diluted........................................... $ (3.15) $ 0.29 ============ =========== Weighted average number of common shares: Basic............................................. 10,080,465 9,856,079 ============ =========== Diluted........................................... 10,080,465 10,824,001 ============ ===========
The accompanying notes are an integral part of these financial statements. F-19 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended -------------------------- December 31, December 31, 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net income (loss)............................... $(30,911,649) $3,124,001 Adjustments to reconcile net income to net cash (used) by operating activities: Depreciation and amortization................. 3,699,173 750,000 Stock compensation expense.................... 79,500 0 Interest expense related to warrants.......... 210,926 0 Changes in noncash working capital items: Accounts receivable........................... (9,174,678) (6,475,864) Other current assets.......................... (3,976,115) (352,378) Other assets.................................. (3,198,072) 3,600 Accounts payable.............................. 20,129,538 1,008,833 Accrued liabilities........................... 1,586,140 (527,093) Accrued taxes................................. 0 (224,518) Deferred revenue.............................. 0 (6,588) ------------ ---------- Net cash (used) by operating activities......... (21,555,237) (2,700,007) INVESTING ACTIVITIES Additions to equipment.......................... (17,436,552) (4,556,428) ------------ ---------- Net cash used in investing activities........... (17,436,552) (4,556,428) FINANCING ACTIVITIES Proceeds from notes payable..................... 27,631,216 1,846,073 Proceeds from the issuance of redeemable preferred stock................................ 11,861,321 0 Repayments under capital leases................. (187,505) 0 Proceeds from the issuance of common stock...... 115,943 106,170 ------------ ---------- Net cash provided by financing activities....... 39,420,975 1,952,243 Increase (decrease) in cash..................... 429,186 (5,304,192) Cash at beginning of year....................... 2,167,930 6,405,670 ------------ ---------- Cash and cash equivalents at end of period...... $ 2,597,116 $1,101,478 ============ ========== NON CASH INVESTING ACTIVITIES Equipment acquired under capital leases......... $ 4,825,279 0 ============ ==========
The accompanying notes are an integral part of these financial statements. F-20 CTC COMMUNICATIONS CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine months ended December 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1999. These statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. NOTE 2: COMMITMENTS AND CONTINGENCIES Lawsuit Against Bell Atlantic. In December 1997, the Company terminated its agency contract and filed suit against Bell Atlantic in Federal District Court for breach of contract, including the failure of Bell Atlantic to pay approximately $11.5 million of agency commissions owed to the Company. The Company also asserted violations by Bell Atlantic of the antitrust laws and Telecommunications Act. On February 24, 1999, the Company settled the lawsuit. Under the terms of the settlement, the Company will receive cash and other consideration. Both parties have agreed to keep the specific terms of the settlement confidential. Although the Company believes that the settlement will now permit the Company to actively expand its customer base and increase its revenues from the sale of communications products and services, there is no assurance that it will do so. During the quarter ended March 31, 1999, the Company expects to recognize approximately $5,300,000 in legal fees and other costs incurred in connection with the final resolution of the matter. The Company does not expect to incur any additional costs related to this matter subsequent to March 31, 1999. The Company is otherwise party to suits arising in the normal course of business which management believes are not material individually or in the aggregate. NOTE 3. PREFERRED STOCK On April 10, 1998, the Company issued for investment to Spectrum Equity Investors II, L.P. ("Spectrum") and certain other private investors (together with Spectrum, the "Investors") an aggregate of 666,666 shares of Series A Convertible Preferred Stock (the "Preferred Shares") for $12 million, pursuant to the terms and conditions of a Securities Purchase Agreement among the Company and the Investors. The Company also issued for investment to the Investors five-year warrants to purchase an aggregate of 133,333 shares of its Common Stock at an exercise price of $9.00 per share. Spectrum purchased 98.63% of the Preferred Shares and warrants in the private placement. On the date of issuance, the Preferred Shares were convertible into 1,333,333 shares of the Company's Common Stock at $9.00 per share, which conversion ratio is subject to certain adjustments. Reference is made to the Company's Report on Form 8-K and exhibits thereto dated and filed on May 15, 1998 for a complete description of the transaction. NOTE 4. CISCO VENDOR FINANCING FACILITY On October 14, the Company obtained three-year vendor financing facility for up to $25 million with Cisco Capital Corp. Under the terms of the agreement, the Company has agreed to a three year, $25 million volume purchase commitment of Cisco Systems equipment and services and Cisco Capital Corp has agreed to advance funds as these purchases occur. In addition, a portion of the Cisco facility can be utilized for working capital costs associated with the integration and operation of Cisco Systems solutions and related peripherals. Pursuant to the terms of the Cisco Vendor Financing Agreement dated as of October 14, 1998, the Company has agreed to give the Lender a senior security interest in all products provided to the Company by F-21 CTC COMMUNICATIONS CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) Cisco and other products purchased with the proceeds advanced under the facility and a subordinate security interest in all other assets of the Company. Under the terms of the facility, the Company is required to pay interest on funds advanced under the facility at an annual rate of 12.5%. In addition, the Company is required to pay a commitment fee of .50% per annum on any unused amounts under the facility and certain other fees. As of February 16, 1999, the Company had borrowed $11.5 million under the facility. Reference is made to the Company's Current Report on Form 8-K and the agreement filed as an exhibit thereto filed on October 14, 1998 for a complete description of the transaction. NOTE 5. GOLDMAN SACHS/FLEET FINANCING AND TORONTO DOMINION FINANCING As of September 1, 1998, the Company as Borrower, entered into a Loan and Security Agreement with Goldman Sachs Credit Partners L.P. and Fleet National Bank as Lenders. Under the terms of the Loan and Security Agreement, the Lenders have provided a three-year senior secured credit facility to the Company consisting of revolving loans in the aggregate amount of up to $75 million (the "Credit Facility"). Advances under the facility bear interest at 1.75% over the prime rate and are secured by a first priority perfected security interest on all of the Company's assets, provided, however, that the Company has the ability to exclude assets acquired through purchase money financing. In addition, the Company is required to pay a commitment fee of 0.5% per annum on any unused amounts under the facility as well as a monthly line fee of $150,000 per month. The Company may borrow $15 million unconditionally and $60 million based on trailing 120 days accounts receivable collections (reducing to the trailing 90 days accounts receivable collections by March 31, 2000). The Company paid a one-time up front fee of $2,531,250, representing 3 3/8% of the facility. In the event that the Company wishes to prepay the loan, the agreement provides for a prepayment penalty of 2% during the first 18 months of the term of the loan. Warrants to purchase an aggregate of 974,412 shares of the Company's common stock at an purchase price of $6.75 per share were issued to the Lenders in connection with the transaction. The Company has valued the Warrants at $1.3 million which is being amortized and included in interest expense over the three-year term of the Loan and Security Agreement. As of March 19, 1999, the Company had availability under the Credit Facility of $44.6 million and had borrowed approximately $38 million as of that date. The Company entered into a Loan Agreement dated as of March 15, 1999 with Toronto Dominion (Texas), Inc. ("TD") to provide an unsecured standby credit facility for up to $30 million for capital expenditures and other general corporate purposes (the "TD Facility"). Under the terms of the TD Facility, $10 million is immediately available and the remaining $20 million would become available if the Company raises an additional $5 million in proceeds from the issuance of common or preferred equity (which could be satisfied by calling the Spectrum Commitment). The Company is required to pay a commitment fee of $450,000 with additional commitment fees payable if the TD Facility is still outstanding on the dates six months, nine months and one year after the closing. In addition, the Company is required to pay a quarterly availability fee on unfunded amounts as well as a funding fee for any draws. Draws under the TD Facility will initially bear interest at 7.00% over the three-month US Dollar deposit LIBOR rate and would increase quarterly thereafter. Warrants to purchase 69,216 shares of the Company's Common Stock at $11.8125 per share were issued to TD as part of the transaction and contingent warrants to purchase up to 573,913 shares of Common Stock at $11.8125 per share may be issued to TD if advances under the TD Facility are outstanding six months after the closing. The TD Facility matures 15 months after the closing. The TD Facility matures 15 months after the closing. The Company is required to repay draws with the proceeds from subsequent issuances of equity or debt securities or from subsequent bank financings. To date, the Company has not utilized the TD Facility. F-22 CTC COMMUNICATIONS CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) NOTE 6. NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share". Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted net income per share:
Nine Months Ended December 31, ----------------------- 1998 1997 ----------- ---------- NUMERATOR: Net income (loss).................................. (30,911,649) 3,124,001 Accretion to redemption value on redeemable preferred stock................................... (840,252) 0 ----------- ---------- Numerator for basic net income (loss) per share and diluted net income (loss) per share............... (31,751,901) 3,124,001 =========== ========== DENOMINATOR: Denominator for basic net income (loss) per share- weighted average shares........................... 10,080,465 9,856,079 EFFECT OF DILUTIVE SECURITIES: Employee stock options............................. 0 967,922 ----------- ---------- Denominator for diluted net income (loss) per share-weighted-average shares..................... 10,080,465 10,824,001 =========== ========== Basic net income (loss) per share.................. (3.15) 0.32 =========== ========== Diluted net income (loss) per share................ (3.15) 0.29 =========== ==========
NOTE 7. INCOME TAXES The provision (benefit) for income taxes is less than the statutory rate based upon management's assessment of the realizability of net operating losses. The benefit is recognized ratably during the year based on the relationship of amounts recoverable and management's estimate of the total loss for the fiscal year ending March 31, 1999. The effective rate of the benefit may vary with changes in management's estimates. F-23 [CTC LOGO APPEARS HERE] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All amounts shown are estimates, except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee.
Item Amount ---- -------- SEC Registration Fee............................................ $ 15,236 NASD Filing Fee................................................. 5,981 Nasdaq National Market Listing Fee.............................. * Transfer Agent and Registrar Fees............................... * Accounting Fees and Expenses.................................... * Legal Fees and Expenses......................................... * Printing Expenses............................................... * Miscellaneous................................................... * -------- Total......................................................... $600,000 ========
The Registrant will bear all expenses shown above. - -------- * To be filed by amendment. Item 14. Indemnification of Directors and Officers Section 67, Chapter 156B of the General Laws of the Commonwealth of Massachusetts, as amended (the "Massachusetts Business Corporation Law"), and Article IV of the Registrant's Bylaws, to which reference is hereby made, contain provisions authorizing indemnification by the Registrant of directors and officers, against certain liabilities and expenses, which they may incur as directors and officers of the Registrant or of certain other entities. Section 67, Chapter 156B of the Massachusetts Business Corporation Law provides that the indemnification of directors, officers, employees and agents of a corporation and persons who serve at the corporation's request as directors, officers, employees and other agents of another organization may be provided to whatever extent as shall be specified by (i) the articles of organization of the corporation or (ii) a bylaw adopted by the stockholder or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. Article IV of the Registrant's Bylaws provide that the Registrant shall, to the fullest extent legally permissible, indemnify each of its directors and officers (including persons who were acting at its request as directors, trustees or officer of another organization), against all expenses and liabilities (including attorneys' fees, judgments, court costs, and the costs of reasonable settlement) reasonably incurred by such person in connection therewith; provided, however, no such indemnification shall be made in relation to matters as to which such director or officer shall be finally adjusted in any such action, suit or proceeding not to have acted in good faith in the reasonable belief that this action was in the best interests of the Registrant. In the event that a settlement or compromise of such action, suit or proceeding is effected, indemnification may be had but only if the Board of Directors shall have been furnished with an opinion of counsel for the Registrant to the effect that such settlement or compromise is in the best interest of the Registrant and that such director or officer does not appear not to have acted in good faith in the reasonable belief that his action was in the best interests of the Registrant, and if the Board of Directors shall have adopted a resolution approving such settlement or compromise. Section 13, Chapter 156B of the Massachusetts Business Corporation Law provides that the articles of organization of a corporation may contain a provision eliminating or limiting the personal liability of a director II-1 to the corporation or its stockholders for monetary damages for breach of a fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Sections 61 or 62, Chapter 156B of the Massachusetts Business Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Article Six of the Restated Articles of Organization of the Registrant contains a provision consistent with Section 13, Chapter 156B of the Massachusetts Business Corporation Law and provides that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director. Item 15. Recent Sales of Unregistered Securities The following information is furnished with regard to all Securities sold by the Registrant within the past three years which were not registered under the Securities Act. (a) From April 1, 1996 to April 30, 1999, the Registrant issued a total of 776,607 shares of common stock for an aggregate consideration of $619,746 pursuant to the exercise of employee incentive stock options by employees of the registrant. (b) On April 10, 1998, the Registrant issued to Spectrum Equity Investors II, L.P. and certain other private investors for $12 million, 666,666 shares of Series A preferred stock and five-year warrants to purchase an aggregate of 133,333 shares of its Common Stock at an exercise price of $9.00 per share. (c) On July 16, 1998, the Registrant issued to Spectrum five-year warrants to purchase up to 55,555 shares of common stock at a purchase price of $9.00 per share in consideration for the commitment by Spectrum that, at any time prior to June 30, 1999, Spectrum will, upon the Registrant's request, purchase an additional $5 million of preferred stock containing the same terms and conditions as the Series A preferred stock. (d) On September 1, 1998, the Registrant issued to Goldman, Sachs Credit Partners, L.P. and Fleet National Bank, in consideration of the lenders providing a three-year senior secured credit facility to the Registrant, five- year warrants to purchase an aggregate of 974,412 shares of Common Stock at a purchase price of $6.75 per share. (e) On January 15, 1999, the Registrant issued to Relational Funding Corporation, in consideration for the provision of a master equipment lease agreement, warrants to purchase 55,555 shares of common stock at a purchase price of $9.00 per share. (f) On March 24, 1999 the Registrant issued to Toronto Dominion (Texas), Inc. in consideration for the provision of a standby credit facility in the aggregate amount of up to $30 million, warrants to purchase an aggregate of 69,216 shares of common stock at a purchase price of $11.1825 per share. All of the above shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. II-2 Item 16. Exhibits and Financial Statement Schedules The following is a list of exhibits filed as a part of this registration statement. (a) Exhibits
Exhibit No. Exhibit ----------- ------- 1.1 Form of Underwriting Agreement(11) 2.1 Agreement and Plan of Reorganization dated as of November 16, 1998 among the Registrant, CTC Communications Group, Inc. and CTC- Newco, Inc.(11) 3.1 Restated Articles of Organization, as amended(6) 3.2 Amended and Restated By-Laws(6) 4.1 Form of Common Stock Certificate(5) 5.1 Opinion of Ropes & Gray(11) 9.1 Voting Agreement dated April 10, 1998 among Robert Fabbricatore and certain of his affiliates and Spectrum(7) 10.1 1996 Stock Option Plan, as amended (3) 10.2 1993 Stock Option Plan(5) 10.3 Employee Stock Purchase Plan(4) 10.4 Lease for premises at 360 Second Ave., Waltham MA(5) 10.5 Sublease for premises at 360 Second Ave., Waltham MA(5) 10.6 Lease for premises at 110 Hartwell Ave., Lexington MA(5) 10.7 Lease for premises at 120 Broadway, New York, NY(5) 10.8 Agreement dated February 1, 1996 between NYNEX and the Company(5) 10.9 Agreement dated May 1, 1997 between Pacific Bell and the Company (5) 10.10 Agreement dated January 1, 1996 between SNET America, Inc. and the Company(5) 10.11 Agreement dated June 23, 1995 between IXC Long Distance Inc. and the Company, as amended(5) 10.12 Agreement dated August 19, 1996 between Innovative Telecom Corp. and the Company(5) 10.13 Agreement dated October 20, 1994 between Frontier Communications International, Inc. and the Company, as amended(5) 10.14 Agreement dated January 21, 1997 between Intermedia Communications Inc. and the Company(5) 10.15 Employment Agreement between the Company and Steven Jones dated February 27, 1998(7) 10.16 Securities Purchase Agreement dated April 10, 1998 among the Company and Spectrum and its affiliates named therein(6) 10.17 Registration Rights Agreement dated April 10, 1998 among the Company and Spectrum and its affiliates named therein(6) 10.18 Form of Warrant dated April 10, 1998(6) 10.19 Loan and Security Agreement dated as of September 1, 1998 by and between the Company, Goldman Sachs Credit Partners L.P. and Fleet National Bank(8) 10.20 Agreement with Cisco Systems Capital Corp. dated as of October 14, 1998(9) 10.21 Warrant dated July 15, 1998 issued to Spectrum(10) 10.22 Lease for premises at 220 Bear Hill Road, Waltham MA(10) 10.23 Warrant dated September 1, 1998 issued to Goldman Sachs & Co.(10) 10.24 Warrant dated September 1, 1998 issued to Fleet National Bank(10) 10.25 1998 Incentive Plan(3) 10.26 Loan Agreement dated as of March 15, 1999 by and between the Company, TD Dominion (Texas), Inc., and TD Securities (USA), Inc.(12) 10.27 Warrant dated March 24, 1999 issued to Toronto Dominion (Texas), Inc.(12)
II-3
Exhibit No. Exhibit ----------- ------- 23.1 Consent of Ropes & Gray (contained in Exhibit 5.1) 23.2 Consent of Ernst & Young LLP(12) 24.1 Power of Attorney (contained on page II-8)
- -------- (1) Incorporated by reference to an Exhibit filed as part of CTC Communications' Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (2) Incorporated by reference to an Exhibit filed as part of CTC Communications' Registration Statement on Form S-18 (Reg. No. 2-96419-B) (3) Incorporated by reference to an Exhibit filed as part of CTC Communications' Registration Statement on Form S-8 (File No. 333-68767). (4) Incorporated by reference to an Exhibit filed as part of CTC Communications' Registration Statement on Form S-8 (File No. 33-44337). (5) Incorporated by reference to an Exhibit filed as part of CTC Communications' Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1997. (6) Incorporated by reference to an Exhibit filed as part of CTC Communications' Current Report on Form 8-K dated May 15, 1998. (7) Incorporated by reference to an Exhibit filed as part of CTC Communications' Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1998. (8) Incorporated by reference to an Exhibit filed as part of CTC Communications' Current Report on Form 8-K dated October 2, 1998. (9) Incorporated by reference to an Exhibit filed as part of CTC Communications' Current Report on Form 8-K dated November 6, 1998. (10) Incorporated by reference to an Exhibit filed as part of CTC Communications' Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (11) To be filed by amendment. (12) Filed herewith. (b) Financial Statement Schedules II-4 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS CTC COMMUNICATIONS CORP. - ----------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E - ---------------------------------------------------------------------------------- Additions ---------- (2) (1) Charged to Balance at Charged to Other Balance at Beginning Costs and Accounts Deductions End of Description of Period Expenses Describe Describe Period - ----------- ---------- ---------- ---------- ---------- ---------- Year ended March 31, 1998: Allowance for doubtful accounts............. $377,000 $1,421,109 $1,306,109(a) $492,000 Year ended March 31, 1997: Allowance for doubtful accounts............. $190,215 $ 316,669 $ 129,884(a) $377,000 Year ended March 31, 1996: Allowance for doubtful accounts............. $128,452 $ 61,763 $ 0 $190,215
- -------- (a) Bad debts written off net of collections. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. II-5 Item 17. Undertakings (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under "Item 14--Indemnification of Directors and Officers" above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of Massachusetts, on this fourth day of May, 1999. CTC Communications Corp. By: /s/ Robert J. Fabbricatore --------------------------------- Name: Robert J. Fabbricatore Title: Chairman of the Board and Chief Executive Officer II-7 POWER OF ATTORNEY Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Robert J. Fabbricatore and John D. Pittenger, jointly and severally, his attorneys-in-fact, each with full power of substitution, and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post- effective amendments) to this Registration Statement on Form S-1, any subsequent registration statement for the same offering which may be filed under Rule 462(b) under the Securities Act of 1933 (a "462(b) Registration Statement") and any and all amendments (including post-effective amendments) to any such 462(b) Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert J. Fabbricatore Chairman of the Board and May 4, 1999 ______________________________________ Chief Executive Officer, Robert J. Fabbricatore Director /s/ John D. Pittenger Chief Financial Officer May 4, 1999 ______________________________________ John D. Pittenger /s/ Richard J. Santagati Director May 4, 1999 ______________________________________ Richard J. Santagati /s/ J. Richard Murphy Director May 4, 1999 ______________________________________ J. Richard Murphy /s/ Henry Hermann Director May 4, 1999 ______________________________________ Henry Hermann /s/ Ralph C. Sillari Director May 4, 1999 ______________________________________ Ralph C. Sillari /s/ Kevin J. Maroni Director May 4, 1999 ______________________________________ Kevin J. Maroni /s/ Robert A. Nicholson Director May 4, 1999 ______________________________________ Robert A. Nicholson /s/ Carl Redfield Director May 4, 1999 ______________________________________ Carl Redfield /s/ Katherine D. Courage Director May 4, 1999 ______________________________________ Katherine D. Courage
II-8
Exhibit No. Exhibit ----------- ------- 1.1 Form of Underwriting Agreement(11) 2.1 Agreement and Plan of Reorganization dated as of November 16, 1998 among the Registrant, CTC Communications Group, Inc. and CTC- Newco, Inc.(11) 3.1 Restated Articles of Organization, as amended(6) 3.2 Amended and Restated By-Laws(6) 4.1 Form of Common Stock Certificate(5) 5.1 Opinion of Ropes & Gray(11) 9.1 Voting Agreement dated April 10, 1998 among Robert Fabbricatore and certain of his affiliates and Spectrum(7) 10.1 1996 Stock Option Plan, as amended (3) 10.2 1993 Stock Option Plan(5) 10.3 Employee Stock Purchase Plan(4) 10.4 Lease for premises at 360 Second Ave., Waltham MA(5) 10.5 Sublease for premises at 360 Second Ave., Waltham MA(5) 10.6 Lease for premises at 110 Hartwell Ave., Lexington MA(5) 10.7 Lease for premises at 120 Broadway, New York, NY(5) 10.8 Agreement dated February 1, 1996 between NYNEX and the Company(5) 10.9 Agreement dated May 1, 1997 between Pacific Bell and the Company (5) 10.10 Agreement dated January 1, 1996 between SNET America, Inc. and the Company(5) 10.11 Agreement dated June 23, 1995 between IXC Long Distance Inc. and the Company, as amended(5) 10.12 Agreement dated August 19, 1996 between Innovative Telecom Corp. and the Company(5) 10.13 Agreement dated October 20, 1994 between Frontier Communications International, Inc. and the Company, as amended(5) 10.14 Agreement dated January 21, 1997 between Intermedia Communications Inc. and the Company(5) 10.15 Employment Agreement between the Company and Steven Jones dated February 27, 1998(7) 10.16 Securities Purchase Agreement dated April 10, 1998 among the Company and the Purchasers named therein(6) 10.17 Registration Rights Agreement dated April 10, 1998 among the Company and the Holders named therein(6) 10.18 Form of Warrant dated April 10, 1998(6) 10.19 Loan and Security Agreement dated as of September 1, 1998 by and between the Company, Goldman Sachs Credit Partners L.P. and Fleet National Bank(8) 10.20 Agreement with Cisco Systems Capital Corp. dated as of October 14, 1998(9) 10.21 Warrant dated July 15, 1998 issued to Spectrum(10) 10.22 Lease for premises at 220 Bear Hill Road, Waltham MA(10) 10.23 Warrant dated September 1, 1998 issued to Goldman Sachs & Co.(10) 10.24 Warrant dated September 1, 1998 issued to Fleet National Bank(10) 10.25 1998 Incentive Plan(3) 10.26 Loan Agreement dated as of March 15, 1999 by and between the Company, TD Dominion (Texas), Inc., and TD Securities (USA), Inc.(12) 10.27 Warrant dated March 24, 1999 issued to Toronto Dominion (Texas), Inc.(12) 23.1 Consent of Ropes & Gray (contained in Exhibit 5.1) 23.2 Consent of Ernst & Young LLP(12) 24.1 Power of Attorney (contained on page II-8)
- -------- (1) Incorporated by reference to an Exhibit filed as part of CTC Communications' Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (2) Incorporated by reference to an Exhibit filed as part of CTC Communications' Registration Statement on Form S-18 (Reg. No. 2-96419-B) 1 (3) Incorporated by reference to an Exhibit filed as part of CTC Communications' Registration Statement on Form S-8 (File No. 333-68767). (4) Incorporated by reference to an Exhibit filed as part of CTC Communications' Registration Statement on Form S-8 (File No. 33-44337). (5) Incorporated by reference to an Exhibit filed as part of CTC Communications' Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1997. (6) Incorporated by reference to an Exhibit filed as part of CTC Communications' Current Report on Form 8-K dated May 15, 1998. (7) Incorporated by reference to an Exhibit filed as part of CTC Communications' Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1998. (8) Incorporated by reference to an Exhibit filed as part of CTC Communications' Current Report on Form 8-K dated October 2, 1998. (9) Incorporated by reference to an Exhibit filed as part of CTC Communications' Current Report on Form 8-K dated November 6, 1998. (10) Incorporated by reference to an Exhibit filed as part of CTC Communications' Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (11) To be filed by amendment. (12) Filed herewith. (b) Financial Statement Schedules 2 EX-10.26 2 LOAN AGREEMENT DATED 3/15/99 W/TD DOMINION EXECUTION COPY - -------------------------------------------------------------------------------- LOAN AGREEMENT by and among CTC COMMUNICATIONS CORP., as Borrower, TORONTO DOMINION (TEXAS), INC., as Lender, TORONTO DOMINION (TEXAS), INC., as Agent and TD SECURITIES (USA) INC., as Arrangement, Structuring & Syndication Agent Dated as of March 15, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- Page No. -------- 1. DEFINITIONS AND CONSTRUCTION.......................................... 1 1.1. Definitions...................................................... 1 1.2. Accounting Terms................................................. 18 1.3. Construction..................................................... 19 1.4. Schedules and Exhibits........................................... 19 2. LOAN AND TERMS OF PAYMENT............................................. 19 2.1. Advances......................................................... 19 2.2. Requirements of Law.............................................. 19 2.3. Borrowing Procedures and Settlements............................. 21 2.4. Payments......................................................... 22 2.5. Unavailability of the Eurodollar Rate............................ 23 2.6. Interest: Rates, Payments, and Calculations..................... 24 2.7. Telephonic Instructions.......................................... 24 2.8. Maintenance of Loan Account; Statements of Obligations........... 25 2.9. Certain Fees..................................................... 25 2.10. Mandatory Prepayment............................................ 25 2.11. Optional Prepayment............................................. 25 2.12. Breakage Costs; Indemnity....................................... 26 2.13. Effect of Notice of Prepayment.................................. 26 2.14. Subordination................................................... 26 3. CONDITIONS; TERM OF AGREEMENT......................................... 26 3.1. Conditions Precedent to the Initial Advance ..................... 26 3.2. Conditions Precedent to all Advances............................. 28 3.3. Condition Subsequent............................................. 29 3.4. Term............................................................. 29 3.5. Effect of Termination............................................ 29 3.6. Early Termination by Borrower.................................... 30 4. REPRESENTATIONS AND WARRANTIES........................................ 30 4.1. Due Organization and Qualification; Subsidiaries................. 30 4.2. Due Authorization; No Conflict................................... 31 4.3. Litigation....................................................... 32 4.4. No Material Adverse Change....................................... 32 4.5. Fraudulent Transfer.............................................. 32 4.6. Employee Benefits................................................ 32 i 4.7. Environmental Condition.......................................... 33 4.8. Brokerage Fees................................................... 33 4.9. Year 2000 Compliance............................................. 33 4.10. Intellectual Property........................................... 33 4.11. Leases.......................................................... 34 4.12. Existing Indebtedness........................................... 34 5. AFFIRMATIVE COVENANTS................................................. 34 5.1. Accounting System................................................ 34 5.2. Financial Statements, Reports, Certificates...................... 34 5.3. Tax Returns...................................................... 36 5.4. Guarantor Reports................................................ 36 5.5. Certain Information in Connection With Acquisitions.............. 36 5.6. Taxes............................................................ 36 5.7. Insurance........................................................ 36 5.8. No Setoffs or Counterclaims...................................... 37 5.9. Compliance with Laws............................................. 37 5.10. Employee Benefits............................................... 37 5.11. Leases.......................................................... 38 5.12. Brokerage Commissions........................................... 38 5.13. Year 2000 Compliance............................................ 38 5.14. Projections..................................................... 38 5.15. Corporate Existence, etc........................................ 38 5.16. Disclosure Updates.............................................. 38 5.17. Use of Proceeds................................................. 39 6. NEGATIVE COVENANTS.................................................... 39 6.1. Indebtedness..................................................... 39 6.2. Liens............................................................ 40 6.3. Restrictions on Fundamental Changes.............................. 41 6.4. Disposal of Assets............................................... 41 6.5. Amendments to Credit Facility.................................... 41 6.6. Guarantee........................................................ 41 6.7. Nature of Business............................................... 41 6.8. [Reserved.] ..................................................... 41 6.9. Margin Stock..................................................... 41 6.10. Distributions................................................... 42 6.11. Accounting Methods.............................................. 42 6.12. Investments..................................................... 42 6.13. Transactions with Affiliates.................................... 43 6.14. Suspension...................................................... 43 6.15. No Prohibited Transactions Under ERISA.......................... 43 6.16. Violation of Material Agreements................................ 44 ii 7. EVENTS OF DEFAULT..................................................... 44 8. THE LENDER GROUP'S RIGHTS AND REMEDIES................................ 46 8.1. Rights and Remedies.............................................. 46 8.2. Remedies Cumulative.............................................. 46 9. TAXES AND EXPENSES.................................................... 46 10. WAIVERS; INDEMNIFICATION............................................. 47 10.1. Demand; Protest; etc............................................ 47 10.2. Indemnification................................................. 47 11. NOTICES.............................................................. 48 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................... 49 13. DESTRUCTION OF BORROWER'S DOCUMENTS.................................. 50 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS........................... 50 14.1. Assignments and Participations.................................. 50 14.2. Successors...................................................... 53 15. AMENDMENTS; WAIVERS.................................................. 53 15.1. Amendments and Waivers.......................................... 53 15.2. No Waivers; Cumulative Remedies................................. 54 16. AGENT; THE LENDER GROUP.............................................. 54 16.1. Appointment and Authorization of Agent.......................... 54 16.2. Delegation of Duties............................................ 55 16.3. Liability of Agent.............................................. 55 16.4. Reliance by Agent............................................... 56 16.5. Notice of Default or Event of Default........................... 56 16.6. Credit Decision................................................. 57 16.7. Costs and Expenses; Indemnification............................. 57 16.8. Agent in Individual Capacity.................................... 58 16.9. Successor Agent................................................. 58 16.10. Withholding Tax................................................ 58 16.11. Restrictions on Actions by Lenders; Sharing of Payments........ 60 iii 16.12. Payments by Agent to the Lenders............................... 60 16.13. Several Obligations; No Liability.............................. 60 17. GENERAL PROVISIONS................................................... 61 17.1. Effectiveness................................................... 61 17.2. Section Headings................................................ 61 17.3. Interpretation.................................................. 61 17.4. Severability of Provisions...................................... 61 17.5. Amendments in Writing........................................... 61 17.6. Counterparts; Telefacsimile Execution........................... 61 17.7. Revival and Reinstatement of Obligations........................ 62 17.8. Integration..................................................... 62 iv LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement"), is entered into as of March 15, --------- 1999, by and among the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and ------ collectively as the "Lenders"), TD SECURITIES (USA) INC., a Delaware corporation ------- ("TDSI"), as an agent for the lenders (in such capacity, "Arrangement, ---- ------------ Structuring & Syndication Agent"), with a place of business located at 31 West - ------------------------------- 52nd Street, New York, New York 10019-6101, TORONTO DOMINION (TEXAS), INC., a Delaware corporation with a place of business located at 909 Fannin Street, Houston, Texas 77010, as administrative agent for the Lenders (in such capacity, "Agent"), and CTC COMMUNICATIONS CORP., a Massachusetts corporation ----- ("Borrower"), with its chief executive office located at 360 Second Avenue, -------- Waltham, Massachusetts 02451. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. ---------------------------- 1.1. Definitions. ----------- As used in this Agreement, the following terms shall have the following definitions: "Acquired Indebtedness" means, with respect to any specified Person, --------------------- Indebtedness of any other Person existing at the time such other Person merged with or into or became a Subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, or such Person acquired all or substantially all of the specified Person's assets, but excluding Indebtedness which is extinguished, retired or repaid in connection with such other Person merging with or into or becoming a Subsidiary of such specified Person. "Advances" has the meaning set forth in Section 2.1(a). -------- -------------- "Affected Party" means any Lender, any Lender's Eurodollar Lending -------------- Office, any beneficial owner of any Lender, and their respective successors and assigns. "Affiliate" means, as applied to any Person, any other Person who, --------- directly or indirectly, controls, is controlled by, or is under common control with such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 5% or more of the Stock having ordinary voting power for the election of directors (or comparable managers) or the direct or indirect power to direct the management and policies of a Person. "Agent" has the meaning set forth in the preamble to this Agreement. ----- "Agent-Related Persons" means Agent and any successor agents together --------------------- with their respective Affiliates, and the officers, directors, employees, counsel, agents, and attorneys-in-fact of such Persons and their Affiliates. "Aggregate Facility Usage" means, as of any date of determination, the ------------------------ sum of the aggregate principal amount of Advances outstanding. "Agreement" has the meaning set forth in the preamble hereto. --------- "Applicable Margin" means: ----------------- (i) with respect to Advances that are Base Rate Advances, 600 basis points at all times through and including the date that is 90 days subsequent to the Closing Date, 650 basis points at all times after the date that is 90 days subsequent to the Closing Date and prior to the date that is 180 days subsequent to the Closing Date, 700 basis points at all times after the date that is 180 days subsequent to the Closing Date and prior to the date that is 270 days subsequent to the Closing Date, 750 basis points at all times after the date that is 270 days subsequent to the Closing Date and prior to the date that is 360 days subsequent to the Closing Date and increasing by an additional 100 basis points on the date that is 360 days subsequent to the Closing Date and on the last day of each 90-day period thereafter until the Maturity Date for so long as any Advances are outstanding, provided, however, the Applicable Margin will increase by an additional 200 basis points on the Maturity Date, if the Advances are not paid in full by the Maturity Date; and (ii) with respect to Advances that are Eurodollar Rate Advances, 700 basis points at all times through and including the date that is 90 days subsequent to the Closing Date, 750 basis points at all times after the date that is 90 days subsequent to the Closing Date and prior to the date that is 180 days subsequent to the Closing Date, 800 basis points at all times after the date that is 180 days subsequent to the Closing Date and prior to the date that is 270 days subsequent to the Closing Date, 850 basis points at all times after the date that is 270 days subsequent to the Closing Date and prior to the date that is 360 days subsequent to the Closing Date and increasing by an additional 100 basis points on the date that is 360 days subsequent to the Closing Date and on the last day of each 90-day period thereafter until the Maturity Date for so long as any Advances are outstanding, provided, however, the Applicable Margin will increase by an additional 200 basis points on the Maturity Date, if the Advances are not paid in full by the Maturity Date. "Arrangement, Structuring & Syndication Agent" has the meaning set -------------------------------------------- forth in the preamble to this Agreement. "Assignee" has the meaning set forth in Section 14.1. -------- ------------ "Assignment and Acceptance" means an Assignment and Acceptance in the ------------------------- form of Exhibit A-1 attached hereto. 2 "Authorized Person" means any officer or other employee of Borrower. ----------------- "Average Life" means, as of any date, with respect to any debt ------------ security or Disqualified Stock, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from such date to the dates of each scheduled principal payment or redemption payment (including any sinking fund or mandatory redemption payment requirements) of such debt security or Disqualified Stock multiplied in each case by (y) the amount of such principal or redemption payment, by (ii) the sum of all such principal or redemption payments. "Average Price" means the average over the 20 trading days ending on ------------- the day immediately preceding the date of determination of the last reported sale price or, if no such sale takes place on any such day, the closing bid price, in either case as reported for consolidated transactions on the principal national securities exchange (including the Nasdaq National Market) on which such security is listed or admitted for trading. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. --------------- (S) 101 et seq.), as amended, and any successor statute. "Base Rate" means, for any day, the higher of (i) the sum of the --------- Federal Funds Rate for such day plus 50 basis points per annum and (ii) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Advance" means an Advance at any time the interest rate ----------------- thereon is computed with reference to the Base Rate. "Bell Atlantic Agreements" means those certain agreements entered into ------------------------ between Borrower and Bell Atlantic with respect to the resale of telecommunications services by Borrower. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3 ------------ (35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3 (5) of ERISA) within the past six years. "Board" means the Board of Governors of the Federal Reserve System of ----- the United States or any successor. "Borrower" has the meaning set forth in the preamble to this -------- Agreement. "Borrower's Books" means all of Borrower's books and records ---------------- including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. 3 "Borrowing" means a borrowing hereunder consisting of Advances made on --------- the same day by the Lenders (or Agent on behalf thereof) to Borrower. "Business Day" means any day that is not a Saturday, Sunday or other ------------ day on which commercial banks in New York City are authorized or required to remain closed; provided that, when used in connection with a Eurodollar Rate Advance, the term "Business Day" shall also exclude any day on which banks are not open for dealings in U.S. dollar deposits in the London interbank market. "Capital Expenditures" means expenditures made or liabilities incurred -------------------- for the acquisition of fixed assets or improvements, replacements, substitutions, or additions thereto that are required to be accounted for as capital expenditures under GAAP, including the total principal portion of Capitalized Lease Obligations. "Capital Markets Transaction" has the meaning specified in Section --------------------------- ------- 2.10. - ----- "Capitalized Lease Obligation" means any Indebtedness represented by ---------------------------- obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Change of Control" shall be deemed to have occurred at such time as: ----------------- (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than a Permitted Holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than the Threshold Percentage of the total voting power of all classes of Stock then outstanding entitled to vote in the election of directors (1) of Borrower prior to the consummation of the Holding Company Reorganization, or (2) of New Holding Company from and after consummation of the Holding Company Reorganization, (b) a majority of members of the board of directors of Borrower shall not be Continuing Directors; (c) Borrower shall cease to own and control, directly and of record, 100% of the issued and outstanding capital Stock of each of the Subsidiaries of Borrower; or (d) from and after consummation of the Holding Company Reorganization, (1) a majority of members of the board of directors of New Holding Company shall not be Holding Company Continuing Directors, or (2) New Holding Company shall cease to own and control, directly and of record, 100% of the issued and outstanding capital Stock of Borrower. "Cisco" means Cisco Systems, Inc. and/or Cisco Systems Capital ----- Corporation. "Cisco Facility" means that certain loan agreement dated as of October -------------- 14, 1998, between Borrower and Cisco Systems Capital Corporation, as lender, as such may be amended, renewed, extended, supplemented, refinanced and replaced or refunded from time to time. "Cisco Subordination Agreement" means that certain Subordination ----------------------------- Agreement to be entered into by Borrower, Cisco and Agent (on behalf of the Lender Group). By entering into the Cisco Subordination Agreement on behalf of the Lender Group, Agent shall bind each member of the Lender Group to the terms thereof. 4 "Class A Contingent Warrants" means those certain warrants issued to --------------------------- the Lenders prior to the initial Advance to purchase a number of shares of common stock of the Borrower equal to the ratio to which the Advances made by the Lenders from the Closing Date to the six month anniversary of the Closing Date hereto bears to $30,000,000 multiplied by the Contingent Warrant Amount, at an exercise price equal to the lesser of 100% of the Average Price as of March 11, 1999 or the day preceding the six month anniversary of the Closing Date. "Class B Contingent Warrants" means those certain warrants issued to --------------------------- the Lenders upon each Advance made to the Borrower after the six month anniversary of the Closing Date to purchase a number of shares of common stock of the Borrower equal to the ratio to which such Advance bears to $30,000,000 multiplied by the Contingent Warrant Amount, at an exercise price equal to the lesser of 100% of the Average Price as of March 11, 1999 or the day preceding the date of such Advance. "Closing Date" means March 24, 1999. ------------ "Closing Date Business Plan" means the set of Projections of Borrower -------------------------- for the 3 year period following the Closing Date (on a year by year basis, and on a quarter by quarter basis). "Collections" means all cash, checks, notes, instruments, and other ----------- items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Commitment" means, at any time with respect to a Lender, the ---------- principal amount set forth beside such Lender's name on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1, in each of the ------------ foregoing cases, as such Commitment may be reduced from time to time in accordance with (i) the last sentence of Section 2.1(a) or (ii) the provisions -------------- of Section 14.1, and "Commitments" means, collectively, the aggregate amount of ------------ ----------- the commitments of all of the Lenders. "Compliance Certificate" means a certificate substantially in the ---------------------- form of Exhibit C-2 and delivered by the chief accounting officer of Borrower to Agent. "Contingent Warrant Amount" means a number of shares of common stock ------------------------- of Borrower, par value $0.01 per share, equal to 4.0% of the outstanding equity of Borrower, calculated using the treasury stock method as of the day preceding the Closing Date using a fair market value of the common stock equal to the Average Price as of March 11, 1999. "Contingent Warrants" means collectively, the Class A Contingent ------------------- Warrants and the Class B Contingent Warrants. "Continuing Director" means, as of any date of determination, a member ------------------- of the board of directors of Borrower who (a) was a member of the board of directors of Borrower on the Closing Date, or (b) was nominated to be a member of the board of directors of Borrower by 5 a majority of the Continuing Directors then in office to fill a vacancy left by the death, expiration of term, permanent disability, or resignation of a Continuing Director. "Credit Facility" means the Loan and Security Agreement, dated as of --------------- September 1, 1998, among Borrower and Goldman Sachs Credit Partners L.P. ("Goldman Sachs") and Fleet National Bank ("Fleet"), as Lenders, Fleet National - --------------- ----- Bank, as Agent and Goldman Sachs Credit Partners L.P., as Arrangement, Structuring & Syndication Agent, providing for revolving credit borrowings and letters of credit, including all related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as such may be amended, renewed, extended, supplemented, refinanced and replaced or refunded from time to time. "Currency Agreements" means, with respect to any person, any currency ------------------- swap agreements, forward exchange rate agreements, foreign currency futures or options, exchange rate collar agreements, exchange rate insurance and other agreements or arrangements, or combination thereof, designed to provide protection against fluctuations in currency exchange rates. "Default" means an event, condition, or default that, with the giving ------- of notice, the passage of time, or both, would be an Event of Default. "Disqualified Stock" means any Capital Stock which, by its terms (or ------------------ by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event or otherwise, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof or is exchangeable at the option of the holder for Indebtedness at any time, in whole or in part, on or prior to the Maturity Date; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require Borrower to repurchase such Capital Stock upon the occurrence of a Change of Control or an asset sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that Borrower may not repurchase or redeem any such Capital Stock pursuant to such provisions unless either (i) such repurchase or redemption is a Permitted Distribution or (ii) this Agreement has been terminated. "Dollars" or "$" means United States dollars. ------- - "Effective Date" has the meaning set forth in Section 2.2(b). -------------- -------------- "Eligible Transferee" means: (a) a commercial bank organized under the ------------------- laws of the United States, or any state thereof, and having total assets in excess of $250,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country, and having total assets in excess of $250,000,000; provided that such bank is acting through a branch or agency located in the United States; (c) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having total assets in 6 excess of $250,000,000; (d) any Affiliate (other than individuals) of a pre- existing Lender; (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Borrower; and (f) during the continuation of an Event of Default, any other Person approved by Agent. "Equity Interests" means Stock and all warrants, options or other ---------------- rights to acquire Stock (but excluding any debt security that is convertible into, or exchangeable for, Stock). "ERISA" means the Employee Retirement Income Security Act of 1974, 29 ----- U.S.C. (S) 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any corporation subject to ERISA whose --------------- employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit ----------- Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA Affiliates. "Eurocurrency Liabilities" has the meaning assigned to that term in ------------------------ Regulation D of the Board, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the ------------------------- office, if any, of such Lender specified from time to time as its "Eurodollar Lending Office" in a written notice to Borrower. "Eurodollar Rate" means the interest rate per annum calculated --------------- according to the following formula: 7 Eurodollar = Interbank Offered Rate Rate --------------------------------------- 1 Eurodollar Reserve Percentage "Eurodollar Rate Advance" means an Advance at any time the interest ----------------------- rate thereon is computed with reference to the Eurodollar Rate. "Eurodollar Reserve Percentage" means, for any day, that percentage ----------------------------- (expressed as a decimal) which is in effect from time to time under Regulation D or any successor regulation, as the maximum reserve requirement (including any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Rate Advances is determined), whether or not Agent or any Lender has any Eurocurrency liabilities subject to such requirements, without benefits of credits or proration, exceptions or offsets that may be available from time to time to Agent or any Lender. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Event of Default" has the meaning set forth in Section 7. ---------------- --------- "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ and any successor statute thereto. "Existing Indebtedness" means Indebtedness of Borrower and its --------------------- Subsidiaries outstanding on the Closing Date, excluding Indebtedness arising under the Credit Facility and the Cisco Facility. "Fabbricatore" means Mr. Robert Fabbricatore. ------------ "Fabbricatore Related Parties" means Fabbricatore, the Family Members ---------------------------- of Fabbricatore, Fabbricatore Family Trusts, and any wholly owned Subsidiary of any combination of the foregoing. "Fabbricatore Family Trusts" means trusts or other estate planning -------------------------- vehicles established for the benefit of the Family Members of Fabbricatore. "Fair Market Value" means, with respect to any asset or property, the ----------------- sale value that could be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors of Borrower or a Subsidiary, as applicable. "Family Member" means, with respect to any individual, any other ------------- individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to such individual. "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight 8 Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Agent (in its individual capacity) on such day on such transactions as determined by Agent. "Fee Letter" means that certain Fee Letter, dated February 12, 1999, ---------- among Borrower, TDSI and TD Texas. "Funding Date" means the date on which a Borrowing occurs. ------------ "GAAP" means generally accepted accounting principles as in effect ---- from time to time in the United States, consistently applied. "Governing Documents" means, with respect to any person, the ------------------- certificate or articles of incorporation, by-laws, or other organizational or governing documents of such Person. "Governmental Authority" shall mean any federal, state, local, or ---------------------- other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Hazardous Materials" means (a) substances that are defined or listed ------------------- in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Holding Company Continuing Director" means, as of any date of ----------------------------------- determination, a member of the board of directors of New Holding Company who (a) was a member of the board of directors of Borrower on the Closing Date and is elected to the board of directors of New Holding Company, or (b) was nominated to be a member of the board of directors of New Holding Company by a majority of the Holding Company Continuing Directors then in office to fill a vacancy left by the death, expiration of term, permanent disability, or resignation of a Holding Company Continuing Director. 9 "Holding Company Guaranty" means a general continuing guaranty in form ------------------------ and substance satisfactory to Agent, to be executed and delivered by New Holding Company to Agent at the time of the Holding Company Reorganization. "Holding Company Reorganization" means the reorganization, on terms ------------------------------ reasonably satisfactory to the Required Lenders, of Borrower into a holding company structure in which the New Holding Company owns 100% of the issued and outstanding stock of Borrower. "Indebtedness" means: (a) all obligations of Borrower for borrowed ------------ money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all Capitalized Lease Obligations, (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co- made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 10.2. ----------------------- ------------ "Indemnified Person" has the meaning set forth in Section 10.2. ------------------ ------------ "Insolvency Proceeding" means any proceeding commenced by or against --------------------- any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of ----------------- the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Interbank Offered Rate" means, for any Eurodollar Rate Advance for ---------------------- any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Interbank Offered Rate" shall mean, for any Eurodollar Rate Advance for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in dollars at approximately 11:00 a.m. (London Time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Interest Payment Date" means (i) the last day of each March, June, --------------------- September and December after the Closing Date in the case of the Base Rate Advances, (ii) the last day of 10 each Interest Period in the case of Eurodollar Rate Advances, (iii) the Maturity Date, and (iv) the date of any prepayment of all or any portion of the principal of the Advances. "Interest Period" means, in respect of any Eurodollar Rate Advance, --------------- (i) in the case of the first Interest Period (if any) applicable to the Advances, the period commencing on and including the Closing Date and ending on the numerically corresponding date in the 3rd month thereafter, and (ii) in the case of each subsequent Interest Period, the period beginning on the last day of the prior Interest Period and ending on the numerically corresponding date in the 3rd month thereafter; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended until the next succeeding Business Day unless the next Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Notwithstanding the foregoing, no Interest Period in respect of the Advances may extend beyond the Maturity Date and each Interest Period that would otherwise commence before and end after the Maturity Date shall end on the Maturity Date. "Interest Rate Agreements" means, with respect to any Person, an ------------------------ obligation of such Person pursuant to any interest rate swap agreement, interest rate cap, collar or floor agreement or other similar agreement or arrangement designed to protect against or manage such Person's or any of its Subsidiaries' exposure to fluctuations in interest rates. "Inventory" means all present and future inventory in which Borrower --------- has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investments" means, with respect to any Person, all investments by ----------- such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide accounts receivable arising from the sale of goods or services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness, Stock, or other securities, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "IRC" means the Internal Revenue Code of 1986, as amended, and the --- regulations thereunder. "Legal Requirements" means all applicable international, foreign, ------------------ federal, state, and local laws, judgments, decrees, orders, statutes, ordinances, rules, regulations, or Permits. "Lender" and "Lenders" have the respective meanings set forth in the ------ ------- preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1 hereof. ------------ 11 "Lender Group" means, individually and collectively, each of the ------------ individual Lenders, Agent, and Arrangement, Structuring & Syndication Agent. "Lender Group Expenses" means all: costs or expenses (including --------------------- taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by the Lender Group; fees or charges paid or incurred by the Lender Group in connection with the Lender Group's transactions with Borrower, including, fees or charges for photocopying, couriers and messengers, telecommunication, costs and expenses incurred by Agent in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Agent resulting from the dishonor of checks; costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, costs and expenses paid or incurred by Agent in examining Borrower's Books, costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower (or any of its Subsidiaries party to one or more Loan Documents); and the Lender Group's reasonable attorneys fees and expenses (including the reasonable fees of Latham & Watkins, counsel to the Lender Group, which, as to such fees in respect of the preparation, execution and delivery of the Loan Documents as in effect on the Closing Date, shall not exceed $150,000, plus reimbursement of the reasonable out-of-pocket expenses) incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys' fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or any guarantor of the Obligations), defending, or concerning the Loan Documents, irrespective of whether suit is brought. The foregoing notwithstanding, unless an Event of Default has occurred and is continuing and all the Obligations are currently due and payable (either by their terms or following acceleration), Borrower shall not be responsible for paying the fees, expenses, or disbursements of more than one set of attorneys for the Lender Group. "Lender-Related Person" means, with respect to any Lender, such --------------------- Lender, together with such Lender's Affiliates, and the officers, directors, managing directors, partners, employees, counsel, agents, and attorneys- in-fact of such Lender and such Lender's Affiliates. "Lien" means any interest in property securing an obligation owed to, ---- or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan" means each related set of Advances made by the Lenders. ---- 12 "Loan Account" has the meaning set forth in Section 2.8. ------------ ----------- "Loan Documents" means this Agreement, the Warrants, the Contingent -------------- Warrants, the Fee Letter, the Cisco Subordination Agreement, the Holding Company Guaranty (from and after the date that it is executed and delivered), any note or notes executed by Borrower and payable to the Lender Group, and any other agreement entered into, now or in the future, in connection with this Agreement. "Material Adverse Change" means any material adverse change in the ----------------------- financial, banking or capital market condition which individually or in the aggregate could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated hereby. "Maturity Date" has the meaning set forth in Section 3.4. ------------- ----------- "Maximum Amount" means $30,000,000 which will be permanently reduced -------------- as a result of prepayments made by Borrower (if any) pursuant to Sections 2.10 ------------- and 2.11. - -------- "Maximum Rate" has the meaning set forth in Section 2.6(d). ------------ -------------- "Multiemployer Plan" means a "multiemployer plan" (as defined in ------------------ Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Net Cash Proceeds" means the aggregate cash proceeds received ----------------- (including any cash and cash equivalents and cash payments received by way of deferred payment of principal pursuant to a note, an installment receivable or otherwise, but only as and when received) from any Capital Markets Transaction. "Net Funded Debt" means the total Indebtedness of Borrower, reduced by --------------- the amount of cash and cash equivalents of Borrower on hand as of any date of measurement thereof. "New Capital Proceeds" means the net proceeds received by New Holding -------------------- Company from any offerings of debt or equity securities after the Closing Date. "New Holding Company" means a Delaware corporation to be created as ------------------- part of the Holding Company Reorganization for the purpose of owning 100% of the issued and outstanding shares of stock of Borrower. "Obligations" means all loans, Advances, debts, principal, interest ----------- (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, or Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by Borrower to the Lender Group of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant to any other agreement between the 13 Lender Group and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that the Lender Group may have obtained by assignment or otherwise, and further including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Old Bell Atlantic Collections" means collections with respect to past ----------------------------- due claims of Borrower against Bell Atlantic or its Subsidiaries arising out of or related to Borrower's former agency relationship with Bell Atlantic or its Subsidiaries (including net cash proceeds received from the litigation against Bell Atlantic in a settlement or non-appealable court decision). "Participant" has the meaning set forth in Section 14.1(e). ----------- --------------- "PBGC" means the Pension Benefit Guaranty Corporation as defined in ---- Title IV of ERISA, or any successor thereto. "Permits" of a Person shall mean all rights, franchises, permits, ------- authorities, licenses, certificates of approval or authorizations, including licenses and other authorizations issuable by a Governmental Authority, which pursuant to applicable Legal Requirements are necessary to permit such Person lawfully to conduct and operate its business as currently conducted and to own and use its assets. "Permitted Distributions" means dividends or distributions by Borrower ----------------------- to New Holding Company made after the effective date of the Holding Company Reorganization pursuant to a budget submitted in advance by Borrower to Agent and approved in advance by the Lender Group in its reasonable discretion, for the purpose of paying the portion of reasonable holding company overhead, public filing costs, accounting costs, and like expenses reasonably allocable to Borrower (but not the portion of any such costs or expenses reasonably allocable to other Subsidiaries of New Holding Company that are not Subsidiaries of Borrower); provided that in no event shall such dividends or distributions be made or used for the purpose of paying interest, fees, costs, or expenses with respect to Indebtedness of, or paying cash dividends or other distributions in respect of Stock of, New Holding Company or of any Subsidiary of New Holding Company. "Permitted Holder" means the Fabbricatore Related Parties or the ---------------- Spectrum Related Parties. "Permitted Liens" means: --------------- (a) Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are the subject of Permitted Protests; (b) Liens set forth on Schedule P-1; 14 (c) the interests of lessors under operating leases; (d) Liens to secure Indebtedness (including Capital Lease Obligations) permitted to be incurred by Section 6.1(j), provided that such -------------- Liens cover only the assets permitted to be acquired with Indebtedness; (e) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests; (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance; (g) Liens or deposits to secure performance of bids, tenders, or leases (to the extent that such leases are entered into in conformity with any applicable provisions of this Agreement), incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money; (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower; (i) Liens of or resulting from any judgment or award that reasonably could not be expected to result in a Material Adverse Change and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review has been secured; (j) Liens on collateral granted to Cisco pursuant to the terms of the Cisco Facility; (k) with respect to any Real Property, easements, rights of way, zoning and similar covenants and restrictions, and similar encumbrances that customarily exist on properties of Persons engaged in similar activities and similarly situated that do not materially interfere with the ordinary conduct of the business of Borrower; and (l) Liens on collateral granted to Fleet and Goldman pursuant to the terms of the Credit Facility. "Permitted Protest" means the right of Borrower to protest any Lien, ----------------- tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in an amount that is reasonably satisfactory to Agent and (b) any such protest is instituted and diligently prosecuted by Borrower in good faith. 15 "Person" means and includes natural persons, corporations, limited ------ liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means any employee benefit plan, program, or arrangement ---- maintained or contributed to by Borrower or with respect to which it may incur liability. "Prepayment Date" has the meaning set forth in Section 2.13. --------------- ------------ "Prime Rate" means the rate of interest per annum established from ---------- time to time by Agent as its prime rate. The Prime Rate is not necessarily the best or the lowest rate of interest offered by Agent. "Projections" means Borrower's forecasted (a) balance sheets, (b) ----------- profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: -------------- (a) with respect to a Lender's obligation to make Advances or to indemnify Agent-Related Persons pursuant to Section 16.7, the percentage ------------ obtained by dividing (i) such Lender's Commitment, by (ii) all such Commitments of all Lenders; and (b) with respect to all other matters, the percentage obtained by dividing (i) the aggregate outstanding principal amount of such Lender's Advances, by (ii) the Aggregate Facility Usage, provided, however, that if there are no Advances outstanding, the Pro Rata Share shall be calculated by the formula contained in subsection (a) of this definition. "Real Property" means any estates or interests in real property now ------------- owned or hereafter acquired by Borrower. "Regulatory Change" means any adoption, interpretation, or change of ----------------- any statute, law, order, regulation, or directive. "Reportable Event" means any of the events described in Section ---------------- 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Required Lenders" means, at any time, Lenders whose Pro Rata Shares ---------------- aggregate more than 50.00% of the Commitments, or if the Commitments have been terminated irrevocably, more than 50.00% of the Obligations then outstanding. 16 "Retiree Health Plan" means an "employee welfare benefit plan" within ------------------- the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Solvent" means, with respect to any Person on a particular date, that ------- on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Spectrum Related Parties" means Spectrum Equity Investors, L.P. and ------------------------ any of its Subsidiaries. "Stated Maturity" means, with respect to any security, the date --------------- specified in such security as the fixed dated on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred) and, when used with respect to any installment of interest on such security, the fixed date on which such installment of interest is due and payable. "Stock" means all shares, options, warrants, interests, ----- participations, or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Subsidiary" of a Person means a corporation, partnership, limited ---------- liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "TD Texas" means Toronto Dominion (Texas), Inc., a Delaware -------- corporation, in its capacity as a Lender. 17 "Telecommunications Business" means the business of (i) transmitting, --------------------------- or providing services relating to the transmission of, voice, video or data through owned or leased transmission facilities, (ii) creating, developing or marketing communications related network equipment, software and other devices for use in (i) above or (iii) evaluating, participating or pursuing any other activity or opportunity that is related or ancillary to those specified in (i) or (ii) above and includes, without limitation, any business in which Borrower and its Subsidiaries are engaged at the Closing Date; provided that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors of Borrower. "Threshold Percentage" means, as of any date of determination, (a) if -------------------- the aggregate percentage of the total voting power of all classes of Stock of Borrower or New Holding Company, as applicable, then outstanding and beneficially owned (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) by the Permitted Holders equals or exceeds 30%, then the Threshold Percentage is 40%, and (b) if the aggregate percentage of the total voting power of all classes of Stock of Borrower or New Holding Company, as applicable, then outstanding and beneficially owned (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) by the Permitted Holders is less than 30%, then the Threshold Percentage is such aggregate percentage. "VA Sub" means CTC Communications of Virginia Inc., a Virginia ------ corporation, which is a wholly owned Subsidiary of Borrower. "Voidable Transfer" has the meaning set forth in Section 17.7. ----------------- ------------ "Warrant Shares" means the shares of common stock of Borrower issued -------------- upon exercise of the Contingent Warrants and Warrants. "Warrants" means those certain warrants to purchase common stock of -------- Borrower, issued to the Lenders or their designees (in accordance with their Pro Rata Shares) by Borrower, in form and substance satisfactory to Agent and each Lender, on the Closing Date for the purchase of 0.5% of the outstanding equity of Borrower, calculated using the treasury stock method as of the day preceding the Closing Date using a fair market value of the common stock equal to the Average Price as of March 11, 1999. The Warrants shall have an exercise price equal to 100% of the Average Price as of March 11, 1999. "Year 2000 Compliant" means, with regard to any Person, that all ------------------- software in goods produced or sold by, or utilized by and material to the business operations or financial condition of, such Person are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including in relation to dates in and after the year 2000. 1.2. Accounting Terms. ---------------- All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. 18 1.3. Construction. Unless the context of this Agreement or any other ------------ Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by Agent. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable. 1.4. Schedules and Exhibits. All of the schedules and exhibits ---------------------- attached to this Agreement shall be deemed incorporated herein by reference. With the consent of the Required Lenders, which shall not unreasonably be withheld, Borrower from time to time may update or supplement the schedules to the Loan Documents. 2. LOAN AND TERMS OF PAYMENT. ------------------------- 2.1. Advances. -------- (a) Subject to the terms and conditions of this Agreement, from and after the date of this Agreement to but excluding the Maturity Date, each Lender severally agrees to make advances ("Advances") to Borrower in an aggregate -------- principal amount not to exceed such Lender's Commitment. Each Advance funded by a Lender shall constitute a permanent reduction in such Lender's Commitment in an amount equal to the principal amount funded. (b) Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be prepaid during the term of this ----------- Agreement, but may not be reborrowed. (c) Each Loan comprised of the Advances made by the Lenders on any Funding Date shall be in a minimum aggregate principal amount of $1,000,000 (or in larger integral multiples of $500,000). 2.2. Requirements of Law. ------------------- (a) In the event that any Regulatory Change shall: (i) change the taxation of any amounts payable to any Lender under this Agreement or any note issued pursuant hereto in respect of any Advance (other than taxes imposed on the net income of such Lender); 19 (ii) impose or modify any reserve, compulsory loan assessment, special deposit or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, any applicable office of such Lender (including any of such Advances); or (iii) impose any other conditions affecting this Agreement in respect of Advances (or any of such extensions of credit, assets, deposits or liabilities); and the result of any of the foregoing shall be to increase such Lender's costs of making or maintaining any of its Advances or its Commitment, or to reduce any amount receivable by such Lender hereunder in respect of any of its Advances or its Commitment, in each case only to the extent that such additional amounts are not already included in the interest rate applicable to such Advance, then Borrower shall pay on demand to Agent, for the account of such Lender, and from time to time as specified by such Lender, such additional amounts as such Lender shall reasonably determine are sufficient to compensate such Lender for such increased cost or reduced amount receivable. (b) If at any time after the date of this Agreement any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the Closing Date pursuant to, or arising after the Closing Date out of, the July 1988 report of the Basle Committee on Lending Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption or implementation after the Closing Date of any other Regulatory Change regarding capital adequacy or any change after the Closing Date in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof (whether or not having the force of law), has or will have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of the existence of its obligations hereunder to a level below that which such Lender or its holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time following written notice by such Lender to Borrower as provided in paragraph (c) of this Section, within fifteen (15) days after demand by such Lender, Borrower shall pay to such Lender, through Agent, such additional amount or amounts as such Lender shall reasonably determine will compensate such Lender or such Lender's holding company, as the case may be, for such reduction, provided that to the extent that any or all of Borrower's liability under this Section arises following the date of the adoption of any such Regulatory Change (the "Effective Date"), such compensation -------------- shall be payable only with respect to that portion of such liability arising after notice of such Regulatory Change is given by such Lender to Borrower (unless such notice is given within sixty (60) days after the Effective Date, in which case such compensation shall be payable in full). (c) If any Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify Borrower of the event by reason of which it has become so entitled. A certificate setting forth in reasonable detail the computation of any 20 additional amounts payable pursuant to this Section shall be delivered to Borrower and the other Lenders promptly after the incurrence of such additional amounts and such certificate shall be presumed correct in the absence of manifest error. The covenants contained in this Section shall survive the termination of this Agreement and the payment of the outstanding Obligations. No failure on the part of any Lender to demand compensation under paragraph (a) or (b) above on any one occasion shall constitute a waiver of its rights to demand compensation on any other occasion. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of any law, regulation or other condition which shall give rise to any demand by such Lender for compensation thereunder. In the event that any of the losses or payments for which any Lender or its holding company is compensated under this Section are reimbursed or otherwise restored to such Lender or its holding company for any reason, including the rescission, nullification or retroactive modification of any such Regulatory Change, such Lender shall reimburse Borrower accordingly as soon as reasonably practicable. 2.3. Borrowing Procedures and Settlements. ------------------------------------ (a) Procedure for Borrowing. Each Loan shall be made upon ----------------------- Borrower's irrevocable request therefor delivered to Agent (which notice must be received by Agent no later than 11:00 a.m. (New York time) on the third Business Day prior to the requested Funding Date) specifying (i) the amount of such Loan, and (ii) the requested Funding Date, which shall be a Business Day. Notwithstanding the foregoing, if Agent has previously notified the Borrower pursuant to Section 2.5 of the unavailability of the Eurodollar ----------- Rate Advances, while such unavailability continues all Loans shall be Base Rate Advances, which shall be made upon Borrower's irrevocable request therefor delivered to Agent (which notice must be received by Agent no later than 11:00 a.m. (New York time) on the first Business Day prior to the requested Funding Date) specifying (i) the amount of such Loan, and (ii) the requested Funding Date, which shall be a Business Day. (b) Disbursement of Funds. Agent may, on behalf of the Lenders, --------------------- disburse funds to Borrower for Loans requested. Unless Agent shall have received notice from a Lender prior to a Funding Date that such Lender will not make available its Pro Rata Share of a Loan requested by Borrower, Agent may assume that such Lender has made such amount available to Agent on the Business Day following the Funding Date. If a Lender has not in fact made its Pro Rata Share available to Agent on such date, then such Lender and Borrower severally agree to pay to Agent forthwith on demand such amount without set-off, counterclaim or deduction of any kind, together with interest thereon, for each day from and including the date such amount was to have been made available to Agent by such Lender to, but excluding, the date of payment to Agent, at (a) in the case of such Lender, the Federal Funds Rate, or (b) in the case of Borrower, the interest rate applicable under this Agreement with respect to such Loan. Until any such amount is paid to Agent, Agent shall not be obligated to submit to such Lender any payment made by Borrower to Agent with respect to any Loan or any fees or other 21 payments with respect thereto. Nothing contained in this Section 2.3(b) -------------- will be deemed to relieve a Lender of its obligation to fulfill its Commitment or to prejudice any rights Agent or Borrower may have against such Lender as a result of any such default by such Lender under this Agreement. (c) Return of Payments. ------------------ (i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind together with interest thereon, for each day from and including the date such amount is made available by Agent to such Lender to, but excluding, the date of repayment to Agent, at the Federal Funds Rate, and such payment to such Lender shall be deemed to not have been made. (ii) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other person pursuant to any requirement at law, court order or otherwise, then, notwithstanding any other term or condition of this Agreement, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. (d) Lenders' Failure to Perform. It is understood that (i) no --------------------------- Lender shall be responsible for any failure by any other Lender to perform its Commitment, nor shall the Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its Commitment, and (ii) no failure by any Lender to perform its Commitment to make any Advance hereunder shall excuse any other Lender from its Commitment to make any Advance hereunder. 2.4. Payments. -------- (a) Payments by Borrower. -------------------- (i) All payments to be made by Borrower shall be made without set-off, recoupment, deduction, or counterclaim, except as otherwise required by law. Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent for the account of the Lenders at Agent's address set forth in Section 11, and shall be made in ---------- immediately available funds, no later than 2:30 p.m. (New York time) on the date specified herein. Any payment received by Agent later than 2:30 p.m. (New York time), at the option of Agent, shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. 22 (ii) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (iii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower has not made such payment in full to Agent, each Lender shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Base Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment, Application, and Reversal of Payments. ---------------------------------------------------- Except as otherwise provided with respect to defaulting Lenders, aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Advances to which such payments relate held by each Lender) and payments of the fees (other than fees designated for Agent's sole and separate account) shall, as applicable, be apportioned ratably among the Lenders. All payments shall be remitted to Agent and all such payments not relating to principal or interest of specific Advances or loans, or not constituting payment of specific fees, shall be applied as in the following order: (i) to pay any fees, or expense reimbursements then due to Agent from Borrower; (ii) to pay any fees or expense reimbursements then due to the Lenders from Borrower; (iii) to pay interest due in respect of all outstanding Loans; (iv) ratably to pay principal of all outstanding Loans; and (v) ratably to pay any other Obligations due to Agent or any Lender by Borrower. 2.5. Unavailability of the Eurodollar Rate. If any Lender determines ------------------------------------- that maintenance of its Eurodollar Rate Advances at a suitable Eurodollar Lending Office would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders determine that (i) deposits of a type and maturity appropriate to match-fund Eurodollar Rate Advances are not available or (ii) the Eurodollar Rate does not accurately reflect the cost of making or maintaining Eurodollar Rate Advances, then, upon written notice from Agent to Borrower, the Advances shall automatically become Base Rate Advances. 23 2.6. Interest: Rates, Payments, and Calculations. -------------------------------------------- (a) Interest Rate Applicable to Advances. Except as provided ------------------------------------ in Section 2.5, all Advances shall be Eurodollar Rate Advances. Subject ----------- to Sections 2.6(c) and (d) below: ----------------------- (i) if an Advance is a Base Rate Advance, the unpaid principal balance thereof shall bear interest until paid at a rate per annum equal to the sum of the Base Rate plus the Applicable Margin, changing when and as the Base Rate and/or the Applicable Margin changes, and (ii) if an Advance is a Eurodollar Rate Advance, the unpaid principal balance thereof shall bear interest until paid at a rate per annum equal to the sum of the Eurodollar Rate plus the Applicable Margin, changing on the first day of each Interest Period when and as the Eurodollar Rate and/or the Applicable Margin changes. (b) Basis of Computation of Interest; Payment of Interest. ----------------------------------------------------- All interest shall be calculated for actual days elapsed on the basis of a 360- day year (or, in the case of Base Rate Advances, a 365- or 366-, as appropriate, day year) and shall be payable in arrears not later than 2:30 p.m. (New York City time) on each Interest Payment Date by wire transfer of immediately available funds. (c) Default Interest. If Borrower shall default in the payment of ----------------- the principal of or interest on any Advance or any other Obligation becoming due hereunder, by acceleration or otherwise, or under any other Loan Document, Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) to the extent lawful, at a rate per annum equal to 200 basis points in excess of the otherwise applicable interest rate on the Advances. Borrower shall pay such default interest and all interest accruing on any overdue Obligation in cash on demand from time to time. (d) Intent to Limit Rate. In no event shall the interest rate or -------------------- rates payable under this Agreement, exceed the lesser of (i) 16.0% per annum and (ii) the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable (such lesser rate being the "Maximum Rate"). Borrower and the Lender Group, in executing and ------------ delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the Maximum Rate, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such Maximum Rate, and payment received from Borrower in excess of such Maximum Rate, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7. Telephonic Instructions. Agent and the Lenders are authorized to ----------------------- make the Advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person; provided, however, that such instructions are 24 promptly followed by written confirmation from the Borrower which is signed by an Authorized Person. 2.8. Maintenance of Loan Account; Statements of Obligations. Agent ------------------------------------------------------ shall maintain an account on its books in the name of Borrower (the "Loan ---- Account") on which Borrower will be charged with all Advances made by Agent - ------- or the Lenders to Borrower or for Borrower's account, including, accrued interest, Lender Group Expenses, and any other payment Obligations of Borrower. Agent shall render monthly statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.9. Certain Fees. Borrower agrees to pay to Agent, for its own ------------ account, the fees specified in the Fee Letter in an amount previously agreed to with Agent, with respect to the Advances, the Commitment, amounts for its expenses incurred hereunder and all other amounts owing under this Agreement and the other Loan Documents. 2.10. Mandatory Prepayment. Borrower shall prepay the Loans, ratably -------------------- amongst Lenders in accordance with their respective Pro Rata Shares, with the Net Cash Proceeds received by Borrower or the New Holding Company from the borrowing, sale or placement of any equity (other than any issuance to satisfy the $5,000,000 requirement described in Section 3.2(d)) or senior or -------------- subordinated debt in a public offering or private placement or in a bank financing (excluding (i) any proceeds up to $75,000,000 received from the Credit Facility as in effect on the Closing Date or pursuant to amendments to the borrowing base entered into from time to time thereafter and (ii) proceeds from any vendor, lease or purchase money financing) (each, a "Capital Markets Transaction"). Borrower shall, not later than the --------------------------- Business Day immediately following any Capital Markets Transaction, apply such Net Cash Proceeds to prepay the Loans pursuant to this Section 2.10, without ------------ premium or penalty, by paying to Agent on behalf of each Lender an amount equal to 100% of such Lender's pro rata share of the aggregate principal amount of the Loans to be prepaid, plus accrued and unpaid interest thereon to the Prepayment Date and any applicable breakage costs. To the extent that such Net Cash Proceeds exceed amounts due hereunder under the preceding sentence, any excess net proceeds shall constitute a dollar for dollar permanent reduction of the Maximum Amount. Amounts prepaid may not be reborrowed. 2.11. Optional Prepayment. Borrower may, upon three Business Days' ------------------- prior written notice to Agent, prepay the Loans ratably amongst the Lenders, in whole or in part, by paying to Agent on behalf of each applicable Lender an amount equal to 100% of such Lender's pro rata share of the aggregate principal amount of Advances to be prepaid, plus accrued and unpaid interest thereon to the Prepayment Date and any applicable breakage costs; provided, however, that each partial prepayment of the Loans shall be in a minimum amount of $1,000,000 (or larger integral multiples of $500,000). Amounts prepaid pursuant to this Section 2.11 may not be reborrowed. ------------ 25 2.12 Breakage Costs; Indemnity. Borrower agrees to indemnify and ------------------------- hold each Affected Party harmless from and against any loss or expense which such Affected Party sustains or incurs as a consequence of: (a) the failure by Borrower to borrow Eurodollar Rate Advances on the Closing Date after Borrower has given a notice with respect thereof in accordance with Section 2.3, ----------- (b) default by Borrower in making any prepayment after Borrower has given a notice thereof in accordance with the provisions of Section 2.10 or --------------- 2.11, as applicable, or - ---- (c) the mandatory or optional prepayment of Eurodollar Rate Advances on a day that is not the last day of an Interest Period. The amount of such indemnification shall be equal to the excess, if any of (i) such Affected Party's actual loss and expenses incurred (excluding lost profits) in connection with, or by reason of, any of the foregoing events and (ii) the excess, if any of (A) the amount of interest that would have accrued on the principal amount of Advances not so made or the principal amount of Advances so prepaid from the date of such proposed issuance or prepayment in the case of a failure to make Advances, to the last day of the Interest Period that would have commenced on the proposed date of funding, or in the case of any such prepayment, to the last day of the Interest Period in which such prepayment occurred, in each case at the applicable rate of interest for such Advances provided for herein (excluding, however, the Applicable Margin included therein, if any) over (B) the amount of interest (as reasonably determined by such Affected Party) which would have accrued to such Affected Party on such amount by placing such amount on deposit for a period comparable to such Interest Period with leading banks in the interbank Eurodollar market. A certificate as to any amounts payable pursuant to this Section 2.12 submitted to Borrower by ------------ any Affected Party shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Obligations. 2.13. Effect of Notice of Prepayment. Borrower shall notify Agent ------------------------------ in writing at its address shown in Section 11 of any date set for prepayment ---------- (each such day, a "Prepayment Date") of Loans. Once such notice is sent or --------------- mailed, the Loans (or portion thereof) to be prepaid shall become due and payable on the Prepayment Date set forth in such notice. Each such notice shall be irrevocable and may not be conditional. 2.14. Subordination. Notwithstanding anything in this Agreement to ------------- the contrary, the Lenders agree that the Obligations of Borrower hereunder are subordinated to Borrower's obligations under the Cisco Facility, to the extent and in the manner provided by the Cisco Subordination Agreement. 3. CONDITIONS; TERM OF AGREEMENT. ----------------------------- 3.1. Conditions Precedent to the Initial Advance. The obligation -------------------------------------------- of each Lender to make its initial Advance is subject to the fulfillment, to the satisfaction of Agent, each Lender, and Agent's counsel, of each of the following conditions on or before the Closing Date: 26 (a) the Closing Date shall occur on or before March 24, 1999; (b) Agent shall have received each of the Loan Documents (except the Class B Contingent Warrants), duly executed by each of the parties thereto, and each such document shall be in full force and effect; (c) the Class A Contingent Warrants shall have been duly authorized and executed by Borrower, and delivered to the Agent; (d) the Warrants shall have been duly authorized and executed by Borrower, and delivered to the Agent; (e) Agent shall have received a certificate from the Clerk of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (f) Agent shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Clerk of Borrower; (g) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (h) Agent shall have received certificates of status with respect to Borrower, each dated within 15 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (i) Agent shall have received an opinion of Borrower's counsel in form and substance satisfactory to Agent and each Lender in their sole discretion; (j) Agent shall have received a Treasurer's Certificate stating that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (k) Agent shall have received payment of all accrued and unpaid Lender Group Expenses; (l) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent and its counsel; 27 (m) the Credit Facility shall be in place and available to Borrower, in accordance with its terms; and (n) since January 22, 1999: (i) no new information relating to conditions or events not previously disclosed to the Lenders in connection with the Commitments, and (ii) no new information or additional development concerning conditions or events which were previously disclosed by Borrower or its affiliates in connection with the Commitments shall have come to the Lenders' attention which, in either case, any Lender reasonably believes may have a material adverse effect on the condition (financial or otherwise), assets, properties, business or prospects of Borrower and its subsidiaries taken as a whole; in the event that any such new information or additional development comes to the Lenders' attention or any of the conditions precedent hereunder are not met, the Lenders may, in their sole discretion, suggest alternative financing amounts or structures that ensure adequate protection for the Lenders or decline to make Advances hereunder. 3.2. Conditions Precedent to all Advances. The obligation of each ------------------------------------ Lender to make each Advance (including the initial Advance) is subject to each of the following being true as of the applicable Funding Date: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against Borrower, Agent, any Lender, or any of their Affiliates; (d) notwithstanding anything else in this Agreement to the contrary, the Lenders will not be obligated to make an Advance in the situation where such Advance would cause the Aggregate Facility Usage to exceed $10,000,000, unless Borrower obtains prior to such Advance, an additional $5,000,000 in net cash proceeds from the sale or placement of its common or preferred equity; provided, however that if Borrower receives in excess of $10,000,000 in net cash proceeds from the litigation against Bell Atlantic Corporation in a settlement or a non- appealable court decision, such $5,000,000 requirement will be reduced on a dollar for dollar basis to the extent such amount exceeds $10,000,000, as long as such net proceeds are used in a manner consistent with Section 5.17; ------------ (e) the absence since December 31, 1998 (the date of the most recent unaudited quarterly financials of Borrower made available to TD Texas and TDSI prior to the Closing Date) of any material adverse change in the business, assets, liabilities (actual or 28 contingent), operations, prospects or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole; (f) after the six month anniversary of the Closing Date, on or before the date of any Advance, the Borrower shall deliver to the Agent, for the benefit of the Lenders, duly authorized and executed Class B Contingent Warrants in form and substance satisfactory to the Lenders, prior to the Lenders making any Advance; and (g) if requested by any Lender, the Borrower shall have executed and delivered a note or notes in form and substance satisfactory to the Lenders to evidence the obligation of any Advance. 3.3. Condition Subsequent. -------------------- As a condition subsequent to initial closing hereunder, Borrower shall (the failure by Borrower to so perform or cause to be performed constituting an Event of Default) on or before September 30, 1999, consummate the Holding Company Reorganization, and deliver to Agent the Holding Company Guaranty, duly executed by New Holding Company; provided, however, that if within such time, Borrower has obtained approval of the Holding Company Reorganization from Borrower's board of directors and shareholders, and the Holding Company Reorganization is not consummated within such time solely because Borrower has not received approvals from such regulatory and other governmental agencies as are required to consummate the Holding Company Reorganization, then so long as Borrower is diligently proceeding with obtaining such approvals, Borrower shall have such time as is reasonably necessary to obtain comply with the provisions contained in this subsection; 3.4. Term. This Agreement shall become effective upon the execution ---- and delivery hereof by Borrower and the Lender Group and shall continue in full force and effect until the fifteen month anniversary of the Closing Date (the "Maturity Date"), unless sooner terminated pursuant to the terms hereof. The ------------- foregoing notwithstanding, the Commitments may be terminated pursuant to Section 8.1 upon the occurrence and during the continuation of an Event of - ----------- Default. 3.5. Effect of Termination. On the date of termination of this --------------------- Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, for the benefit of the Lender Group, shall remain in effect until all Obligations have been fully and finally discharged and the Lenders' obligations to provide additional credit hereunder have been terminated. 29 3.6. Early Termination by Borrower. Borrower has the option, at any ----------------------------- time upon three Business Days prior written notice to Agent, to terminate this Agreement by paying to Agent, for the ratable benefits of the Lender Group, in cash, the Obligations equal to 100% times the Aggregate Facility Usage, plus accrued interest, fees and any breakage costs payable pursuant to Section 2.11. ------------ In the event any such notice is timely received by Agent, and Borrower thereafter fails to timely pay to Agent the amount set forth in the immediately preceding sentence, such notice shall be deemed to never have been given. 4. REPRESENTATIONS AND WARRANTIES. ------------------------------ In order to induce the Lender Group to enter into this Agreement, Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance thereafter, as though made on and as of the date of such Advance (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 4.1. Due Organization and Qualification; Subsidiaries. ------------------------------------------------ (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 4.1, is a complete and accurate description of the authorized capital Stock of Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding and the number of such shares that are held in Borrower's treasury. Other than as described on Schedule 4.1, all such outstanding shares have been validly issued and, as of the Closing Date, are fully paid and nonassessable shares as to which there are no contractual preemptive rights. The issuance and sale of all such shares have been in compliance with all applicable federal and state securities laws. Other than as described on Schedule 4.1, on the Closing Date, there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Other than as described on Schedule 4.1, Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 4.1, is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. 30 (d) Except as set forth on Schedule 4.1, no Stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for Stock) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. (e) VA Sub is the only Subsidiary of the Borrower and it exists solely for the purpose of complying with regulatory requirements of Virginia law, has no material assets other than governmental licenses and permits, and does not engage in active business operations other than proposed sales operations. As of the date hereof, the fair market value of the Borrower's investment in VA Sub (measured as of the time such investment or investments were made) is less than $100,000. 4.2. Due Authorization; No Conflict. ------------------------------ (a) The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the other Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Contingent Warrants and the Warrants have been duly authorized by Borrower and, when executed and authenticated pursuant to their respective terms and delivered to the Lenders, will be valid and binding obligations of Borrower, enforceable 31 against it in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors' rights generally and by general principles of equity (whether arising under a proceeding at law or in equity). (f) The Warrant Shares have been duly authorized and when validly issued, upon exercise of the Contingent Warrants and the Warrants in accordance with their respective terms will be fully paid and nonassessable. 4.3. Litigation. There are no actions or proceedings pending by or ---------- against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 4.3; and (c) matters arising after the date hereof that, if decided adversely to Borrower, reasonably could not be expected to result in a Material Adverse Change. 4.4. No Material Adverse Change. All financial statements relating to -------------------------- Borrower or any guarantor of the Obligations that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year- end audit adjustments) and fairly present Borrower's (or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower (or such guarantor, as applicable) since December 31, 1998. 4.5. Fraudulent Transfer. ------------------- (a) Borrower is Solvent. (b) No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 4.6. Employee Benefits. None of Borrower, any of its Subsidiaries, or ----------------- any of their ERISA Affiliates maintains or contributes to any Benefit Plan, other than those listed on Schedule 4.6. Borrower, each of its Subsidiaries and each ERISA Affiliate have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse 32 Change. None of Borrower or its Subsidiaries, any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan under any applicable law, treaty, rule, regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA Affiliate is required to provide security to any Plan under Section 401(a)(29) of the IRC. 4.7. Environmental Condition. None of Borrower's properties or assets ----------------------- has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials. None of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 4.8. Brokerage Fees. Except as contemplated in the Fee Letter, no -------------- brokerage commission or finders fees has or shall be incurred or payable in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement, and Borrower has not utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement. 4.9. Year 2000 Compliance. -------------------- (a) On the basis of a comprehensive inventory, review and assessment currently being undertaken by Borrower of Borrower's computer applications utilized by Borrower or contained in products produced or sold by Borrower, and upon inquiry made of Borrower's material suppliers and vendors, Borrower's management is of the considered view that Borrower, its products, and all such suppliers and vendors will be Year 2000 Compliant before October 1, 1999. (b) Borrower (i) has undertaken a detailed inventory, review and assessment of all areas within its business and operations that could be adversely affected by the failure of Borrower or its products to be Year 2000 Compliant on a timely basis, (ii) is developing a detailed plan and timeline for becoming Year 2000 Compliant on a timely basis, and (iii) to date, is implementing that plan in accordance with that timetable in all material respects. Borrower reasonably anticipates that it will be Year 2000 Compliant on a timely basis. 4.10. Intellectual Property. Borrower and each of its Subsidiaries --------------------- own, or hold licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses which are necessary in all material respects to conduct their respective businesses and to operate their respective properties as now conducted and operated. The consummation of the transactions contemplated by this Agreement and the Loan Documents will not alter or impair any of such rights of Borrower or any of its Subsidiaries. 33 4.11. Leases. Borrower and each of its Subsidiaries enjoy peaceful and ------ undisturbed possession under all leases material to the business, operations, and financial condition of Borrower and its Subsidiaries, taken as a whole, to which any of them is a party or under which any of them is operating. All of such leases are valid and subsisting and no material default by Borrower or any of its Subsidiaries exists under any of them. 4.12. Existing Indebtedness. As of the Closing Date and since the date --------------------- of the Credit Facility, all Indebtedness incurred by Borrower and its Subsidiaries have been in compliance with the terms of the Credit Facility. As of the Closing Date, Indebtedness of the Company does not exceed $75,000,000, in the aggregate. 5. AFFIRMATIVE COVENANTS. --------------------- Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless the Lender Group shall otherwise consent in writing, Borrower shall do all of the following: 5.1. Accounting System. Maintain a standard and modern system of ----------------- accounting that enables Borrower to produce financial statements in accordance with GAAP. 5.2. Financial Statements, Reports, Certificates. Deliver to each ------------------------------------------- Lender: (a) as soon as available, but in any event within 45 days after the end of each month during each of Borrower's fiscal years, a company prepared balance sheet, income statement, and statement of cash flow covering Borrower's operations during such period (including quarterly information with respect to each month that is the end of a fiscal quarter of Borrower); provided that monthly financial statements with respect to any month that is not the last month of a fiscal quarter of Borrower need not contain all detail that would be required by GAAP, may be subject to quarter-end and year-end adjustments, and will be sufficient hereunder if they are in the same form as is submitted internally by Borrower to the senior management of Borrower, and quarterly financial statements of Borrower may be subject to year-end adjustments; and (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, together with a certificate of such accountants addressed to Agent stating that such accountants do not have knowledge of the existence of any Default or Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. If Borrower is a parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another company, then, in addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present Borrower and each such related entity separately, and on a consolidated basis. 34 Together with the above, Borrower also shall deliver to Agent, with copies to each Lender, Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower with the Securities and Exchange Commission, if any, as soon as the same are filed, or any other information that is provided by Borrower to its shareholders, and any other report reasonably requested by the Lender Group relating to the financial condition of Borrower (including, without limitation, any oral reports regarding the status of Borrower's litigation with Bell Atlantic from time to time requested by Agent). Each month, together with the financial statements provided pursuant to Section 5.2(a), Borrower shall deliver to Agent, with copies to each Lender, -------------- a certificate signed by its treasurer or chief financial officer to the effect that: (i) all financial statements delivered or caused to be delivered to any one or more members of the Lender Group hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes or other detail and being subject to year-end (and in the case of monthly statements for months other than the last month of a fiscal quarter of Borrower, quarter-end adjustments, and provided, further, that, with respect to such monthly statements, such certificate may be qualified by the representation that such financial statements may not be fully in compliance with GAAP but are in the same form as is provided internally by Borrower to the senior management of Borrower) and (subject to the qualifications permitted above) fairly present the financial condition of Borrower, (ii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and (iii) on the date of delivery of such certificate to Agent there does not exist any condition or event that constitutes a Default or Event of Default (or, in the case of clauses (i) or (ii), to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). Subject to the limitation contained at the end of this paragraph, Borrower shall have issued written instructions to its independent certified public accountants authorizing them to communicate with Agent and to release to Agent whatever financial information concerning Borrower that Agent may request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties to deliver to Agent, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Agent any information they may have regarding Borrower's business affairs and financial conditions. The foregoing notwithstanding, Agent shall request any such information in the first instance from Borrower, shall give Borrower a reasonable opportunity itself to obtain such information for Agent and provide same to Agent, 35 and shall not directly contact Borrower's auditors, accountants, or other third parties unless Borrower fails to provide the requested information within 10 days. 5.3. Tax Returns. Deliver to Agent copies of each of Borrower's future ----------- federal income tax returns, and any amendments thereto, within 30 days of the filing thereof with the Internal Revenue Service. Deliver satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which (a) Borrower conducts business or is required to pay any such excise tax, (b) where Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of Borrowers, or (c) where Borrower's failure to pay any such applicable excise tax would constitute a Material Adverse Change. 5.4. Guarantor Reports. After the Holding Company Reorganization is ----------------- consummated, cause New Holding Company to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Agent and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 5.5. Certain Information in Connection With Acquisitions. Prior to --------------------------------------------------- making any acquisition governed by Section 6.12(a), Borrower shall provide to --------------- Agent updated Projections through the Maturity Date that give effect to such acquisition on a pro forma basis and demonstrate that Borrower will have sufficient working capital after giving effect to such acquisition to operate its business and perform the Obligations in accordance with their terms. If such acquisition is based in whole or in part on subsections 6.12(a)(C) or ------------------------- (D), then, before such acquisition may be consummated, Required Lenders must - --- approve such Projections, which approval shall not unreasonably be withheld. 5.6. Taxes. Cause all assessments and taxes, whether real, personal, ----- or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Agent, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Borrower has made such payments or deposits. 5.7. Insurance. Borrower shall at its expense keep its insurable --------- properties adequately insured at all times by financially sound and reputable insurers, maintain such other insurance (including self insurance), to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in 36 connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law. 5.8. No Setoffs or Counterclaims. Make payments hereunder and under --------------------------- the other Loan Documents by or on behalf of Borrower without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 5.9. Compliance with Laws. Comply with the requirements of all -------------------- applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, and all orders, judgments, or decrees of any court, in each case, other than laws, rules, regulations, orders, judgments, or decrees the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 5.10. Employee Benefits. ----------------- (a) Cause to be delivered to Agent, each of the following: (i) promptly, and in any event within 10 Business Days after Borrower or any of its Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Change, a written statement of the chief financial officer of Borrower describing such ERISA Event and any action that is being taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Benefit Plan of which it is the plan sponsor, (ii) promptly, and in any event within 3 Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within 3 Business Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Agent, upon Agent's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of Borrower or its Subsidiaries; 37 (ii) the most recent determination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrower or its Subsidiaries under any Retiree Health Plan. 5.11. Leases. Pay when due all rents and other amounts payable under ------ any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 5.12. Brokerage Commissions. Borrower agrees to indemnify, defend, and --------------------- hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrower's obtaining financing from the Lender Group under this Agreement. 5.13. Year 2000 Compliance. Be Year 2000 Compliant by October 1, 1999. -------------------- 5.14. Projections. Not later than 30 days after annual budgets have ----------- been presented to the board of directors of Borrower, but in any event not later than the 90th day of the first fiscal year of Borrower to which such Projections relate, deliver to Agent Projections of Borrower, in form and substance (including as to scope and underlying assumptions) satisfactory to each Lender in its discretion, for the forthcoming 3 fiscal years of Borrower, year by year, and for the forthcoming fiscal year of Borrower, quarter by quarter, certified by the Clerk of Borrower as being true, correct, and complete and certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby. 5.15. Corporate Existence, etc. At all time preserve and keep in full ------------------------- force and effect Borrower's valid corporate existence and good standing and any rights and franchises material to Borrower's businesses. 5.16. Disclosure Updates. Promptly and in no event later than 5 ------------------ Business Days after obtaining knowledge thereof, (i) notify Agent if any written information, exhibit, or report 38 furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (ii) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgment, filing, or recordation thereof. 5.17. Use of Proceeds. Use the proceeds of the Loans for on-going --------------- liquidity requirements, capital expenditures, interest hereunder and other general corporate purposes consistent with Borrower's existing line of business and not including any acquisition of all or a substantial portion of a person or business. 6. NEGATIVE COVENANTS. ------------------ Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without the Lender Group's prior written consent: 6.1. Indebtedness. Create, incur, assume, or permit to exist, directly ------------ or indirectly, any Indebtedness (including Acquired Indebtedness) and Borrower will not issue any Disqualified Stock. The foregoing limitation will not apply to: (a) Indebtedness of Borrower existing under the Credit Facility; provided that the aggregate principal amount of all such Indebtedness under the Credit Facility shall not exceed the greater of (A) $75,000,000 at any one time outstanding and (B) 85% (or such greater percentage permitted pursuant to the Credit Facility) of the accounts receivable of Borrower net of reserves and allowances for doubtful accounts, determined in accordance with GAAP; (b) Indebtedness of Borrower existing under the Cisco Facility; provided that the aggregate principal amount of all such Indebtedness under the Cisco Facility shall not exceed $40,000,000 at any one time outstanding; (c) Existing Indebtedness; (d) Indebtedness of Borrower owing to any Subsidiary (but only so long as such Indebtedness is held by such Subsidiary); provided that any Indebtedness of Borrower owing to any such Subsidiary is subordinated in right of payment from and after the Maturity Date to the payment and performance of Borrower's obligations hereunder; and provided further that any transaction pursuant to which any Subsidiary to which such Indebtedness is owed ceases to be a Subsidiary will be deemed to be an incurrence of Indebtedness by Borrower that is not permitted by this clause (d); (e) Indebtedness of any Subsidiary to Borrower or of any Subsidiary to another Subsidiary; (f) Indebtedness of Borrower pursuant to this Agreement; 39 (g) Indebtedness in respect of performance, surety or appeal bonds provided by Borrower in the ordinary course of business; (h) Indebtedness under Currency Agreements and Interest Rate Agreements entered into in the ordinary course of business; provided that such agreements are designed to protect Borrower against, or manage exposure to, fluctuations in currency exchange rates and interest rates, respectively, and that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (i) the incurrence by Borrower of Refinancing Indebtedness issued in exchange for, or the proceeds of which are used to refinance, repurchase, replace, refund or defease ("Refinance" and correlatively, "Refinanced" and --------- ---------- "Refinancing") Indebtedness permitted pursuant to clause (c), (f) or (j) of this - ------------ paragraph; provided that (i) the amount of such Refinancing Indebtedness shall not exceed the principal amount of, premium, if any, and accrued and unpaid Interest on the Indebtedness so Refinanced (or if such Indebtedness was issued with original issue discount, the original issue price plus amortization of the original issue discount at the time of the repayment of such Indebtedness) plus the fees, expenses and costs of such Refinancing and reasonable prepayment premiums, if any, in connection therewith, (ii) such Refinancing Indebtedness shall have a Stated Maturity no earlier than the earlier of (A) the Stated Maturity of the Indebtedness being Refinanced and (B) 180 days after the Maturity Date, (iii) such Refinancing Indebtedness shall have an Average Life equal to or greater than the longer of (A) the Average Life of the Indebtedness being Refinanced and (B) the Maturity Date, (iv) if the Indebtedness being Refinanced is subordinated in right of payment to the Advances, such Refinancing Indebtedness shall be subordinated in right of payment to the Advances on terms at least as favorable to the holders of Advances as those contained in the documentation governing the Indebtedness being so Refinanced, and (v) no Subsidiary shall incur Refinancing Indebtedness to Refinance Indebtedness of Borrower; (j) the incurrence by the Borrower of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money or similar obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment useful in a Telecommunications Business; and (k) Indebtedness of Borrower not otherwise permitted to be incurred pursuant to the foregoing clauses (a) through (j) above, the principal amount (or original issue price) of which shall not exceed $30,000,00 at any one time outstanding. 6.2. Liens. Create, incur, assume, or permit to exist, directly or ----- indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is 40 refinanced under Section 6.1(i) and so long as the replacement Liens only -------------- encumber those assets or property that secured the original Indebtedness). 6.3. Restrictions on Fundamental Changes. ----------------------------------- (a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock with the exception of the Holding Company Reorganization. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. 6.4. Disposal of Assets. Sell, lease, assign, transfer, or otherwise ------------------ dispose of any of Borrower's properties or assets except for (i) sales of Inventory to buyers in the ordinary course of Borrower's business as currently conducted, and (ii) dispositions by Borrower of equipment or other fixed assets, provided that such equipment or other fixed assets are substantially worn, damaged or obsolete, replacement equipment or other fixed assets of like kind, function and value shall be acquired prior to or concurrently with such disposition, and such replacement equipment or other fixed assets are free and clear of Liens other than Permitted Liens. 6.5. Amendments to Credit Facility. Enter into any material amendment ----------------------------- to the Credit Facility. 6.6. Guarantee. Guarantee or otherwise become in any way liable with --------- respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Agent. 6.7. Nature of Business. Make any change in the principal nature of ------------------ Borrower's business. Borrower shall not permit VA Sub to acquire any material assets other than governmental licenses and permits, nor to engage in active business operations other than proposed sales operations. The Borrower shall not form or acquire any other Subsidiary or make any additional investment in VA Sub after the date hereof, unless the terms and conditions herein shall be amended prior to such formation, investment or acquisition on terms and conditions reasonably satisfactory to the Agent, in order to make the terms and conditions of this Agreement applicable to such Subsidiary. 6.8. [Reserved.] -------- 6.9. Margin Stock. Use or permit the use of any of the proceeds of the ------------ Advances, directly or indirectly, for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any Margin Stock (as defined in Regulation U referred to below) or for any other purpose which 41 might constitute the transactions contemplated hereby a "purpose credit" within the meaning of Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System, or cause any Advance, the application of proceeds thereof or this Agreement to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or the Securities Exchange Act of 1934, as amended, or any rules or regulations promulgated under such statutes. 6.10. Distributions. Except for Permitted Distributions, make (or ------------- permit New Holding Company to make) any distribution or declare or pay (or permit New Holding Company to declare or pay) any dividends (in cash or other property, other than Stock) on, or purchase, acquire, redeem, or retire any of Borrower's Stock (or permit New Holding Company to purchase, acquire, redeem, or retire any of New Holding Company's Stock), of any class, whether now or hereafter outstanding. 6.11. Accounting Methods. Modify or change its method of accounting or ------------------ enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 6.12. Investments. ----------- (a) Directly or indirectly make, acquire, or incur any liabilities (including contingent obligations), which, in the aggregate, exceed the sum of (A) $5,000,000, plus (B) $10,000,000 of Stock of Borrower or New Holding Company (but not cash or other property other than Stock of Borrower or New Holding Company), plus (C) 85% of the amount of New Capital Proceeds actually contributed by New Holding Company to Borrower after the Closing Date, plus (D) Old Bell Atlantic Collections in excess of $10,000,000 (if any), for or in connection with (i) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (ii) loans, advances, capital contributions, or transfers of property to a Person, in connection with any acquisition permitted by clause (i) or clause (iii) of this paragraph, or (iii) the acquisition of all or substantially all of the properties or assets of a Person; provided that, in the case of any acquisition of any Subsidiary, Borrower shall cause to be provided to the Lender Group, a guaranty from such Subsidiary of the Obligations, in each case in form and substance satisfactory to Agent. (b) Permit New Holding Company directly or indirectly to make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (i) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (ii) loans, advances, capital contributions, or transfers of property to a Person, or (iii) the acquisition of all or substantially all of the properties or assets of a Person. 42 (c) Prior to making any acquisition governed by this Section 6.12, Borrower shall comply with the provisions of Section 2.10 and - ------------ ------------ Section 3.2(d). - -------------- 6.13. Transactions with Affiliates. Directly or indirectly enter into ---------------------------- or permit to exist any material transaction with any Affiliate of Borrower except for (a) transactions set forth on Schedule 6.13, or (b) transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Agent, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 6.14. Suspension. Suspend or go out of a substantial portion of its ---------- business. 6.15. No Prohibited Transactions Under ERISA. Directly or indirectly: -------------------------------------- (a) engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) terminate, or permit any Subsidiary of Borrower to terminate, any Benefit Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of Borrower to amend, a Plan resulting in an increase in current liability for the plan year such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or 43 reasonably would be expected to result in a claim against or liability of Borrower, any of its Subsidiaries or any ERISA Affiliate in excess of $10,000. 6.16. Violation of Material Agreements. Breach any material -------------------------------- contractual obligation (including, but not limited to, the Bell Atlantic Agreements). 7. EVENTS OF DEFAULT. ----------------- Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: ---------------- 7.1. If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 7.2. (a) If Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in any negative covenant set forth in Article 6 of this Agreement, contained in any negative --------- covenant set forth in any other Loan Document, or contained in Section 5.10 of ------------ this Agreement; or (b) If Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and the Lender Group, other than those covered by clause (a) of this Section 7.2, and such failure or neglect, in each case, is ----------- not cured to the Lender Group's reasonable satisfaction within 15 Business Days after the sooner to occur of Borrower's receipt of notice of such failure or neglect from Agent or the date on which such failure or neglect first becomes actually known to any of the chairman of the board, chief executive officer, president, treasurer, chief financial officer, or corporate controller of Borrower; provided that if any failure or neglect referred to in this paragraph is the subject of another provision of this Section 7, in such event such other --------- provision of this Section 7 shall govern; --------- 7.3. If properties or assets of Borrower with an aggregate value (based on greater of cost or market) in excess of $2,000,000 are attached, seized, subjected to a writ or distress warrant, or is levied upon, or come into the possession of any third Person; 7.4. If an Insolvency Proceeding is commenced by Borrower; 7.5. If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; 44 (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent), and each member of the Lender Group shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; 7.6. If Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 7.7. If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts in an aggregate amount exceeding $2,000,000 owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof; 7.8. If any judgments or other claims in an aggregate amount exceeding $2,000,000 become a Lien or encumbrance upon any of Borrower's properties or assets; 7.9. If there is a default in any material agreement to which Borrower is a party with one or more third Persons and (a) the aggregate amount of Borrower's obligations under all such material agreements in which there is a default exceeds $2,000,000, and (b) such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 7.10. If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 7.11. If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to the Lender Group by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn; 45 7.12. If the obligation of any guarantor under its guaranty or other third Person under any Loan Document is limited or terminated by operation of law or by the guarantor or other third Person thereunder, or any such guarantor or other third Person becomes the subject of an Insolvency Proceeding; 7.13. If a Change of Control occurs; or 7.14. If the Borrower fails to execute and deliver Class B Contingent Warrants to Agent pursuant to Section 3.2(f). -------------- 8. THE LENDER GROUP'S RIGHTS AND REMEDIES. -------------------------------------- 8.1. Rights and Remedies. Upon the occurrence, and during the ------------------- continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may, except to the extent otherwise expressly provided or required below, authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the other Loan Documents or under any other agreement between Borrower and the Lender Group; (c) Terminate the Commitments; and/or (d) The Lender Group shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents. 8.2. Remedies Cumulative. The rights and remedies of Agent, on behalf ------------------- of the Lender Group, under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided by law, or in equity. No exercise by Agent, on behalf of the Lender Group, of one right or remedy shall be deemed an election, and no waiver by the Required Lenders or the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by Agent or the Lender Group shall constitute a waiver, election, or acquiescence by it. 9. TAXES AND EXPENSES. ------------------ If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that 46 Agent determines that such failure by Borrower could result in a Material Adverse Change, in its discretion and without prior notice to Borrower, Agent may do any or all of the following: (a) make payment of the same or any part thereof; or (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure. Any such amounts paid by Agent shall constitute Lender Group Expenses. Any such payments made by Agent shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 10. WAIVERS; INDEMNIFICATION. ------------------------ 10.1. Demand; Protest; etc. Borrower waives demand, protest, notice of --------------------- protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 10.2. Indemnification. Borrower shall pay, indemnify, defend, and hold --------------- Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") ------------------ harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). ----------------------- Borrower shall have no obligation to any Indemnified Person under this Section 10.2 with respect to any Indemnified Liability that a court of competent - ------------ jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. 47 11. NOTICES. ------- Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, or telefacsimile to the relevant party, as the case may be, at its address set forth below: If to Borrower: CTC COMMUNICATIONS CORP. 360 Second Avenue Waltham, Massachusetts 02451 Attn.: Mr. Steven Jones Fax No. 781-890-1613 with copies to: ROPES & GRAY One International Place Boston, Massachusetts 02110 Attn.: David A. McKay, Esq., and Mary E. Weber, Esq. Fax No. 617-951-7050 and to: Leonard Glass, Esq. 45 Central Avenue Tenafly, New Jersey 07670 Fax No. 201-894-1718 If to TDSI or Arrangement, Structuring & Syndication Agent: TD SECURITIES (USA) INC. 31 West 52nd Street New York, New York 10019-6101 Attn.: Mr. Thomas Regan Fax No. 212-581-5795 48 with copies to: LATHAM & WATKINS 1001 Pennsylvania Avenue, N.W. Suite 1300 Washington, D.C. 20004-2505 Attn.: John D. Watson, Jr., Esq. Fax No. (202) 637-2200 If to TD Texas or Agent: TORONTO DOMINION (TEXAS), INC. 909 Fannin Street Houston, Texas 77010 Attn.: Mr. Walter Finley Fax No. (713) 951-9921 with copies to: LATHAM & WATKINS 1001 Pennsylvania Avenue, N.W. Suite 1300 Washington, D.C. 20004-2505 Attn.: John D. Watson, Jr., Esq. Fax No. (202) 637-2200 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to all other parties. All notices or demands sent in accordance with this Section 11, shall ---------- be deemed received on the earlier of the date of actual receipt or 3 days after the deposit thereof in the mail. 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. ------------------------------------------ THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK. BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY 49 CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 13. DESTRUCTION OF BORROWER'S DOCUMENTS. ----------------------------------- All documents, schedules, agings, or other papers delivered to any one or more members of the Lender Group may be destroyed or otherwise disposed of by such member of the Lender Group four months after they are delivered to or received by such member of the Lender Group, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. ------------------------------------------ 14.1 Assignments and Participations. ------------------------------ (a) Any Lender may, with the written consent of Agent, assign and delegate to one or more assignees (provided that no written consent of Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Transferee) (each an "Assignee") all, or any ratable part of all, -------- of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to Borrower and Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to Borrower and Agent an Assignment and Acceptance; and (iii) the assignor Lender or Assignee has paid to Agent for Agent's sole and separate account a processing fee in the amount of $3,500. Anything contained herein to the contrary notwithstanding, the consent of Agent shall not be required (and payment of any fees shall not be required) if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender. 50 (b) From and after the date that Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 10.2 hereof) and be released from its obligations under ------------ this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrower and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto; (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto; (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (5) such Assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (6) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. 51 (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests ----------- in the Obligations, the Commitment, and the other rights and interests of that Lender (the "originating Lender") hereunder and under the other Loan Documents ------------------ (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower and Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the sole and exclusive right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating; (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating; (C) release all or a material portion of the guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating; (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender; or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums; and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the originating Lender with whom such Participant participates and no Participant shall have any direct rights as to the other Lenders, Agent, Borrower, the Collections or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. 52 (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrower or Borrower's business. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR Sec. 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 14.2. Successors. This Agreement shall bind and inure to the benefit ---------- of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required ------------ pursuant to Section 14.1 hereof, no consent or approval by Borrower is required ------------ in connection with any such assignment. 15. AMENDMENTS; WAIVERS. ------------------- 15.1. Amendments and Waivers. No amendment or waiver of any provision ---------------------- of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and Borrower and acknowledged by Agent, do any of the following: (a) increase or extend the Commitment of any Lender; (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments that is required for the Lenders or any of them to take any action hereunder; (e) amend this Section or any provision of the Agreement providing for consent or other action by all Lenders; 53 (f) change the definition of "Required Lenders"; ---------------- (g) release Borrower from any Obligation for the payment of money, or consent to any assignment or transfer by Borrower of any Obligation; (h) amend any of the provisions of Section 15 or 16; or ---------------- (i) release any guarantor from its obligations under a guaranty; and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, affect the rights or duties of Agent under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of or with respect to any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 15.2. No Waivers; Cumulative Remedies. No failure by Agent or any ------------------------------- Lender to exercise any right, remedy, or option under this Agreement, any other Loan Document, or any present or future supplement hereto or thereto, or in any other agreement between or among Borrower and Agent or any Lender, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or the Lenders on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy which Agent or any Lender may have. 16. AGENT; THE LENDER GROUP. ----------------------- 16.1. Appointment and Authorization of Agent. Each Lender hereby -------------------------------------- designates and appoints TDSI as Arrangement, Structuring & Syndication Agent and TD Texas as Agent under this Agreement and the other Loan Documents, and each Lender hereby irrevocably authorizes Agent and to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Each Lender authorizes and directs Agent to enter into the Cisco Subordination Agreement on its behalf and agrees to be bound by the terms of the Cisco Subordination Agreement with the same force and effect as if such Lender were a party thereto. Agent and Arrangement, Structuring & Syndication Agent agree to act as such on the express conditions contained in this Section 16. The provisions of this Section 16 are solely for ---------- ---------- the benefit of Agent, Arrangement, Structuring & Syndication Agent, and the Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein; provided, however, that certain of the provisions of Section 16.10 hereof also shall be for the benefit of Borrower. ------------- Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, neither Agent nor Arrangement, Structuring & 54 Syndication Agent shall have any duties or responsibilities, except those expressly set forth herein, nor shall Agent nor Arrangement, Structuring & Syndication Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent or Arrangement, Structuring & Syndication Agent; it being expressly understood and agreed that the use of the words "Agent" and "Arrangement, Structuring & Syndication Agent" is for convenience only, that TD Texas and TDSI are merely the representatives of the Lenders, and have only the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent and Arrangement, Structuring & Syndication Agent shall have and may use their sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions which Agent or Arrangement, Structuring & Syndication Agent, as applicable, is expressly entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Advances, and related matters; (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents; (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents; (d) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, or otherwise related to any of same as provided in the Loan Documents; and (e) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 16.2. Delegation of Duties. Except as otherwise provided in this -------------------- section, Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made in compliance with this section and without gross negligence or willful misconduct. 16.3. Liability of Agent. None of Agent-Related Persons shall (i) be ------------------ liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the 55 Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of Borrower or any of Borrower's Subsidiaries or Affiliates. The foregoing notwithstanding, nothing in this section is intended to create a standard of care or impose liability on any Agent-Related Person that would not otherwise exist but for this section. 16.4. Reliance by Agent. Agent shall be entitled to rely, and shall be ----------------- fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5. Notice of Default or Event of Default. Agent shall not be deemed ------------------------------------- to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take ------------ such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 8; provided, however, that --------- unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable. 56 16.6. Credit Decision. Each Lender acknowledges that none of --------------- Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of Agent-Related Persons. 16.7. Costs and Expenses; Indemnification. Agent may incur and pay ----------------------------------- Lender Group Expenses to the extent Agent deems reasonably necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including without limiting the generality of the foregoing, court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this 57 Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8. Agent in Individual Capacity. TDSI, TD Texas, and their ---------------------------- Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though TDSI and TD Texas were not agents hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, TDSI, TD Texas, or their Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall be under no obligation to provide such information to them. The terms "Lender" and "Lenders" include TD Texas in ------ ------- its individual capacity. 16.9. Successor Agent. Agent may resign as Agent upon 45 days notice --------------- to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the ----- retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to ---------- be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. 16.10. Withholding Tax. ---------------- (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: 58 (i) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Lender and in each succeeding taxable year of such Lender during which interest may be paid under this Agreement, and IRS Form W-9; and (iii) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form 1001 as no longer valid. (c) If any Lender claiming exemption from United States withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the IRC. (d) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify Agent fully for all amounts paid, directly or indirectly, by 59 Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. 16.11. Restrictions on Actions by Lenders; Sharing of Payments. ------------------------------------------------------- (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings. (b) Subject to Section 15.8, if, at any time or times any Lender ------------ shall receive (i) by payment, foreclosure, setoff or otherwise, or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in same day funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.12. Payments by Agent to the Lenders. All payments to be made by -------------------------------- Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium or interest on revolving advances or otherwise. 16.13. Several Obligations; No Liability. Notwithstanding that certain --------------------------------- of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective 60 Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 17.7, no member of the Lender Group shall ------------ have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 17. GENERAL PROVISIONS. ------------------ 17.1. Effectiveness. This Agreement shall be binding and deemed ------------- effective when executed by Borrower and each member of the Lender Group whose signature is provided for on the signature pages hereof. 17.2. Section Headings. Headings and numbers have been set forth ---------------- herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 17.3. Interpretation. Neither this Agreement nor any uncertainty or -------------- ambiguity herein shall be construed or resolved against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 17.4. Severability of Provisions. Each provision of this Agreement -------------------------- shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5. Amendments in Writing. This Agreement can only be amended by a --------------------- writing signed by Agent, the Required Lenders, and Borrower. 17.6. Counterparts; Telefacsimile Execution. This Agreement may be ------------------------------------- executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 61 17.7. Revival and Reinstatement of Obligations. If the incurrence or ---------------------------------------- payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to the Lender Group of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if ----------------- the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 17.8. Integration. This Agreement, together with the other Loan ----------- Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. [Signature page to follow.] 62 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. CTC COMMUNICATIONS CORP., a Massachusetts corporation By: ----------------------------------------- Title: ----------------------------------------- TORONTO DOMINION (TEXAS), INC., a Delaware corporation, as Agent, and as a Lender By: ----------------------------------------- Title: ----------------------------------------- TD SECURITIES (USA) INC., a Delaware corporation, as Arrangement, Structuring & Syndication Agent By: ----------------------------------------- Title: ----------------------------------------- 63 EX-10.27 3 WARRANT DATED 3/24/99 ISSUED TO TORONTO DOMINION EXECUTION COPY WARRANT TORONTO DOMINION (TEXAS), INC. "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE --------- ISSUED DIRECTLY OR INDIRECTLY." CTC COMMUNICATIONS CORP. ------------------------ WARRANT TO PURCHASE 69,216 SHARES OF COMMON STOCK CTC COMMUNICATIONS CORP., a Massachusetts corporation (the "Company"), hereby certifies that, for value received, Toronto Dominion (Texas), Inc., a Delaware corporation or its registered transferees, successors or assigns (each, a "holder"), is the registered holder of warrants (the "Warrants") to subscribe for and purchase Sixty-Nine Thousand Two Hundred and Sixteen (69,216) shares of the fully paid and nonassessable Common Stock (as adjusted pursuant to Section 4 --------- hereof, the "Warrant Shares") of the Company, at a purchase price per share equal to Eleven Dollars and Eighty-One and 25/100 Cents ($11.8125) (such price, as adjusted pursuant to Section 4 hereof, the "Warrant Price"), subject to the --------- provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "Common Stock" shall mean the Company's presently authorized Common Stock, par value $0.01 per share, and any stock into or for which such Common Stock may hereafter be converted or exchanged, (b) the term "Date of Grant" shall mean March 24, 1999, and (c) the term "Other Warrants" shall mean any warrant issued upon transfer or partial exercise of this Warrant. The term "Warrant" as used herein shall be deemed to include Other Warrants unless the context hereof or thereof clearly requires otherwise. This Warrant is being issued pursuant to that certain Loan Agreement (the "Loan Agreement") dated as of March 15, 1999 by and among the Company, TD Securities (USA) Inc. and Toronto Dominion (Texas), Inc. As used herein the term "Loan Warrants" shall mean this Warrant together with any other warrants issued pursuant to the Loan Agreement and the term "Loan Warrant Shares" shall mean all of the shares of Common Stock issued or issuable upon the exercise of the Loan Warrants. In connection with any consents or amendments of the Loan Warrants, from the Date of Grant to and including September 24, 1999, 643,129 Loan Warrant Shares (comprised of 69,216 Loan Warrant Shares purchasable under this Warrant and 573,913 Warrant Shares purchasable under the Class A Contingent Warrant (as defined in the Loan Agreement)) shall be deemed to be outstanding. In connection with any consents or amendments of the Loan Warrants after September 24, 1999, the actual number of Loan Warrants and Loan Warrant Shares outstanding shall be considered outstanding. 1. Term. The purchase right represented by this Warrant is ---- exercisable, in whole or in part, at any time and from time to time from the Date of Grant through and including the close of business on March 24, 2009 (the "Expiration Date"); provided, however, that in the event any portion of this -------- ------- Warrant is unexercised as of the Expiration Date, the terms of Section 2(b) ------------ below shall apply. 2. Exercise. -------- a. Method of Exercise; Payment; Issuance of New Warrant. ---------------------------------------------------- Subject to Section 1 hereof, the purchase right represented by this Warrant may --------- be exercised by the holder hereof, in whole or in part and from time to time, by the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company, except as --------- otherwise provided for herein, and by the payment to the Company of an amount equal to the then applicable Warrant Price multiplied by the number of Warrant Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised if exercised prior to the close of business on such date; otherwise, the date of record shall be the next business day. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of Common Stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised (including without limitation, exercise pursuant to Section 2(b) below), a new Warrant representing the portion ------------ of the Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty (30)-day period. b. Automatic Exercise. In the event that any portion of this ------------------ Warrant remains unexercised as of the Expiration Date and the fair market value (determined in accordance with Section 4(h) below) of one share of Common Stock ----------- as of the Expiration Date is greater than the applicable Warrant Price as of the Expiration Date, then this Warrant shall be deemed to have been exercised automatically immediately prior to the close of business on the Expiration Date (or, in the event that the Expiration Date is not a business day, the immediately preceding business day) (the "Automatic Exercise Date"), and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such Warrant Shares as of the close of business on such Automatic Exercise Date. This Warrant shall be deemed to be surrendered to the Company on the Automatic Exercise Date by virtue of this Section 2(b) and without any action by the ----------- holder of this Warrant or any other person, and payment to the Company of the then applicable Warrant Price multiplied by the number of Warrant Shares then being purchased shall be deemed to be made pursuant to the terms of Section 2(c) ------------ below (without payment by the holder of any exercise price or any cash or other consideration). As promptly as practicable on or after the Automatic Exercise Date and in any event within thirty (30) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of Warrant Shares issuable upon such exercise. c. Right to Convert Warrant into Common Stock; Net Issuance. -------------------------------------------------------- (1) Right to Convert. In addition to and without limiting ---------------- the rights of the holder hereof under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this Section 2(c) ------------ at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to all or a specified portion of shares subject to this Warrant 2 (the "Converted Warrant Shares"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock equal to the quotient obtained by dividing (i) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in Section ------- 2(c)(2) hereof), which value shall be equal to (A) the aggregate fair market - ------- value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date less (B) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right by (ii) the fair market value of one (1) share of Common Stock on the Conversion Date. Expressed as a formula, such conversion shall be computed as follows: X = A - B ----- Y Where: X = the number of shares of Common Stock that may be issued to the holder Y = the fair market value (FMV) of one (1) share of Common Stock A = the aggregate FMV (i.e., FMV x Converted Warrant Shares) B = the aggregate Warrant Price (i.e., Converted Warrant Shares x Warrant Price) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Right. For purposes of Section 9 of this --------- Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. (2) Method of Exercise. The Conversion Right may be exercised by ------------------ the holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section ------- 2(c)(l) hereof as the Converted Warrant Shares) in exercise of the Conversion - ------- Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"). Certificates for the shares issuable upon exercise of the Conversion Date, and, if applicable, a new warrant evidencing the balance of the shares remaining subject to the Warrant shall be issued as of the Conversion Date and shall be delivered to the holder, within thirty (30) days following the Conversion Date. (3) Determination of Fair Market Value. For purposes of this ---------------------------------- Section 2(c) "fair market value" of a share of Common Stock shall have the - ------------ meaning set forth in Section 4(h) below. ------------ 3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that --------------------------------------- may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and 3 conditions herein, be fully paid and nonassessable, and free from all taxes, liens, charges, and pre-emptive rights with respect to the issue thereof. The Company shall pay all transfer taxes, if any, attributable to the issuance of the Warrant Shares upon the exercise of this Warrant. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number ------------------------------------------------ and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Adjustment for Initial Errors. The Company hereby ----------------------------- acknowledges that the number of Warrant Shares constituting the initial number of securities purchasable upon the exercise of this Warrant (the "Exercise Quantity") was calculated based upon the Company's representation that the number of outstanding shares of Common Stock of the Company, calculated on a fully diluted basis using the treasury stock method as contemplated by the Accounting Principles Board Opinion No.15 (as referred to in Statement of Financial Accounting Standards No. 128) (such shares as calculated on any date, the "Fully Diluted Shares"), as of the Date of Grant using a fair market value equal to the Average Price (as defined in the Loan Agreement) as of March 11, 1999 of $11.8125 per share of Common Stock and before giving effect to the issuance of any of the Loan Warrants or the Loan Warrant Shares, totaled 13,773,901 shares. The calculation used by the Company in determining such amount is set forth in Exhibit B hereto. If for any reason it shall hereafter --------- be determined that the actual number of Fully Diluted Shares as of the Date of Grant differed from such amount, then the Company or the holder (whichever shall discover such error) shall notify the other of such determination and the Company shall forthwith reissue all of the outstanding Warrants with an appropriate proportional adjustment in said number to be effective from the Date of Grant, provided that such adjustment shall be made only if it results in an -------- increase in the number of Warrant Shares hereunder. b. Merger, Sale, Reclassification. In case of any (i) ------------------------------ consolidation or merger (including a merger in which the Company is the surviving entity), (ii) sale or other disposition of all or substantially all of the Company's assets or distribution of property to Stockholders (other than distributions payable out of earnings or retained earnings), or (iii) reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), then the Company shall take all necessary actions to ensure that thereafter the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of this unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such consolidation, merger, sale or other disposition, reclassification, change or conversion by a holder of the number of shares of Common Stock then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(b) shall similarly apply to --------- ------------ successive reclassifications, changes and conversions. c. Subdivision or Combination of Shares. If the Company at any ------------------------------------ time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Common Stock, the Warrant Price shall be proportionately decreased in the case of a subdivision or 4 increased in the case of a combination, effective at the close of business on the date the subdivision or combination becomes effective. d. Stock Dividends and Other Distributions. If the Company at --------------------------------------- any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Common Stock payable in Common Stock, or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in Section 4(b), Section 4(c), or Section 4(e) hereof) ------------ ------------ ------------ of Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of Fully Diluted Shares outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of Fully Diluted Shares outstanding immediately after such dividend or distribution. e. Special Distributions. In case the Company shall make --------------------- any distribution (other than dividends and distributions referred to in Section ------- 4(c) or Section 4(d) above and other than cash dividends) to all holders of - ---- ------------ shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of evidences of indebtedness, assets or subscription rights, options, warrants, or exchangeable or convertible securities containing the right to subscribe for or purchase shares of any class of equity securities of the Company, the Warrant Price to be in effect on and after the date of such distribution shall be adjusted by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the fair market value per share of Common Stock on such record date (determined in accordance with Section 4(h) below), less the fair market value (as determined by the Board ------------ of Directors of the Company in good faith as set forth in a duly adopted board resolution certified by the Company's Clerk or Assistant Clerk) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription tights, options, warrants, or exchangeable or convertible securities applicable to one (1) share of the Common Stock outstanding as of such record date, provided, that in the event the Board of Directors is unable -------- to make such a determination or holders of at least a majority of the Loan Warrant Shares issuable under the outstanding Loan Warrants disagree in writing with such determination (as the manner provided in Section 4(h) below), then the ------------ fair market value of such consideration shall be determined in the same manner as a Valuation under Section 4(h) below, and (ii) the denominator of which shall ------------ be such fair market value per share of Common Stock as determined in the manner set forth under Section 4(h) below. Such adjustment shall be made successively ------------ whenever a distribution is made. If the holder hereof has exercised all or any portion of this Warrant after the record date for a distribution covered by this paragraph, but prior to the date distribution is made by the Company, then the Company shall make a distribution to the holder, concurrent with the distribution to stockholders, of such consideration that the holder would have been entitled to receive in connection with such distribution with respect to the shares issued on such exercise, had the holder exercised all or such portion of this Warrant immediately prior to such record date. f. Other Issuances of Securities. ----------------------------- (1) In case the Company or any subsidiary thereof shall, at any time after the Date of Grant, issue shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding (i) shares, rights, options, warrants, or convertible or exchangeable securities outstanding on the Date of Grant, or issued in any of the transactions described in Section 4(c), ------------ 4(d) and 4(e) above, (ii) shares issued upon the exercise of such rights, - ---- ---- options or warrants or upon conversion or exchange of 5 such convertible or exchangeable securities, (iii) the Loan Warrants and any shares issued upon exercise thereof, (iv) up to Three Million Fifty-Eight Thousand Five Hundred Twenty-Six (3,058,526) shares of Common Stock issued or issuable to directors, officers, employees or consultants of the Company or any subsidiary in connection with their service as directors, officers, employees or consultants pursuant to any stock grant, stock option, warrant or other right (the "Employee Shares")), at a price per share of Common Stock (determined in the case of such rights, options, warrants, or convertible or exchangeable securities by dividing (x) the total amount received and/or receivable by the Company in consideration of the sale and issuance of such rights, options, warrants, or convertible or exchangeable securities, plus the total minimum consideration payable to the Company upon exercise, conversion, or exchange thereof by (y) the total maximum number of shares of Common Stock covered by such rights, options, warrants, or convertible or exchangeable securities) less than the fair market value per share of Common Stock (determined in accordance with Section 4(h) below) on the date the Company fixes the offering price of ------------ such shares, rights, options, warrants, or convertible or exchangeable securities, then the Warrant Price shall be adjusted so that it shall equal the price determined by multiplying the Warrant Price in effect immediately prior thereto by a fraction (i) the numerator of which shall be the sum of (A) the number of Fully Diluted Shares outstanding immediately prior to such sale and issuance plus (B) the number of shares of Common Stock which the aggregate consideration received (determined as provided above and below) for such sale or issuance would purchase at such fair market value per share, and (ii) the denominator of which shall be the total number of Fully Diluted Shares outstanding immediately after such sale and issuance. Such adjustment shall be made successively whenever such an issuance is made. (2) For the purposes of an adjustment under Section 4(f)(1), the --------------- maximum number of shares of Common Stock which the holder of any such rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance; furthermore, the consideration received by the Company therefor shall be deemed to be equal to the price per share of Common Stock (determined in the case of such rights, options, warrants, or convertible or exchangeable securities by dividing (x) the total amount received and/or receivable by the Company in consideration of the sale and issuance of such rights, options, warrants, or convertible or exchangeable securities, plus the total minimum consideration payable to the Company upon exercise, conversion, or exchange thereof by (y) the total maximum number of shares of Common Stock covered by such rights, options, warrants, or convertible or exchangeable securities) multiplied by the number of shares deemed issued and outstanding in this sentence. In case the Company shall issue shares of Common Stock, or rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, for a consideration consisting, in whole or in part, of consideration other than cash or its equivalent, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence or Section 4(f)(1), the Board of Directors of the Company shall determine, in good - --------------- faith, the fair market value of said property, and such determination shall be described in a duly adopted board resolution certified by the Company's Clerk or Assistant Clerk, provided, that in the event the Board of Directors is unable to -------- make such a determination or, in the case of, and solely to the extent that, any issuance constitutes an Affiliated Transaction as defined in Section 4(f)(3) --------------- below, holders of at least a majority of the Loan Warrant Shares issuable under the outstanding Loan Warrants disagree in writing with such determination (in the manner provided in Section 4(h) below), then the fair market value of such ------------ consideration shall be determined in the same manner as a Valuation under Section 4(h) below. In case the Company shall issue shares of Common Stock, or - ------------ rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, together with one (1) or more other securities as a part of a unit at a price per unit, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of Section 4(f)(l), the Board --------------- of 6 Directors of the Company shall determine, in good faith, which determination shall be described in a duly adopted board resolution certified by the Company's Clerk or Assistant Clerk, the fair market value of the rights, options, warrants, or convertible or exchangeable securities then being sold as part of such unit, provided, that in the event the Board of Directors is unable to make -------- such a determination or, in the case of, and solely to the extent that, any issuance constitutes an Affiliated Transaction as defined in Section 4(f)(3) --------------- below, holders of at least a majority of the Loan Warrant Shares issuable under the outstanding Loan Warrants disagree in writing with such determination (in the manner provided in Section 4(h) below), then the fair market value of such ------------ consideration shall be determined in the same manner as a Valuation under Section 4(h) below. - ------------ (3) For purposes of this Section 4(f), an "Affiliated Transaction" ------------ shall mean any issuance of shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, to (i) any officer or director of the Company or any member of the immediate family of such a person or (ii) any 10% or greater beneficial stockholder of the Company or any person who, to the Company's knowledge, is a member of the immediate family of such a stockholder (if such stockholder is a natural person), or to any partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association or joint venture which, directly or indirectly, is in control of, is controlled by, or is under common control with, (i) any officer or director of the Company or any member of the immediate family of such a person or (ii) any 10% or greater beneficial stockholder of the Company or any person who, to the Company's knowledge, is a member of the immediate family of such a stockholder (if such stockholder is a natural person). For purposes of the preceding sentence, the term "control" shall mean the power, directly or indirectly, to (i) vote 51% or more of the voting securities of an entity, or (ii) direct or cause the direction of the management or policies of an entity as the trustee, general partner or managing member of such entity. Notwithstanding the foregoing, no transaction or part thereof shall be considered an "Affiliated Transaction" if the securities or rights issued to any person described in the first sentence of this Section 4(f)(3) constitutes less than three percent (3%) -------------- of the aggregate securities and rights issued in such transaction. g. Adjustment of Number of Shares. Upon each adjustment in the ------------------------------ Warrant Price, the number of Warrant Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Warrant Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. h. Determination of Fair Market Value. For purposes of those ---------------------------------- provisions of this Warrant requiring a determination in accordance with this Section 4(h), "fair market value" as of a particular date (the "Determination - ------------ Date") shall mean (i) for any security if such security is traded on a national securities exchange (an "Exchange"), the weighted average (based on daily trading volume) of the mid-point between the daily high and low trading prices of the security on each of the last five (5) trading days prior to the Determination Date reported on such Exchange, (ii) for any security that is not traded on an Exchange but trades in the over-the-counter market and such security is quoted on the Nasdaq Stock Market ("NASDAQ"), (A) the weighted average (based on daily trading volume) of the mid-point between the daily high and low trading prices reported on NASDAQ on each of the last five (5) trading days (or if the relevant price or quotation did not exist on any of such days, the relevant price or quotation on the next preceding business day on which there was such a price or quotation) prior to the Determination Date, or (iii) for any security or any other asset, if no price can be determined on the basis of the above methods of valuation, then the judgment of valuation shall be determined in good faith by 7 the Board of Directors of the Company, which determination shall be described in a duly adopted board resolution certified by the Company's Clerk or Assistant Clerk. If the Board of Directors of the Company is unable to determine any Valuation (as defined below), or if (except in the case of a fair market value determination to the extent in connection with a non-Affiliated Transaction under Section 4(f)(2) above), the holders of at least a majority of all of the --------------- Loan Warrant Shares issuable under the outstanding Loan Warrants (collectively, the "Requesting Holders") disagree with the Board's determination of any Valuation by written notice delivered to the Company within five (5) business days after the determination thereof by the Board of Directors of the Company is communicated to holders of the Warrants affected thereby, which notice specifies a majority-in-interest of the Requesting Holders' determination of such Valuation, then, unless the Company accepts the Valuation so proposed and the Company and a majority-in-interest of the Requesting Holders agree upon a valuation within five (5) business days thereafter, the Company and (in the event of a disagreement by the Requesting Holders) a majority-in-interest of the Requesting Holders shall select a mutually acceptable investment banking firm of national reputation which has not had a material relationship with the Company or any officer of the Company within the preceding two (2) years, which shall determine such Valuation. Such investment banking firm's determination of such Valuation shall be final, binding and conclusive on the Company and the holders of all of the Warrants issued hereunder and then outstanding, to the extent of the issuance or distribution to which such Valuation applies. If the Board of Directors of the Company was unable to determine such Valuation, all costs and fees of such investment banking firm shall be borne by the Company. If the Requesting Holders disagreed with the Board's determination of such Valuation, the party whose determination of such Valuation differed from the Valuation determined by such investment banking firm by the greatest amount shall bear all costs and fees of such investment banking firm. For purposes of this Section ------- 4(h), the term "Valuation" shall mean the determination, to be made initially by - ---- the Board of Directors of the Company, of the fair market value of any asset pursuant to clause (iii) above. 5. Notice of Adjustments. Whenever the Warrant Price or the number --------------------- of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief - --------- financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Warrant Shares purchasable hereunder after giving effect to such adjustment, which shall be mailed (without regard to Section 13 hereof, by first class mail, postage ---------- prepaid) to the holder of this Warrant. 6. Fractional Shares. No fractional shares of Common Stock will ----------------- be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value (as determined in accordance with Section 4(h) above) of a ----------- share of Common Stock on the date of exercise. 7. Compliance with Securities Act; Disposition of Warrant or Warrant ----------------------------------------------------------------- Shares. ------- a. Compliance with Securities Act. The holder of this Warrant, ------------------------------ by acceptance hereof, agrees that this Warrant and the shares of Common Stock to be issued upon exercise hereof, are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "Act"). Upon exercise of this Warrant, the holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that --------- the shares of Common Stock so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all shares of Common 8 Stock issued upon exercise of this Warrant (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES --------- WERE ISSUED DIRECTLY OR INDIRECTLY." In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows: (1) The holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for resale in connect on with any "distribution" thereof for purposes of the Act. (2) The holder understands that this Warrant and the Warrant Shares have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder's investment intent as expressed herein. In this connection, the holder understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if the holder's representation was predicated solely upon a present intention to hold the Warrant and the Warrant Shares for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Warrant and the Warrant Shares, or for a period of one (1) year or any other fixed period in the future. (3) The holder further understands that this Warrant and the Warrant Shares must be held indefinitely unless subsequently registered under the Act and any applicable state securities laws, or unless exemptions from registration are otherwise available. (4) The holder is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: the availability of certain public information about the Company, the resale occurring not less than one (1) year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (5) The holder further understands that at the time it wishes to sell this Warrant and the Warrant Shares there may be no public market upon which to make such a sale, and 9 that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the holder may be precluded from selling this Warrant and the Warrant Shares under Rule 144 and 144A even if the one (1)-year minimum holding period had been satisfied. (6) The holder further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and 144A is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 and 144A will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. b. Disposition of Warrant or Warrant Shares. This Warrant and the ---------------------------------------- Warrant Shares may be detached and transferred, in whole or in part, separately from the Loan Agreement. With respect to any offer, sale or other disposition of this Warrant, or any Warrant Shares acquired pursuant to the exercise of this Warrant prior to the sale or disposition of such Warrant or Warrant Shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such Warrant Shares and indicating whether or nor under the Act certificates for this Warrant or such Warrant Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with applicable law. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Warrant Shares, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder ------------ is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly after such determination has been made. The foregoing notwithstanding, this Warrant or such Warrant Shares may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 and 144A under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance, including, where reasonably required, an opinion of counsel, that the provisions of Rule 144 and 144A have been satisfied. Each certificate representing this Warrant or the Warrant Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent or, if acting as its own transfer agent, the Company may stop transfer on its corporate books, in connection with such restrictions. 8. Rights as Stockholders; Information. Except as provided in ----------------------------------- Section 10.2 below, no holder of this Warrant, as such, shall be entitled - ------------ to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of the directors or upon any matter submitted to stockholders at any meeting thereof, or to 10 receive notice of meetings, or to receive dividends or subscription rights or otherwise, until this Warrant shall have been exercised and the Warrant Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. The foregoing notwithstanding, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the stockholders. 9. Registration Rights. ------------------- 9.1. Demand Registration Rights. -------------------------- a. Shelf Registration. The Company covenants and agrees ------------------ that at any time after receipt of a written request (a "Shelf Registration Request") from the holder(s) of the Loan Warrants and/or the Loan Warrant Shares (collectively, the "Securityholders") constituting at least thirty percent (30%) of the Loan Warrant Shares (determined on an as-exercised basis) not already sold pursuant to Section 9 of any Loan Warrant or Rule 144 under the Act, to --------- have the Company register the Loan Warrant Shares for sale on a continuous basis pursuant to Rule 415 under the Act, then the Company shall: (i) promptly deliver written notice (the "Shelf Registration Notice") to all other Securityholders of the Company's receipt of the Shelf Registration Request; (ii) file with the SEC a registration statement on Form S-3 or any successor form or registration to such form, or, if the Company is ineligible for Form S-3, Form S-1 or any successor form of registration to such form, for an offering to be made on a continuous basis pursuant to Rule 415 (the "Shelf Registration Statement"), covering all of the outstanding Loan Warrant Shares (determined on an as- exercised basis) (the "Registrable Securities"), within forty-five (45) days of delivery of the Shelf Registration Request, (iii) shall use its best efforts to cause such registration statement to be declared effective within one hundred and twenty (120) days of delivery of the Shelf Registration Notice and (iv) shall use its best efforts, including but not limited to the filing of any and all supplements and amendments to the Shelf Registration Statement required under applicable rules, regulations or instructions or reasonably requested by the holders of a majority of the shares then registered under the Shelf Registration Statement, to keep the Shelf Registration Statement continuously effective under the Act for 12 months or such shorter period as may be requested by Securityholders representing a majority of the shares included in such registration. The Company shall be obligated to effect only one registration under Section 9.1(a) of all of the Loan Warrants. Notwithstanding the -------------- foregoing, the Company shall not be obligated to effect any registration pursuant to Section 9.l(a) of any Loan Warrant if it has already effected two -------------- registrations under Section 9.1(b) of the Loan Warrants. -------------- b. Other Demand Registrations. The Company covenants and -------------------------- agrees that at any time after receipt of a written request (a "Demand Registration Request") from Securityholders holding at least thirty percent (30%) of the Registrable Securities not already sold pursuant to Section 9 of --------- any Loan Warrant or Rule 144 under the Act, stating that such Securityholders desire and intend to have the Company register all or a portion of the Registrable Securities held by them on Form S-3, or any successor form of registration to such form, or, if the Company is ineligible therefore, Form S-1, or any successor form of registration to such form, the Company shall give notice (the "Registration Notice") to all of the Securityholders (30) days of the Company's receipt of such registration request, the Company shall to be included in such registration all Registrable Securities requested to be included herein by any such Securityholder within fifteen (15) days after such Registration Notice is (subject to the provisions of the final sentence of this Section 9.1(b). After such fifteen (15)-day period, the Company shall file as - -------------- promptly as practicable a registration statement and use its reasonable best efforts to cause such registration statement to become effective under the Act and remain effective for six (6) 11 months or such shorter period as may be required if all such Registrable Securities covered by such registration statement are sold prior to the expiration of six (6)-month period; provided, however, that the Company shall -------- ------- not be obligated to effect any such registration pursuant to this Section 9.1(b) ------------- after the Company has effected (i) two (2) registrations pursuant to Section ------- 9.1(b) of any of the Loan Warrants or (ii) one (1) registration pursuant to - ------ Section 9.1(a) of any Loan Warrant and one (1) registration pursuant to Section - -------------- ------- 9.1(b) of any Loan Warrant. For purposes of this Section 9, a registration shall - ------ not be deemed to have been effected unless a requested registration statement has been declared effective and, subject to Section 9.3(b) hereof, remained -------------- effective for a period of six (6) months (or such shorter period as is permitted in the second sentence of this Section 9.1(b)). The foregoing notwithstanding, --------------- in the event of an underwritten offering pursuant to this Section 9.1(b), if the -------------- managing underwriter of such offering shall advise the Securityholders in writing that, in its opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in the registration shall be reduced in the following order: (i) first, securities proposed to be included by the Company and securities that are not Registrable Securities shall be excluded as determined by the Company and (ii) second, Registrable Securities will be excluded pro rata among all of the Registrable Securities requested to be included therein. For purposes of this Section 9.1(b), the Securityholders who -------------- have requested registration of Common Stock to be acquired upon the exercise of Warrants not theretofore exercised shall furnish the Company with an undertaking that they or the underwriters or other persons to whom such Warrants will be transferred have undertaken to exercise such Warrants and to sell, transfer or otherwise dispose of the Warrant Shares received upon exercise of such Warrants in such registration. 9.2. Incidental Registration ----------------------- a. Subject to Section 9.2(b) below, the Company covenants -------------- and agrees that in the event the Company proposes after the Date of Grant to file a registration statement under the Act with respect to any of its equity securities (other than pursuant to registration statements on Form S-4 or Form S-8 or any successor or similar forms and other than registrations pursuant to Section 9.1), whether or not for its own account, then the Company shall give - ----------- written notice of such proposed filing to all Securityholders promptly (and in any event at least twenty (20) days before the anticipated filing date). Such notice shall offer to such Securityholders, together with others who, have similar rights, the opportunity to include in such Statement such number of Registrable Securities as they may request (other than Registration Securities already registered pursuant to a Shelf Registration Statement). The Company shall direct and use its reasonable best efforts to cause the managing underwriter of a proposed underwritten offering (unless the offering is an underwritten offering of a class of the Company's equity securities other than Common Stock and the managing underwriter has advised Company in writing that, in its opinion, the inclusion in such offering of Common Stock would materially adversely affect the distribution of such offering) to permit the holders of Registrable Securities requested to be included in the registration to include such Registrable Securities in the proposed offering and the Company shall use its reasonable best efforts to include such Registrable Securities in such proposed offering on the same terms and conditions as any similar securities of the Company included therein. If the offering of which the Company gives notice is a public offering involving an underwriter, the right of a Securityholder to registration pursuant to this Section 9.2 shall be conditioned upon (i) such ----------- Securityholder's participation in such underwriting and the inclusion of the Registrable Securities to be sold by such securityholder in the underwriting and (ii) such Securityholder executing the underwriting agreement entered into by the Company which includes customary terms and conditions relating to sales by shareholders. The foregoing notwithstanding, in the case of an underwritten offering, if the managing 12 underwriter of such offering shall advise the Company in writing that, in its opinion, the distribution of all or a specified portion of the Registrable Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities, then the securities to be included in a registration which is a primary underwritten offering on behalf of the Company shall be reduced in the following order: (i) first, Registrable Securities and such other securities requested to be included by holders of such other securities shall be excluded pro rata and (ii) second the securities the Company proposes to include therein shall be excluded. b. In the event that a holder or holders of the Company's securities (other than a Securityholder or Securityholders) requests, pursuant to rights granted to such holder or holders, that the Company file a registration statement for the public offering of securities and the Company and the other holders of the Company's securities (including the Securityholders) who have rights to be included in such registration, request to be included in such registration and the managing underwriter of such offering shall advise the Company and the holders requesting inclusion in the offering that, in its opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities then, the securities to be included in the registration shall be reduced in the following order: (i) first, any securities requested to be included therein by the holders of such other securities in such a manner as determined by the Company, (ii) second, Registrable Securities shall be excluded pro rata, (iii) third, securities issued or issuable upon exercise of securities issued pursuant to that certain Loan and Security Agreement dated as of September 1, 1998 by and among the Company, Goldman Sachs Credit Partners L.P. and Fleet National Bank if the holders thereof have requested that the registration shall be included, (iv) fourth, securities proposed to be included by the Company shall be excluded and, (v) fifth, securities requested to be included therein by the holder or holders making the initial request for the registration. 9.3. Company's Obligations --------------------- a. In connection with the registration of Registrable Securities on behalf of the holders thereof (such Securityholders being referred to herein as "Sellers") in accordance with Section 9.1 or Section 9.2 above, and ----------- ----------- in addition to its other obligations under this Section 9, the Company agrees --------- to: (i) with respect to any registration pursuant to Section ------- 9.1(a) or Section 9.1(b), prepare and file with the SEC a registration statement - ------ -------------- on the form specified in such section, with respect to the Registrable Securities to be registered pursuant to such section, and to use its best efforts to cause such registration statement to become and remain effective as provided in such section; (ii) enter into a cross-indemnity agreement, in customary form, with each underwriter, if any, and each Seller; (iii) subject to the provisions of Section 9.1 and Section ----------- ------- 9.2 regarding reductions in Registrable Securities to be included in a - --- registration, include in the registration statement filed with the SEC, the Registrable Securities for which requests for registration have been made (or, in the case of a registration under Section 9.l(a), all such Registrable -------------- Securities), promptly after filing of such a registration statement or prospectus or any amendments or supplements thereto, furnish to each Seller copies of all such documents filed including, if requested, documents incorporated 13 by reference in the registration statement, and notify each Seller of any stop order issued or threatened by the SEC and use its best efforts to prevent the entry of such stop order or to remove it if entered; (iv) subject to Section 9.3(b), prepare and file with the SEC -------------- such amendments of and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective (A) with respect to a registration statement under Section 9.1(b) or Section 9.2 for a period of six (6) months or such -------------- ----------- shorter period as may be required if all such Registrable Securities covered by such registration statement are sold prior to the expiration of such period or (B) with respect to a Shelf Registration Statement, until all the Registrable Securities covered by such registration statement are sold, and to otherwise comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Sellers set forth in such registration statement; (v) furnish to each Seller and each underwriter, if any, without charge, such number of copies of the registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Seller may reasonably request in order to facilitate the disposition of the Registrable Securities proposed to be sold by such Seller; (vi) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or Blue Sky laws of such jurisdictions as any Seller or any such underwriter reasonably requests in writing and keep such registrations or qualifications in effect for so long as such registration statement remains in effect and do any and all acts and things which may be reasonably necessary or advisable to enable such Seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Seller, provided, however, that the Company shall not be required -------- ------- to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Subsection 9.3(a)(vi), or (B) --------------------- consent to general service of process in any such jurisdiction; (vii) notify each Seller, at any time when the Company becomes aware that a prospectus relating to such Seller's Registrable Securities is required to be delivered under the Act, of the occurrence of any event as a result of which the prospectus in such registration statement contains an untrue statement of a material fact or omits to state any material fact necessary to make the statements therein not misleading, and as soon as practicable prepare a supplement or amendment to such prospectus so that, as thereafter to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (viii) cause all such Registrable Securities to be listed on any Exchange or NASDAQ on which similar securities issued by the Company are then listed; (ix) provide a transfer agent, registrar and CUSIP number for all such Registrable Securities not later than the effective date of such registration statement; (x) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other customary actions that a majority in interest of the Sellers or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; 14 (xi) with respect to any underwritten offering, use its reasonable best efforts to obtain a "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as a majority in interest of the Sellers or any underwriter may reasonably request; (xii) with respect to an underwritten offering, use its reasonable best efforts to obtain an opinion of counsel to the Company, addressed to the Sellers and any underwriter, in customary form and including such matters as are customarily covered by such opinions in underwritten registered offerings of equity securities as a majority in interest of the Sellers or any underwriter may reasonably request, such opinion to be in form and substance reasonably satisfactory to a majority in interest of the Sellers; and (xiii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months subsequent to the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder. b. Any other provisions of this Section 9 notwithstanding, --------- upon receipt by the Securityholders of a written notice signed by the chief executive officer or chief financial officer of the Company to the effect set forth below, the Company shall not be obligated during a reasonable period of time (not to exceed ninety (90) days) thereafter (i) to effect any registrations pursuant to this Section 9 or (ii) with respect to an effective Shelf --------- Registration Statement, may suspend the effectiveness of such registration statement, at any time at which, in the Company's reasonable judgment, (i) there is a development involving the Company or any of its affiliates which is material but which has not yet been publicly disclosed or (ii) sales pursuant to the registration statement would materially and adversely affect an underwritten public offering for the account of the Company or any other financing project or a proposed or pending merger or other acquisition or business combination or disposition of the Company's assets, to which the Company or any of its affiliates is, or is expected to be, a party. In the event a registration is postponed in accordance with this Section 9.3(b), (x) the Company must (unless -------------- otherwise instructed by those holders who requested such registration) file the requested registration within nine (9) months from the date the Company first received the request of the holders, (y) the Company may not suspend the effectiveness of a Shelf Registration Statement pursuant to this Section 9.3(b) -------------- more than ninety days in the aggregate during in any eighteen (18)-month period, and (z) there shall be added to any period during which the Company is obligated to keep a effective the number of days for which the effectiveness thereof was suspended pursuant to this Section 9.3(b). -------------- c. If, but only if, the Company obtains a similar agreement with respect to a registration from each holder of 3% or more of the Company's Common Stock on a Fully Diluted Basis that acquired such shares directly or indirectly from the Company in a transaction not involving a public offering and on the date of determination the Loan Warrant Shares purchasable under the Loan Warrants are 3% or more of the Company's Common Stock on a Fully Diluted Basis the holder agrees, if so reasonably required by the managing underwriter in a registration pursuant to this Section 9, not to effect any public sale or --------- distribution of Registrable Securities or sales of such Registrable Securities pursuant to Rule 144 or Rule 144A under the Securities Act, during the seven (7) days prior to and 180 days after any firm commitment underwritten registration pursuant to Section 9 has become effective (except as part of such underwritten --------- registration) or, if the managing underwriter advises the Company that, in its opinion, no such public sale or distribution should be effected for a period of not more than 180 days after such underwritten registration in order to complete the sale and distribution of securities 15 included in such registration and the Company gives notice to such effect to the Holders of such advice, the holder shall not effect any public sale or distribution of Registrable Securities or sales of such Registrable Securities pursuant to Rule 144 or Rule 144A under the Securities Act during such period after such underwritten registration, except as part of such underwritten registration, whether or not such holder participates in such registration. d. The Company may require that each Seller, as a condition to registering his, her or its Registrable Securities pursuant hereto, furnish the Company with such information regarding such Seller and the distribution of the Registrable Securities proposed to be sold by such Seller as the Company may from time to time reasonably request in writing. e. Each Seller agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section ------- 9.3(a)(vii) above, such Seller shall forthwith discontinue disposition of - ----------- Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Seller's receipt of copies of the supplemented or amended prospectus contemplated by Section 9.3(a)(vii) above and, if so ------------------- directed by the Company, such Seller will deliver to the Company (at the Company's expense) all copies, other than permanent file copies in such Seller's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 9.3(a)(iv) above shall be extended by ------------------ the number of days during the period from and including the date of giving of such notice to and including the date when each Seller shall have received the copies of the supplemented or amended prospectus contemplated by Section ------- 9.3(a)(vii) above. - ----------- f. The Company shall not file or permit the filing of any registration or comparable statement which refers to any Seller by name or otherwise as the Seller of any securities of the Company unless such reference to such Seller is agreed to by the Seller or is, specifically required by the Act or any similar federal statute then in force. 9.4. All expenses incident to the Company's performance of or compliance with this Warrant, including without limitation all registration and filing fees, fees and expenses relating to filings with any Exchange, fees and expenses of compliance with securities or Blue Sky laws in jurisdictions reasonably requested by any Seller or underwriter pursuant to Section 9.3(a)(vi) ------------------ (including reasonable fees and disbursements of counsel in connection with Blue Sky qualifications of the Registrable Securities), all word processing, duplicating and printing expenses, messenger and delivery expenses, fees and disbursements of counsel for the Company and one (1) counsel for the Sellers (selected by those Sellers owning a majority of the Registrable Securities), independent public accountants (including the expenses of any special audit or "cold comfort" letters required by or incident to such performance), all the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the expense of any liability insurance (if the Company determines to obtain such insurance) and the fees and expenses incurred in connection with the listing of the securities to be registered on any Exchange and/or NASDAQ on which such securities issued by the Company are then listed, the reasonable fees and expenses of any special experts (including attorneys) retained by the Company (if it so desires) in connection with such registration and fees and expenses of other persons retained by the Company (all such expenses being herein called "Registration Expenses"), shall be borne by the Company. In no event shall the Company be obligated for any discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals attributable to the securities being registered (which discounts, commissions or fees with respect to any Seller's 16 respective shares shall be paid by such Seller) and legal expenses of any person other than the Company and the Sellers. 9.5. Participation ------------- a. In connection with the preparation and filing of each registration statement under the Act pursuant to this Section 9 in connection --------- with an underwritten offering, the Company shall give the underwriters under such registration statement and such underwriters' counsel and their respective accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such underwriters' counsel, to conduct a reasonable investigation within the meaning of the Act. b. In connection with the preparation and filing of each registration statement under the Act pursuant to this Section 9 not involving an --------- underwritten offering, the Company shall give the Sellers under such registration statement and such Sellers' counsel and their respective accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public who have certified its financial statements as shall be necessary, in the opinion of such Sellers' counsel, to conduct a reasonable investigation within the meaning of the Act. Each Seller agrees to keep confidential and not use, and to ensure that its representatives keep confidential and not use, any non-public information of the Company made available in such investigation. 9.6. Indemnification --------------- a. In the event of any registration of any securities of the Company under the Act, the Company shall, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 9.1 or Section 9.2 above, the Seller of any Registrable Securities - ----------- ----------- covered by such registration statement, its directors, officers, employees and agents, each other person who participates as an underwriter in the offering or sale of such Registrable Securities and each other person, if any, who controls such Seller or any such underwriter within the meaning of the Act against any losses, claims, damages, or liabilities (or actions or proceedings whether commenced or threatened in respect thereof), joint or several, to which such Seller or any such director or officer or employee or agent or underwriter or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, 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 the Company shall reimburse such Seller and each such director, officer, employee, agent, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action, or proceeding; provided, -------- however, that the Company shall not be liable in any such case to the extent - ------- that any such loss, claim, damage, liability (or action or proceeding in respect thereof), or expense arises out of or is based upon an untrue 17 statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment, or supplement in reliance upon and in conformity with written information furnished to the Company by such Seller for the express purpose of use in the preparation thereof and, provided, further, that the Company shall nor be liable in any such ease to the extent that any such loss, claim, damage, liability (or action or proceeding, whether commenced or threatened, in respect thereof), or expense arises out of such person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Act to the person asserting an untrue Statement or alleged untrue statement or omission or alleged omission if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Seller or any such director, officer, employee, agent, underwriter or controlling person and shall survive the transfer of such Registrable Securities by such Seller. b. In the event that the Company includes any Registrable Securities of a prospective Seller in any registration statement filed pursuant to Section 9.1 or Section 9.2, above such prospective Seller shall, and hereby ----------- ----------- does, indemnify and hold harmless the Company, its directors, officers, employees and agents, each other person who participates as an underwriter in the offering or sale of such Registrable Securities and each other person, if any, who controls the Company or any such underwriter within the meaning of the Act against any losses, claims, damages, or liabilities (or actions or proceedings in respect thereof), joint or several, to which the Company or any such director or officer or employee or underwriter or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions or proceedings, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, 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 such prospective Seller shall reimburse the Company and any such director, officer, employee, agent, underwriter or controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action, or proceeding if, and only if, such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment, or supplement. In no event shall the liability of any Seller hereunder be greater in amount than the dollar amount of the proceeds received by such Seller upon the sale of the Registrable Securities giving rise to such indemnification obligation. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer, employee, agent, underwriter or controlling person and shall survive the transfer of such Registrable Securities by such Seller. c. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers, and similar securities industry professionals participating in the distribution to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or registration statement. d. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in this Section 9.6, such indemnified party shall, if a claim in respect thereof is to - ----------- be made against an indemnifying party, give 18 written notice to the latter of the commencement of such action; provided, -------- however, that the failure of any indemnified party to give notice as provided - ------- herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 9.6, except to the extent that the ----------- indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified, and after notice from the indemnifying party to such indemnified party of election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof. If, in the indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnified party may assume the defense of such claim, jointly with any other indemnified party that reasonably determines such conflict of interest to exist, and the indemnifying party shall be liable to such indemnified parties for the reasonable legal fees and expenses of one counsel for all such indemnified parties and for other expenses reasonably incurred in connection with the defense, thereof incurred by the indemnified party. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action 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, or a covenant not to sue, in respect of such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. e. Indemnification and contribution similar to that specified in this Section 9.6 (with appropriate modifications) shall be given by the Company ----------- and each Seller with respect to any required registration or other qualification of Registrable Securities under any Federal or state law or regulation of any governmental authority, other than the Act. f. The indemnification required by this Section 9.6 shall be ----------- made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. g. If the indemnification provided for in this Section 9.6 from ----------- the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities, or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result, of losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. In no event shall the liability of any Seller hereunder be greater in amount than the dollar amount of the proceeds received by such 19 Seller upon the sale of the Registrable Securities giving rise to such contribution obligation. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.6(g) were determined by pro -------------- rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in this Section 9.6(g). No -------------- person guilty of fraudulent misrepresentation (within the meaning of Section 11(g) of the Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 9.7. Assignment of Rights; Termination. The rights granted --------------------------------- under this Section 9 may be assigned to any transferee of at least 10,000 Loan --------- Warrants, Loan Warrant Shares or any combination thereof, and upon (a) prior written notice to the Company of the assignment, and (b) the transferee's agreement to be bound by the relevant terms and conditions of this Section 9 and --------- the Warrant. The rights of the holder and any transferee under this Section 9 --------- will terminate on the five (5) year anniversary of the Expiration Date. 10. Additional Rights. ----------------- 10.1. Notice of Sale. In the event that the Company -------------- undertakes to effect a Sale, the Company will use its best efforts to provide to the holder at least thirty (30) days notice of the terms and conditions of the proposed transaction. The Company will cooperate with the holder in consummating the sale of this Warrant in connection with any such transaction. 11. Representations and Warranties. The Company represents and ------------------------------ warrants to the holder of this Warrant as follows: a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies; b. The Warrant Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; c. The rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the holders thereof are as set forth in the Articles of Organization of the Company, as amended to the Date of Grant (as so amended, the "Charter"), a true and complete copy of which has been delivered to the original holder of this Warrant; d. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Charter or by-laws of the Company, do not and will not contravene, in any material respect, any governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby; 20 e. There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant; f. The authorized capital stock of the Company and the capital stock issued and outstanding, or reserved for issuance, are as set forth on Schedule 4.1 to the Loan Agreement. All of the outstanding shares of the Company have been validly issued and are fully nonassessable shares and have not been issued in violation of any applicable preemptive rights; g. Except as set forth on Schedule 4.1 to the Loan Agreement, there are no subscriptions, rights, options, warrants, or calls relating to any shares of the Company's capital stock, including any right of conversion or exchange under any outstanding security or other instrument; and 12. Modification and Waiver. This Warrant and any ----------------------- provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Unless otherwise specifically provided herein, ------- all communications under this Warrant shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is to be given, (ii) on the day of transmission if sent by facsimile transmission to a telephone number provided by a party for such purposes, and telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the day after delivery to Federal Express or similar overnight courier, or (iv) on the fifth day after mailing, if mailed to the patty to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed, return receipt requested, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. Any party hereto may change its address for purposes of this Section 13 by ---------- giving the other party written notice of the new address in the manner set forth herein. 14. Binding Effect on Successors. This Warrant shall be binding ---------------------------- upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such -------- request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 15. Lost Warrants or Stock Certificates. The Company covenants ----------------------------------- to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any loss, theft or destruction, upon receipt of an executed lost securities bond or indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 21 16. Descriptive Headings. The descriptive headings of the several -------------------- paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced ------------- in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York. 18. Survival of Representations, Warranties and Agreements. Each ------------------------------------------------------ of the respective representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) and the termination or expiration of any rights hereunder. Each of the respective agreements of each of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. Without limiting the generality of the foregoing sentence, the registration rights contained in Section 9 above shall survive the exercise or conversion of this Warrant (or any - --------- part hereof) and the termination or expiration of any other rights hereunder. 19. Remedies. In case any one (1) or more of the covenants and -------- agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 20. Acceptance. Receipt of this Warrant by the holder hereof ---------- shall constitute acceptance of and agreement to the foregoing terms and conditions. 21. No Impairment of Rights. The Company will not, by amendment ----------------------- of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against material impairment. 22. Amendment. This Warrant may be amended by written agreement --------- of the Company and holders of at least a majority of the Loan Warrant Shares, collectively on an as-exercised basis, and such amendment shall be binding on all holders of this Warrant or Warrant Shares. [Signature page follows.] 22 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. CTC COMMUNICATIONS CORP. By: -------------------------------- Name: -------------------------------- Title: -------------------------------- Address: 360 Second Avenue Waltham, Massachusetts 02154 Dated: as of March 24, 1999 S-1 EXHIBIT A --------- NOTICE OF EXERCISE To: CTC COMMUNICATIONS CORP. 1. The undersigned hereby elects to purchase _____ shares of Common Stock of CTC COMMUNICATIONS CORP. pursuant to the terms of the attached Warrant, and lenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: ------------------------- (Name) ------------------------- ------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, in support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. ------------------------- (Signature) - ------------------------- (Date) Schedule I ---------- INVESTMENT REPRESENTATION STATEMENT Purchaser: Company: CTC COMMUNICATIONS CORP. Security: Common Stock Amount: Date: In connection with the purchase of the above-listed securities (the "Registrable Securities"), the undersigned (the "Purchaser") represents to the Company as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Registrable Securities. The Purchaser is purchasing the Registrable Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Registrable Securities Act of 1933, as amended (the "Act"). (b) The Purchaser understands that the Registrable Securities have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Registrable Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Registrable Securities for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Registrable Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Registrable Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. In addition, the Purchaser understands that the certificate evidencing the Registrable Securities will be imprinted with the legend referred to in the Warrant under which the Registrable Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, among other things: The availability of certain public information about the resale occurring not less than one (1) year after the party has purchased and paid securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Registrable Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Registrable Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the Purchaser may be precluded from selling the Registrable Securities under Rule 144 and 144A even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden or proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Purchaser: ------------------------- EXHIBIT B --------- Analysis Based on Average Price (as defined in Loan Agreement) on 3/11/99 of: $11.8125 Total Primary Shares Outstanding 10,308,348 Outstanding Options: Employee Options in the Money 3,679,495 Proceeds from Options $25,282,017 Average exercise price $6.87 Shares to be purchased 2,140,277 Incremental Shares 1,539,218 ----------- Total Shares outstanding pre warrants and convertibles 11,847,566 Spectrum warrants in the money 188,888 Goldman/Fleet Warrants (struck at $6.75) 974,412 Relational Warrants (struck at $9.00) 55,555 Proceeds from Warrant Exercise $ 8,777,268 Shares to be Purchased 743,049 Incremental warrant shares 475,806 ----------- Total Shares outstanding pre-Convertibles 12,323,372 Spectrum Convertible Preferred Stock 1,333,333 Spectrum shares from 9% dividend accreted to 3/24/99 117,196 ----------- Total Convertibles 1,450,529 Total Shares outstanding Pre Loan Warrants (on a Fully Diluted Basis) 13,773,901 =========== Warrants % of Fully Diluted Shares 0.5% Incremental Warrant Shares 69,216
EX-23.2 4 CONSENT OF ERNST & YOUNG Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated May 28, 1998 (except Note 1, as to which the date is July 15, 1998), included in the Registration Statement (Form S-1) and related Prospectus of CTC Communications Corp. for the registration of 2,875,000 shares of its Common Stock. Our audits also included the financial statement schedule listed in Part II. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Boston, Massachusetts April 30, 1999 -----END PRIVACY-ENHANCED MESSAGE-----