-----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, G0WzIu1lboJ9vjBCGDfNuiDeTua6JGQsbRW1OUSAqB1y6vSm89AZlbOUKSzAOg6F Oz3ni4ojguuaNx7PGQnj3A== 0001056114-98-000020.txt : 19981116 0001056114-98-000020.hdr.sgml : 19981116 ACCESSION NUMBER: 0001056114-98-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-13627 FILM NUMBER: 98749169 BUSINESS ADDRESS: STREET 1: 360 SECOND AVE CITY: WALTHAM STATE: MA ZIP: 02154 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 10-Q 1 9/30/98 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter ended September 30, 1998. Commission File Number 0-13627. CTC COMMUNICATIONS CORP. (Exact name of registrant as specified in its charter) Massachusetts 04-2731202 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 360 Second Avenue, Waltham, Massachusetts 02154 (Address of principal executive offices) (Zip Code) (781) 466-8080 (Registrant's telephone number including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of Common Stock, as of the latest practicable date: As of November 9, 1998, 10,275,299 shares of Common Stock were outstanding. CTC COMMUNICATIONS CORP. FORM 10-Q INDEX
Part I FINANCIAL STATEMENTS PAGE NO. Item 1. Financial Statements Condensed Balance Sheets as of September 30 and March 31, 1998 3 Condensed Statements of Operations Three Months Ended September 30, 1998 and 1997 4 Condensed Statements of Operations Six Months Ended September 30, 1998 and 1997 5 Condensed Statements of Cash Flows Six Months Ended September 30, 1998 and 1997 6 Notes to Condensed Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 Item 3. Quantitative and Qualitative Inapplicable Disclosures About Market Risk Part II OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 21 Item 3. Default Upon Senior Securities Inapplicable Item 4. Submission of Matters to a Vote of Security Holders Inapplicable Item 5. Other Information Inapplicable Item 6. Exhibits and Reports on Form 8-K 22-23
2 In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 including, but not limited to, those statements regarding the successful implementation of the Company's business plan, availability of additional financing if required, the ability to improve operational, financial and management information systems, future profitability, the timing and success of the expansion and deployment of facilities, future operations and availability of capital and other future plans, events and performance and other statements located elsewhere herein. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those outlined in Exhibit 99.1 filed with this Quarterly Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. CTC COMMUNICATIONS CORP. CONDENSED BALANCE SHEETS September 30, March 31, 1998 1998 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 2,167,474 $ 2,167,930 Accounts receivable, net 25,538,298 17,288,183 Prepaid expenses and other current assets 5,073,783 3,029,069 ------------- ------------- Total Current Assets 32,779,555 22,485,182 Furniture, Fixtures and Equipment 19,242,013 13,376,970 Less accumulated depreciation (8,447,683) (6,837,683) ------------- ------------- Total Equipment 10,794,330 6,539,287 Deferred income taxes 1,834,000 1,834,000 Other assets 4,198,786 108,885 ------------- ------------- Total Assets $ 49,606,671 $ 30,967,354 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 18,736,601 $ 8,958,476 Accrued salaries and related taxes 2,166,186 756,159 Current portion of obligations under capital leases 249,661 231,796 Current portion of note payable to bank 0 1,196,400 ------------- ------------- Total Current Liabilities 21,152,448 11,142,831 Obligations under capital leases, net of current portion 1,013,568 1,114,277 Note payable to bank, net of current portion 21,100,000 7,130,671 Series A redeemable convertible preferred stock 12,260,165 0 Stockholders' equity (deficit): Common Stock 100,101 99,806 Additional paid in capital 6,905,946 5,245,704 Deferred compensation (265,410) (318,410) Retained earnings (deficit) (12,524,322) 6,688,300 ------------- ------------- (5,783,685) 11,715,400 Amounts due from stockholders (135,825) (135,825) ------------- ------------- Total Stockholders' Equity (Deficit) (5,919,910) 11,579,575 ------------- ------------- Total Liabilities and Stockholders' Equity (Deficit) $ 49,606,671 $ 30,967,354 ============= ============= The accompanying notes are an integral part of these financial statements. 3 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended September 30, September 30, 1998 1997 ------------- ------------- Telecommunications revenues $ 14,516,189 $ 3,488,684 Commission revenues 0 8,356,413 ------------- ------------- Total revenues 14,516,189 11,845,097 Costs and expenses Cost of telecommunications revenues 12,383,432 2,712,249 Selling, general and administrative expenses 13,001,503 7,053,701 ------------- ------------- 25,384,935 9,765,950 ------------- ------------- Income (loss) from operations (10,868,746) 2,079,147 Other Interest income 38,437 39,352 Interest expense (983,466) (5,772) Other 3,149 1,273 ------------- ------------- (941,880) 34,853 ------------- ------------- Income (loss) before income taxes (11,810,626) 2,114,000 Provision (benefit) for income taxes (827,000) 870,000 ------------- ------------- Net income (loss) $(10,983,626) $ 1,244,000 ============= ============= Net income (loss) per share available to common stockholders Basic $ (1.13) $ 0.13 ============= ============= Diluted $ (1.13) $ 0.12 ============= ============= Shares used in computing net income (loss) per share available to common stockholders Basic 10,002,370 9,894,195 ============= ============= Diluted 10,002,370 10,694,319 ============= =============
The accompanying notes are an integral part of these financial statements. 4 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended September 30, September 30, 1998 1997 ------------- ------------- Telecommunications revenues $ 27,351,874 $ 6,542,785 Commission revenues 0 16,961,264 ------------- ------------- Total revenues 27,351,874 23,504,049 Costs and expenses Cost of telecommunications revenues 23,996,900 5,156,085 Selling, general and administrative expenses 22,496,457 13,987,801 ------------- ------------- 46,493,357 19,143,886 ------------- ------------- Income (loss) from operations (19,141,483) 4,360,163 Other Interest income 170,832 96,938 Interest expense (1,400,976) (10,227) Other 33,001 5,127 ------------- ------------- (1,197,143) 91,838 ------------- ------------- Income (loss) before income taxes (20,338,626) 4,452,001 Provision (benefit) for income taxes (1,424,000) 1,834,000 ------------- ------------- Net income (loss) $(18,914,626) $ 2,618,001 ============= ============= Net income (loss) per share available to common stockholders Basic $ (1.92) $ 0.27 ============= ============= Diluted $ (1.92) $ 0.24 ============= ============= Shares used in computing net income (loss) per share available to common stockholders Basic 9,993,281 9,825,439 ============= ============= Diluted 9,993,281 10,696,616 ============= =============
The accompanying notes are an integral part of these financial statements. 5 CTC COMMUNICATIONS CORP. CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended September 30, September 30, 1998 1997 ------------- --------------- OPERATING ACTIVITIES Net cash used in operating activities (18,776,472) (599,047) INVESTING ACTIVITIES Additions to equipment (5,865,043) (1,478,700) ------------- ------------- Net cash used in investing activities (5,865,043) (1,478,700) FINANCING ACTIVITIES Net proceeds from issuance of redeemable preferred stock 11,862,113 0 Proceeds from the issuance of common stock 88,861 44,671 Net borrowings/(repayment) of obligations under capital leases (82,844) 0 Net borrowings/(repayment) of note payable to bank 12,772,929 0 ------------- ------------- Net cash provided by financing activities 24,641,059 44,671 ------------- ------------- (Decrease) in cash (456) (2,033,076) Cash at beginning of period 2,167,930 6,405,670 ------------- ------------- Cash and cash equivalents at end of period $ 2,167,474 $ 4,372,594 ============= =============
The accompanying notes are an integral part of these financial statements. 6 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 three and six months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1999. These statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. NOTE 2: COMMITMENTS AND CONTINGENCIES Federal Court Action In December 1997, the Company filed a Complaint and Jury Trial Demand ("Complaint")against Bell Atlantic Corporation ("Bell Atlantic") in the United States District Court for the District of Maine (Civil Action No. 97-CV-395-P-H) alleging breach by Bell Atlantic (as successor to the NYNEX Company) of the Agreement for Sale of Services and Account Management effective as of February 1, 1996 between NYNEX and the Company (the "Agency Agreement") by reason of failure to pay approximately $14.0 million in commission payments due and owing under the Agency Agreement among other breaches. Subsequent to filing the suit, Bell Atlantic paid the Company approximately $2.5 million in reduction of the amount due to the Company. The Complaint also seeks monetary damages, and certain injunctive relief, for alleged unlawful competition, illegal tying arrangements in violation of the Sherman Antitrust Act and violation of Section 251 of the Telecommunications Act of 1996 by Bell Atlantic. In January 1998, Bell Atlantic instituted an action against the Company in the U.S. District Court for the Southern District of New York (98 CIV 0048) denying that it had breached its obligations under the Agency Agreement and requesting an order compelling the Company to arbitrate its dispute with Bell Atlantic and enjoining the Company from proceeding with the above-described litigation in the Maine federal court. Bell Atlantic's complaint also sought an injunction to prevent the Company from continuing to engage in certain activities allegedly in violation of its post termination non-competition, trademark usage and confidentiality 7 obligations under the Agency Agreement. Subsequent to initiating the action, Bell Atlantic filed a motion for a temporary restraining order and preliminary injunction and an order compelling arbitration of the entire dispute. The Company filed an answer denying the material allegations of the Bell Atlantic complaint. It believes that it has meritorious defenses to the Bell Atlantic action and will vigorously defend the action. On January 30, 1998, the Court issued an order denying Bell Atlantic's motion seeking to compel arbitration and granting its motion for a temporary restraining order. Specifically, the order temporarily enjoined the Company from selling or promoting the sale of any non-Bell Atlantic IntraLATA (local) telecommunications products, including IntraLATA products purchased wholesale from Bell Atlantic for resale to the Company's customers, to any Bell Atlantic customer for whom the Company was responsible for account management or to whom the Company sold any such Bell Atlantic service during the 12 months preceding December 30, 1997. The order also temporarily enjoined the Company from any use of Bell Atlantic's trademarks and trade name in promotional, advertising or marketing material without Bell Atlantic's written permission and from any use of certain Bell Atlantic confidential information disclosed to the Company in its capacity as Bell Atlantic's sales agent. On July 2, 1998, the United States Court of Appeals for the Second Circuit denied Bell Atlantic's appeal to compel arbitration of the Company's claims against Bell Atlantic. The denial of Bell Atlantic's appeal eliminates any obstacle to permitting the Company's lawsuit in the United States District Court in Maine to proceed against Bell Atlantic. The Company believes that the trial will commence in February or March 1999. On July 31, 1998, Judge Gene Carter of the United States District Court in Portland, Maine, ordered the dissolution of the temporary restraining order against the Company and denied Bell Atlantic's motion for a permanent injunction. The court ruled that the Company has an absolute right to solicit the customers they had serviced while a Bell Atlantic agent. State Regulatory Proceedings On February 6, 1998, the Company filed a Complaint and Request for Emergency Relief ("Complaint") with the Commonwealth of Massachusetts, Department of Telecommunications and Energy ("DTE") against New England Telephone and Telegraph Company d/b/a Bell Atlantic - Massachusetts ("Bell Atlantic"). The Complaint alleges that Bell Atlantic has recently rescinded its policy in the New England states of permitting resellers, including the Company, to assume the service contracts of retail customers under contract to Bell Atlantic. The Complaint alleges that Bell Atlantic's actions violate the resale agreement between the Company and Bell Atlantic, Section 251 of the Telecommunications Act of 1996 (which provides, in relevant part, that incumbent local exchange carriers have a duty not to prohibit, and not to 8 impose unreasonable or discriminatory conditions or limitations on, the resale of telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers) and the DTE's Order on Competition in Massachusetts. The Complaint seeks an order directing Bell Atlantic to cease and desist from refusing to permit the assignment of existing contracts and to continue its long-standing practice of allowing resellers to assume these customer agreements, without penalty, on a resold basis or, in the alternative, an emergency, expedited investigation by the DTE into the dispute. On July 2, 1998, the Massachusetts Department of Telecommunications and Energy ruled that it is illegal for Bell Atlantic to impose contract termination fees on its customers who choose a competitive Bell Atlantic reseller as their local provider. Bell Atlantic has appealed the decision on procedural grounds. The Company anticipates that the DTE will issue a final order on appeal prior to the end of 1998. On September 14, 1998, the State of New York Public Service Commission, and on October 7, 1998, the New Hampshire Public Utilities Commission, also ruled in favor of the Company and ordered Bell Atlantic to eliminate the customer termination fees. Hearings have been held in both Vermont and Maine seeking to reverse Bell Atlantic's policy of imposing contract termination fees on its customers who choose a competitive Bell Atlantic reseller as their local provider. To date, no decisions have been rendered. The Company has also filed a petition for repeal of the Bell Atlantic customer termination fee requirement in the State of Rhode Island. The Company is also a party to suits arising in the normal course of business which either individually or in the aggregate are not material. NOTE 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. 9 NOTE 4. TRANSACTIONS SUBSEQUENT TO SEPTEMBER 30, 1998 On November 2, 1998, 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 Cisco products purchased with the proceeds of the first $15 million advanced under the Credit Facility and a subordinate security interest in all other assets of the Company. Under the terms of the Credit Facility, the Company is required to pay interest on funds advanced under the facility at an annual rate of 12.5%. In addition, the Company is required to pay a commitment fee of .50% per annum on any unused amounts under the facility as well as a monthly line fee of $15,000 per month. 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 On September 1, 1998, the Company as Borrower, entered into a Loan and Security Agreement ("Loan and Security Agreement") with Goldman Sachs Credit Partners L.P. and Fleet National Bank as Lenders. Under the terms of the Loan and Security Agreement, the Lenders have provided a three-year senior secured credit facility to the Company consisting of revolving loans in the aggregate amount of up to $75 million (the "Credit Facility"). Advances under the facility bear interest at 1.75% over the prime rate and are secured by a first priority perfected security interest on all of the Company's assets, provided, however, that the Company has the ability to exclude assets acquired through purchase money financing. In addition, the Company is required to pay a commitment fee of 0.5% per annum on any unused amounts under the facility as well as a monthly line fee of $150,000 per month. The Company may borrow $15 million unconditionally and $60 million based on trailing 120 days accounts receivable collections (reducing to the trailing 90 days of collections by March 31, 2000). The Company paid a one-time up front fee of $2,531,250, representing 3 3/8% of the facility. In the event that the Company wishes to prepay the loan, the agreement provides for a prepayment penalty of 2% during the first 18 months of the term of the loan. Warrants to purchase an aggregate of 974,412 shares of the Company's common stock at a purchase price of $6.75 per share were issued to the Lenders in connection with the transaction. The Company has valued the Warrants at $1.3 million which is being amortized and included in interest expense over the three-year term of the Loan and Security Agreement. As of October 31, 1998, the Company had borrowed $24,500,000 under the Credit Facility. 10 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:
Three Months Ended Six Months Ended September 30, September 30 1998 1997 1998 1997 ------------------------- -------------------------- Numerator: Net income (loss) (10,983,626) 1,244,000 (18,914,626) 2,618,001 Accretion to redemption value on redeemable preferred stock (270,000) 0 (270,000) 0 Numerator for basic net income (loss) per share and diluted net income ------------------------ -------------------------- (loss) per share (11,253,626) 1,244,000 (19,184,626) 2,618,001 ======================== ========================== Denominator: Denominator for basic net income (loss) per share-weighted average shares 10,002,370 9,894,195 9,993,281 9,825,439 Effect of dilutive securities: Employee stock options 0 800,124 0 871,177 Denominator for diluted net income ------------------------- -------------------------- (loss) per share-weighted-average shares 10,002,370 10,694,319 9,993,281 10,696,616 ========================== ========================== Basic net income (loss) per share (1.13) 0.13 (1.92) 0.27 ========================== ========================== Diluted net income (loss) per share (1.13) 0.12 (1.92) 0.24 ========================== ==========================
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. 11 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this Report. OVERVIEW CTC Communications Corp. (the "Company"), a Massachusetts corporation, is a rapidly growing integrated communications provider ("ICP") with 14 years of local telecommunications marketing, sales and service experience. The Company offers local, long distance, Internet access, Frame Relay and other data services on a single integrated bill. CTC currently serves small to medium-sized business customers in seven Northeastern states through its experienced 197-member direct sales force and 85 customer care representatives located in 25 branch offices throughout the region. Prior to becoming an ICP in January 1998, the Company was the oldest and largest independent sales agent for Bell Atlantic Corp. ("Bell Atlantic"), selling local telecommunications services as an agent since 1984. The Company has also offered long distance and data services under its own brand name since 1994. As an agent, during the 1997 calendar year, the Company managed relationships with approximately 5,600 franchise customers who purchased approximately $200 million of annual local telecommunications services, representing an estimated 280,000 local access lines at year end. In late 1997, the Company became certified as a Competitive Local Exchange Carrier ("CLEC") in New York and the six New England states in order to embark upon its ICP strategy and take advantage of market opportunities created by deregulation. In December 1997, the Company terminated its agency agreement with Bell Atlantic and began ICP operations in January 1998. As an ICP, the Company is utilizing its well-developed infrastructure and the same relationship-centered sales approach that it employed as an agent without the limitations on potential customers, services and pricing that were imposed upon it as an agent. Over the next three years, the Company plans to expand within its existing markets and into six additional states in the Boston- Washington, D.C. corridor and add network facilities. 12 Beginning in the first calendar quarter of 1999, the Company intends to deploy a state-of-the-art, data centric, packet-switched Integrated Communications Network ("ICN"). Installation initially will take place in the Company's existing markets and in new markets as customer demand and concentrations warrant. The ICN when completed will consist of an advanced Asynchronous Transfer Mode (ATM)-based network, using Cisco Systems, Inc. BPX(r) 8600 series and MGX(tm) 8800 series IP+ATM wide-area switches, that will deliver enhanced access services such as traditional dedicated services, frame relay, IP, video, and circuit emulation transport services. Cisco's solutions should enable CTC to deliver all of these services and voice services across a single multiservice dedicated connection that should lower customers' telecommunications costs. The ICN will be interconnected by leased transmission and access facilities. Initially, the Company will offer dedicated long distance and data services over the ICN. The Company intends to continue to lease local dialtone capabilities until these services can be cost effectively integrated into a packet switched network architecture. The Company expects that the ICN will be able to take advantage of the growing customer demand for dedicated long distance and data transmission capabilities and the economic benefits that can be achieved by utilizing a combination of Company-owned switching facilities and leased network elements. Once deployed, the Company believes that the ICN will enable the Company to improve margins, enhance customer control and broaden service offerings. Prior to deploying the ICN, the Company is building its base of installed access lines through reselling the network services of other Telecommunications carriers. Although management believes that its current strategy will have a positive effect on the Company's results of operations over the long-term, through an increase in its customer base and product offerings, this strategy is expected to have a negative effect on the Company's results of operations over the short-term. The Company's operations are subject to certain material risks, as set forth in Exhibit 99.1 to this Quarterly Report, and to certain other factors discussed further in this Quarterly Report under "Liquidity and Capital Resources." The Company anticipates losses and negative cash flow in the near term, attributable in part to significant investments in operating, sales, marketing, management information systems and general and administrative expenses as well as investments in the ICN. 13 Historically, the Company's network service revenues have consisted of commissions earned as an agent of Bell Atlantic and other RBOCs and since 1994, revenues from the resale of long distance, frame relay, Internet access and other communications services. For the fiscal year ended March 31, 1998, agency commissions accounted for approximately 60% of network service revenues with resale revenues accounting for 40% of such revenues. As a result of the transition to an ICP strategy in December 1997, agency commissions earned in the future will not be material. The Company bills its customers for local and long distance usage based on the type of local service utilized, the number, time and duration of calls, the geographic location of the terminating phone numbers and the applicable rate plan in effect at the time of the call. During the period in which the Company resells the services of other telecommunications carriers prior to deploying its ICN, cost of services includes the cost of local and long distance services charged by carriers for recurring charges, per minute usage charges and feature charges, as well as the cost of fixed facilities for dedicated services and special regional calling plans. Selling expense consists of the costs of providing sales and other support services for customers including salaries, commissions and bonuses to salesforce personnel. General and administrative expense consists of the costs of the billing and information systems and personnel required to support the Company's operations and growth as well as all amortization expenses. Depreciation is allocated throughout sales, marketing, general and administrative expense based on asset ownership. The Company has experienced significant growth in the past and, depending on the extent of its future growth, may experience significant strain on its management, personnel and information systems. To accommodate this growth, the Company intends, subject to the availability of adequate financing, to continue to implement and improve operational, financial and management information systems. Since implementing its ICP strategy, the Company has expanded its staff to include three additional senior executives and over 85 additional employees. The Company is also expanding its information systems to provide improved recordkeeping for customer information and management of uncollectible accounts and fraud control. 14 RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1997. The results for the quarter ended September 30, 1998 reflect the Company's operations as an Integrated Communications Provider ("ICP"). In its capacity as an independent agent for the Regional Bell Operating Companies (RBOCs), the Company recorded revenues which represented the fees and commissions earned by the Company for sales of products and services to business customers. As an ICP, the Company purchases local services from the RBOCs at a discount to the retail rate, and resells and bills these services to business customers. The Company also resells other services including long distance, Internet access, and various data services in order to provide a total integrated telecommunications solution to its customers. The Company will continue reselling telecommunications services until the deployment of its Integrated Communications Network ("ICN") and begins migrating customers onto its own network. Total revenues for the second fiscal quarter were $14,516,000, as compared to $11,845,000 for the same period of the preceding Fiscal year, or an increase of 23%. Total revenues for the six months ended September 30, 1998 were $27,352,000, as compared to $23,504,000, or an increase of 16%. The September quarter revenues also represented an increase of 13% over the June 1998 quarter revenues of $12,836,000. Revenues for local, Internet access and data services increased a combined 63% on a sequential quarter basis due primarily to the addition of new customer relationships. Long distance revenue experienced a 24% decrease on a sequential quarter basis as a result of the Company's strategic decision to stop offering long distance to outbound call center customers. These customers tend to be high volume, low margin businesses where the relationship is short-term. It is the Company's policy to focus on long-term relationships with customers that purchase the full complement of services. A common basis for measurement of an ICP's progress is the growth in access line equivalents. During the quarter ended September 30, 1998, the Company sold 33,183 access line equivalents and provisioned 25,553, bringing the total lines in service to 64,394 for the Company's first nine months as an ICP. New lines sold represented a 26% sequential increase over lines sold during the quarter ended June 30, 1998. 15 Costs of telecommunications revenues for the quarter ended September 30, 1998 were $12,383,000, as compared to $2,712,000 for the same period of the preceding Fiscal year. For the six months ended September 30, 1998 costs of telecommunications revenues were $23,997,000, as compared to $5,156,000 for the same period of the preceding Fiscal year. Since substantially all revenues since January 1, 1998 have resulted from operations as ICP, comparative numbers on a year to year basis are not relevant. As a percentage of telecommunications revenues, cost of telecommunications revenues was 85% for the second quarter of Fiscal 1999, as compared to 90% for the first quarter of Fiscal 1999 and 95% for fourth quarter of Fiscal 1998, the first quarter of transition from agency status to ICP status. The gross margin improvement over the first nine months as an ICP is primarily attributable to the implementation of the lower long distance wholesale costs previously renegotiated with the Company's principal long distance supplier, significant improvements made in local service gross margins, and the elimination of the lower margin call center business from long distance gross margins. For the quarter ended September 30, 1998, Selling, general and administrative expenses (SG & A) increased 84% to $13,001,000 from $7,054,000 for the same period of the preceding fiscal year. For the six months ended September 30 1998, SG & A expenses were $22,496,000, as compared to $13,988,000, or an increase of 61%. These increases were due primarily to the opening of five new branch sales offices during the six months ended September 30, 1998 and the associated increased number of sales and service employees hired in connection with the transition to the ICP platform. As of September 30, 1998, CTC employed 392 people including 197 Account Executives and 85 Network Coordinators in 25 branch locations throughout New England and New York. In addition, SG & A expenses increased due to operating expenses associated with the network build out, as well as an additional $500,000 of increased depreciation expense in the second fiscal quarter associated with the investments in the Integrated Communications Network. The final component of the increase is related to legal and regulatory activities. Legal expenses in prosecuting both the anti-trust action against Bell Atlantic now pending in the federal courts and the state regulatory proceedings instituted in each of the New England States against Bell Atlantic for discriminatory practices regarding the Bell Atlantic policy of imposing contract termination fees on its customers as well as the regulatory expenses incurred in obtaining certification as a reseller in additional states, were $1,913,000 and $2,632,000 respectively, for the three and six months ended September 30, 1998. 16 For the quarter ended September 30, 1998 the Company reported a loss before taxes of $11,811,000. For the quarter ended June 30, 1998 the Company reported a net loss before taxes of $8,528,000, and recorded a tax benefit of $2,900,000, for a net loss of $5,628,000, or $0.56 per share. Initially, the Company recognized the benefit of the tax loss carry-back at the Federal tax rate of 34%. The Company has determined that the benefit should be applied ratably as a percentage of the Company's estimated pre-tax loss over each of the four quarters of the fiscal year. The effective rate of the benefit may vary with changes in management's estimates. While applying the tax benefit ratably over each of the four quarters will not change the year end result, an adjustment was made for the first quarter reducing the tax benefit to $597,000 compared to the previously recorded tax benefit of $2,900,000. Based on the foregoing, the net loss for the first quarter will increase from the previously reported $5,628,000, or $0.56 per share, to $7,931,000, or $0.79 per share. An Amendment to the Form 10-Q for the quarter ended June 30, 1998 is being filed to reflect this change. Liquidity and Capital Resources Working capital at September 30, 1998 amounted to $11,627,000 as compared to $11,342,000 at March 31, 1998, an increase of 3%. Cash balances at September 30, 1998 and March 31, 1998 totaled approximately $2,167,000. Historically, the Company funded its working capital and operating expenditures primarily from cash flow from operations. As a result of Bell Atlantic's failure to pay approximately $14 million in agency commissions (currently approximately $11.5 million) that the Company believes it is owed under its agency contract, the losses incurred following transition to an ICP strategy, and the investment required to implement the Integrated Communications Network, the Company has been required to raise additional capital. Although the Company has sued Bell Atlantic and believes the collection of the agency commissions is probable, there is no assurance that the Company will be successful in its collection efforts were that such collections will not be delayed. If the Company fails to collect any of the agency commissions or if their collection becomes less than probable, the Company would be required to write off the uncollected amounts reflected in its financial statements or amounts for which collection becomes less than probable. Delay in the collection or write-off of agency commissions may adversely affect the Company. In April 1998, the Company completed a $12 million private placement of Series A Convertible Preferred Stock and Warrants to Spectrum Equity Investors II, L.P. 17 On September 1, 1998, the Company as Borrower, entered into a Loan and Security Agreement ("Loan and Security Agreement") with Goldman Sachs Credit Partners L.P. and Fleet National Bank as Lenders. Under the terms of the Loan and Security Agreement, the Lenders have provided a three-year senior secured credit facility to the Company consisting of revolving loans in the aggregate amount of up to $75 million (the "Credit Facility"). Advances under the facility bear interest at 1.75% over the prime rate and are secured by a first priority perfected security interest on all of the Company's assets, provided, however, that the Company has the ability to exclude assets acquired through purchase money financing. In addition, the Company is required to pay a commitment fee of 0.5% per annum on any unused amounts under the facility as well as a monthly line fee of $150,000 per month. The Company may borrow $15 million unconditionally and $60 million based on trailing 120 days accounts receivable collections (reducing to the trailing 90 days of collections by March 31, 2000). The Company paid a one-time up front fee of $2,531,250, representing 3 3/8% of the facility. In the event that the Company wishes to prepay the loan, the agreement provides for a prepayment penalty of 2% during the first 18 months of the term of the loan. Warrants to purchase an aggregate of 974,412 shares of the Company's common stock at an purchase price of $6.75 per share were issued to the Lenders in connection with the transaction. The Company has valued the Warrants at $1.3 million which is being amortized and included in interest expense over the three-year term of the Loan and Security Agreement. As of October 31, 1998, the Company had borrowed $24,500,000 under the Credit Facility. On November 2, 1998, the Company obtained three-year vendor financing facility for up to $25 million from Cisco Capital Corp. Under the terms of the agreement, the Company has agreed to a three year, $25 million volume purchase commitment of Cisco Systems equipment and services and Cisco Capital Corp has agreed to advance funds as these purchases occur. In addition, a portion of the Cisco facility can be utilized for working capital costs associated with the integration and operation of Cisco Systems solutions and related peripherals. Pursuant to the terms of the Cisco Vendor Financing Agreement dated as of October 14, 1998, the Company has agreed to give the Lender a senior security interest in all Cisco products purchased with the proceeds of the first $15 million advanced under the facility and a subordinate security interest in all other assets of the Company. Under the terms of the Cisco facility, the Company is required to pay interest on funds advanced under the facility at an annual rate of 12.5%. In addition, the Company is required to pay a commitment fee of .50% per annum on any unused amounts under the facility as well as a monthly line fee of $15,000 per month. The Company paid a closing fee of 1% of the total credit facility. 18 The Company expects to utilize the proceeds of the Cisco financing to deploy the first phase of its data-centric Integrated Communications Network in 22 network hub and node sites within the New York and New England regions. The implementation of the Company's current business plan to further penetrate its existing markets, deploy the ICN in its existing markets and enhance and expand the CTC information systems will require significant capital. The Company may require additional capital if it experiences demand for its products and services in excess of that which is currently planned, accelerates the rate of expansion of its sales presence from that which is currently anticipated or accelerates the deployment of the ICN in its existing markets. Additional capital will be required to expand the Company's sales presence into the New York-Washington D.C. corridor and deploy its ICN into this region or any other new markets. The Company also expects to seek additional lease financing to fund the acquisition of equipment and software related to the enhancements and expansion of the CTC information systems and the deployment of its network operating centers. The Company's actual capital requirements also may be materially affected by many factors, including the timing and actual cost of expansion into new markets, the extent of competition and pricing of telecommunications services in its markets, acceptance of the Company's services, technological change and potential acquisitions. While the Company believes that under its current business plan the proceeds from the Goldman Sachs/Fleet credit facility combined with the Cisco facility and other anticipated lease financing will be sufficient to fund operations at least through December 1999, several factors could influence the timing of the Company's need for additional capital. These factors include, but are not limited to: (a) the need to finance larger amounts of working capital if the Company experiences demand for its services in excess of that which is planned, (b) the Company expands its sales presence faster than currently anticipated, (c) the enhancements and expansion of the CTC information systems turn out to be more capital intensive than originally planned, or (d) the Company fails to collect or is delayed in collecting the approximately $11.5 million which it believes is due from Bell Atlantic under its former Agency arrangement or is delayed in collecting such amounts. The Company may seek opportunistic financing activities prior to December 1999 depending on market conditions. 19 Part II Item 1. Legal Proceedings The information required under this item with respect to the actions entitled (1) "CTC Communications Corp. v. Bell Atlantic Corporation," U.S. District Court for the District of Maine, Civil Action No. 97-CV-395-P-H and (2) "Bell Atlantic Corporation v. CTC Communications Corp. and Computer Telephone Company," U.S. District Court for the Southern District of New York, Case No. 98 CIV 0048, has been previously reported in the Company's Current Reports on Form 8-K dated February 3, 1998 and August 4, 1998 and in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. In December 1997, the Company terminated its agency contract and filed suit against Bell Atlantic for breaches of the contract, including the failure of Bell Atlantic's retail division to pay $14 million in agency commissions (now approximately $11.5 million) owed to the Company. The Company also asserted violations by Bell Atlantic of antitrust laws and the Telecommunications Act. Bell Atlantic filed counterclaims asserting that the Company breached a provision of the agency contract prohibiting the Company from selling non-Bell Atlantic local services to certain agency customers for a one-year period following termination of the contract. Based on that provision, Bell Atlantic obtained a temporary restraining order ("TRO") that prohibits the Company from marketing certain local telecommunications services to any Bell Atlantic customer for whom the Company was responsible for account management, or to whom the Company sold Bell Atlantic services, during 1997. On July 31, 1998, Judge Gene Carter of the United States District Court of Portland, Maine ordered the dissolution of the TRO against the Company and denied Bell Atlantic's motion for a permanent injunction. The Court ruled that the Company has an absolute right to solicit the customers they had serviced while a Bell Atlantic Agent. The Company purchases Bell Atlantic telecommunications services local products for resale and believes that the lawsuit has not affected the Company's good relations with the Bell Atlantic wholesale division. Moreover, Bell Atlantic is prohibited by applicable federal law from discriminating against the Company in the provision of wholesale services. See "Risk Factors-Potential Impact of the Bell Atlantic Litigation" and Note 2 to the Company's Unaudited Financial Statements contained herein. The Company is otherwise party to suits arising in the normal course of business which management believes are either individually or in the aggregate not material. 20 Item 2. Changes in Securities (c) During the quarter ended September 30, 1998, the Company issued a total of 14,850 shares of Common Stock for an aggregate consideration of $34,429 pursuant to the exercise of employee incentive stock options by four employees of the Company. The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. The recipients of the securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were attached to the shares certificates and stop transfer orders given to the Company's transfer agent. All recipients had adequate access to information regarding the Company. On July 15, 1998, the Company issued to Spectrum Equity Investors II, L.P. ("Spectrum") five-year warrants to purchase up to 55,555 shares of Common Stock at a purchase price of $9.00 per share in consideration for the Spectrum commitment that, at any time prior to June 30, 1999, it would, upon the Company's request, purchase an additional $5 million of Preferred Stock containing the same terms and conditions as the Series A Convertible Preferred Stock. The Spectrum commitment was given in conjunction with a $20 million Interim Financing Commitment issued by Fleet National Bank to satisfy the Company's short-term liquidity requirements of the bank. The warrants were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. On September 1, 1998, the Company issued to Goldman Sachs Credit Partners, L.P. and Fleet National Bank (collectively, the "Lenders"), in consideration of the Lenders providing a three-year senior secured credit facility to the Company consisting of revolving loans in the aggregate amount of up to $75 million, five- year warrants to purchase an aggregate of 974,412 shares of Common Stock at a purchase price of $6.75 per share. The warrants were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. Reference is made to the Company's Current Report on Form 8-K and exhibit thereto dated and filed on October 2, 1998 for a complete description of the transaction. 21 Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 3.1 Restated Articles of Organization, as amended(6) 3.2 Amended and Restated By-Laws of Registrant(6) 4.1 Form of Common Stock Certificate(5) 9.1 Voting Agreement dated April 10, 1998 among Robert Fabbricatore and certain of his affiliates and Spectrum(7) 10.1 1996 Stock Option Plan(3) 10.2 1993 Stock Option Plan(5) 10.3 Employee Stock Purchase Plan(4) 10.4 Lease for premises at 360 Second Ave., Waltham MA(5) 10.5 Sublease for premises at 360 Second Ave., Waltham MA(5) 10.6 Lease for premises at 110 Hartwell Ave., Lexington MA(5) 10.7 Lease for premises at 120 Broadway, New York, NY(5) 10.8 Agreement dated February 1, 1996 between NYNEX and the Company(5) 10.9 Agreement dated May 1, 1997 between Pacific Bell and the Company (5) 10.10 Agreement dated January 1, 1996 between SNET America,Inc. and the Company(5) 10.11 Agreement dated June 23, 1995 between IXC Long Distance Inc. and the Company, as amended(5) 10.12 Agreement dated August 19, 1996 between Innovative Telecom Corp. and the Company(5) 10.13 Agreement dated October 20, 1994 between Frontier Communications International, Inc. and the Company, as amended(5) 10.14 Agreement dated January 21, 1997 between Intermedia Communications Inc. and the Company(5) 10.15 Employment Agreement between the Company and Steven Jones dated February 27, 1998(7) 10.16 Securities Purchase Agreement dated April 10, 1998 among the Company and the Purchasers named therein(6) 10.17 Registration Rights Agreement dated April 10, 1998 among the Company and the Holders named therein(6) 10.18 Form of Warrant dated April 10, 1998(6) 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 Rd., 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) 27 Financial Data Schedule(10) 99.1 Risk Factors(10) - ----------------- (footnotes on next page) 22 (1) Incorporated by reference to an Exhibit filed as part of the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (2) Incorporated by reference to an Exhibit filed as part of the Registrant's Registration Statement on Form S-18 (Reg. No. 2-96419-B) (3) Incorporated by reference to an Exhibit filed as part of the Registrant's Registration Statement on Form S-8 (File No. 333-17613) (4) Incorporated by reference to an Exhibit filed as part of the Registrant's Registration Statement on Form S-8 (File No. 33-44337) (5) Incorporated by reference to an Exhibit filed as part of the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1997. (6) Incorporated by reference to an Exhibit filed as part of the Registrant's Current Report on Form 8-K dated May 15, 1998. (7) Incorporated by reference to an Exhibit filed as part of the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1998. (8) Incorporated by reference to an Exhibit filed as part of the Registrant's Current Report on Form 8-K dated October 2, 1998. (9) Incorporated by reference to an Exhibit filed as part of the Registrant's Current Report on Form 8-K dated November 6, 1998. (10) Filed herewith. (b) Reports on Form 8-K On August 4, 1998, the Registrant filed a report on Form 8-K incorporating its August 3, 1998 press release which provided an update on the status of the Bell Atlantic litigation and various state regulatory actions. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. CTC COMMUNICATIONS CORP. Date: November 13, 1998 /S/ ROBERT J. FABBRICATORE ---------------------------- Robert J. Fabbricatore Chairman and CEO Date: November 13, 1998 /S/ STEVEN C. JONES ----------------------------- Steven C. Jones Executive Vice President, and Chief Financial Officer 24
EX-27 2 FDS FOR Q.E. 9/30/98
5 1,000 6-MOS MAR-31-1999 SEP-30-1998 2,167 0 27,409 1,871 0 32,780 19,242 8,448 49,607 21,152 0 0 12,260 100 (6,020) 49,607 14,516 14,557 12,383 25,385 0 0 983 (11,811) (827) (10,984) 0 0 0 (10,984) (1.13) (1.13)
EX-10.21 3 7/15/98 WARRANT ISSUED TO SPECTRUM EXHIBIT 10.21 WARRANT CTC Communications Corp. THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. Date of Issuance: July 15, 1998 Certificate No. W-10 FOR VALUE RECEIVED, CTC Communications Corp., a Massachusetts corporation (the "Corporation"), hereby grants to Spectrum Equity Investors II, L.P., or its registered assigns (the "Registered Holder") the right to purchase from the Corporation fifth-five thousand five hundred fifty-five (55,555) shares of Common Stock at a price of $9.00 per share, subject to adjustment as provided herein. This Warrant is the warrant (together with any replacements or subdivisions thereof, the "Warrants") issued pursuant to the terms of a commitment letter dated as of July 13, 1998 between the Corporation and Spectrum Equity Investors II, L.P. Certain capitalized terms used herein are defined in Section 8 hereof. Capitalized terms used herein but not otherwise defined herein shall have the meanings set forth for such terms in the Securities Purchase Agreement dated as of April 10, 1998 among the Corporation and the Purchasers named therein (the "Purchase Agreement"). This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. A. Exercise Period. The Registered Holder may exercise, in whole or in part, the purchase rights represented by this Warrant at any time and from time to time after the Date of Issuance to and including the fifth (5th) anniversary of the Date of Issuance (the "Exercise Period"). B. Exercise Procedure. (i) This Warrant or any part hereof specified by the Registered Holder shall be deemed to have been exercised when the Corporation has received all of the following items (the "Exercise Time"): (a) a completed Exercise Agreement, as described in Section 1C below, executed by the Person exercising all or part of the rights represented by this Warrant; (b) this Warrant or an affidavit as provided in Section 10 hereof; (c) the aggregate Exercise Price for the number of shares of Common Stock being purchased through such exercise, such aggregate Exercise Price to be payable by any combination of (1) a bank cashier's check or wire transfer in immediately available funds to the Corporation in an amount equal to the product of the Exercise Price multiplied by the number of shares of Common Stock being purchased with the proceeds of such wire transfer or (2) a written notice to the Corporation that the Holder is exercising the Warrants (or a portion thereof) and as consideration of such exercise is authorizing the Corporation to withhold from issuance a number of shares of Common Stock issuable upon exercise of this Warrant which, when multiplied by the sum of (x) the Market Price Per Share of the Common Stock minus (y) the Exercise Price is equal to the aggregate Exercise Price for the number of shares of Common Stock being purchased with such consideration (in which event such withheld shares shall no longer be issuable under this Warrant); and (d) if this Warrant is not registered in the name of the original Registered Holder, an Assignment or Assignments substantially in the form set forth in Exhibit II hereto evidencing the assignment of this Warrant to the Purchaser. (ii) Certificates for shares of Common Stock purchased upon exercise of all or part of this Warrant shall be delivered by the Corporation to the Purchaser within ten (10) business days after the date of the Exercise Time. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Corporation shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall, within such ten (10) business day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (iii) The Common Stock issuable upon the exercise of all or part of this Warrant shall be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser shall be deemed for all purposes to have become the record holder of such Common Stock at the Exercise Time. (iv) The issuance of certificates for shares of Common Stock upon exercise of all or part of this Warrant shall be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such exercise and the related issuance of shares of Common Stock. Each share of Common Stock issuable upon exercise of all or part of this Warrant shall be fully paid and nonassessable and free from all Liens and charges with respect to the issuance thereof. (v) The Corporation shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Common Stock issuable upon exercise of this Warrant is at all times equal to or less than the Exercise Price, on a per share basis. (vi) The Corporation shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or to obtain any governmental approvals prior to or in connection with any exercise of all or part of this Warrant (including, without limitation, making any filings required to be made by the Corporation). (vii) Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or Organic Change, the exercise of any portion of this Warrant may, at the election of the holder hereof, be conditioned upon the consummation of the public offering or Organic Change, in which case such exercise shall not be deemed to be effective until immediately prior to the consummation of such public offering or Organic Change. (viii) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock as are issuable upon the exercise of all outstanding Warrants. The Corporation shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation applicable to the Company or any requirements of NASDAQ or any securities exchange upon which shares of Common Stock may be listed or quoted (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). C. Exercise Agreement. The Exercise Agreement to be executed in connection with the exercise of this Warrant shall be substantially in the form set forth in Exhibit I hereto, except that if the shares of Common Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement shall also state the name of the Person to whom the certificates for the shares of Common Stock are to be issued. Section 2. Adjustment of Number of Shares and Exercise Price. A. The number of shares of Common Stock obtainable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as provided in this Section 2. B. Exercise Price. The initial exercise price shall be nine dollars ($9.00) per share of Common Stock, which may be adjusted from time to time hereafter (as so adjusted, the "Exercise Price") . If and whenever on or after the original Date of Issuance of the Warrants the Corporation issues or sells, or in accordance with Section 2(C) is deemed to have issued or sold, any shares of its Common Stock or Convertible Securities for a consideration per share less than the Exercise Price in effect immediately prior to the time of such issue or sale, then upon such issue or sale, the Exercise Price shall be reduced to an amount determined by dividing (a) the sum of (1) the product derived by multiplying (i) the Exercise Price in effect immediately prior to such issue or sale times (ii) the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (2) the consideration, if any, received (or deemed received pursuant to Section 2(C)(ii) below) by the Corporation upon such issue or sale, by (b) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. C. Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under Section 2, the following shall be applicable: (i) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Exercise Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon exercise, conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the cumulative minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the exercise, conversion or exchange thereof and, if applicable, the exercise, conversion and exchange of any other Convertible Securities that such Convertible Securities may be converted into or exchanged for, by (b) the total maximum number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. No further adjustment of the Exercise Price shall be made when Common Stock and, if applicable, any other Convertible Securities, are actually issued upon the exercise, conversion or exchange of such Convertible Securities. (ii) Change in Exercise Price or Conversion Rate. If the additional consideration payable to the Corporation upon the exercise, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock should change at any time, the Exercise Price in effect at the time of such change shall be readjusted to the Exercise Price that would have been in effect at such time had such Convertible Securities that are still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time such Convertible Securities were initially granted, issued or sold; and on the termination date of any right to exercise, convert or exchange such Convertible Securities without such right having been duly exercised, the Exercise Price then in effect hereunder shall be increased to the Exercise Price that would have been in effect at the time of such termination had such Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued. (iii) Exceptions for Excluded Securities. Notwithstanding the foregoing, no adjustments to the Exercise Price shall be made under Section 2 with respect to the issuance of any Excluded Securities. D. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately reduced, and conversely, in the event the outstanding shares of Common Stock shall be combined (by reverse stock split or otherwise) into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. In any such event all numbers, percentages, computations and the like in this Warrant shall be deemed modified as necessary to give appropriate effect to such subdivision or combination. E. Adjustment in Number of Shares Issuable. Upon each adjustment in the Exercise Price pursuant to any provisions of Section 2(D), the number of shares of Common Stock purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying such number of shares purchasable immediately prior to the event giving rise to such adjustment in the Exercise Price by a fraction, the numerator of which shall be the Exercise Price immediately prior to such adjustment and the denominator of which shall be the Exercise Price in effect immediately thereafter. F. Certain Events. If an event not specified in this Section 2 occurs that has substantially the same economic effect on the Warrants as those specifically enumerated, then this Section 2 shall be construed liberally, mutatis mutandis, in order to give the Warrants the intended benefit of the protections provided under this Section 2. In such event, the Corporation's Board of Directors shall make an appropriate adjustment in the Exercise Price so as to protect the rights of the holders of the Warrants; provided that no such adjustment shall increase the Exercise Price as otherwise determined pursuant to this Section 2 or decrease the number of shares of Common Stock issuable upon exercise of this Warrant. G. Notices. (i) Immediately upon any adjustment of the Exercise Price, the Corporation shall give written notice thereof to the Registered Holder of this Warrant, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to the Registered Holder of this Warrant at least twenty (20) days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any dissolution or liquidation. Section 3. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in the reclassification of any Common Stock) or sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities, cash or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change." Prior to the consummation of any Organic Change, the Corporation shall make appropriate provision to insure that each of the holders of the Warrants shall thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore issuable upon the exercise of such holder's Warrant, such shares of stock, securities, cash or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore issuable upon exercise of such holder's Warrant had such Organic Change not taken place. In any such case, the Corporation shall make appropriate provision with respect to such holders' rights and interests to insure that the provisions of Section 2 and Section 3 hereof shall thereafter be applicable to the Warrants. The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument the obligation to deliver to each such holder such shares of stock, securities, cash or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. Section 4. Dividends. If the Corporation declares or pays a dividend upon the Common Stock, except for a stock dividend payable in shares of Common Stock, then the Exercise Price shall be reduced, on a cumulative basis, by an amount equal to the amount of such dividend which would have been paid to the holder of each share of Common Stock had all Warrants issued under the Purchase Agreement been exercised prior to the record date for payment of such dividend, until such Exercise Price has been reduced to zero, and thereafter the Corporation shall pay to the Registered Holder of this Warrant at the time of payment thereof an amount equal to such dividend. Section 5. Purchase Rights. If at any time the Corporation grants, issues or sells any rights to purchase stock, warrants, securities or other property pro rata to the holders of Common Stock (the "Purchase Rights"), then the Registered Holder of this Warrant shall be entitled to obtain, upon the same terms on which holders of Common Stock are to receive such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock issuable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 6. Transfer Restriction. The Warrants are subject to the transfer restrictions in Section 4.8 of the Purchase Agreement, mutatis mutandis. Section 7. Certificates, Notices and Consents. A. Certificates. Upon the occurrence of any event requiring adjustments of the number of shares subject to this Warrant pursuant to Section 2, the Corporation shall mail to the Registered Holder (by registered or certified mail, postage prepaid) a certificate signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer of the Corporation, setting forth in reasonable detail the events requiring the adjustment and the method by which such proposed adjustment was calculated, specifying the adjusted number of shares subject to this Warrant after giving effect to the proposed adjustment and the number of shares of Common Stock to be issued pursuant to Section 2 hereof. B. Notice. If the Corporation after the Date of Issuance shall propose to: (i) pay any dividend payable in stock to the holders of Common Stock or to make any other distribution to the holders of Common Stock or any extraordinary dividend directly or indirectly attributable to proceeds from the sale or other disposition of a significant business or asset of the Corporation; (ii) offer to the holders of Common Stock rights to subscribe for or purchase any additional shares of any class of stock or any other rights or options; (iii) effect any reclassification except the subdivision or combination of shares of outstanding Common Stock; (iv) effect any Organic Change or sale transaction described in Section 2B or the liquidation, dissolution or winding up of the Corporation; or (v) engage in any diluting event not otherwise mentioned in this Section 6B, then, in each such case, the Corporation shall mail (by registered or certified mail, postage prepaid) to the Registered Holder notice of such proposed action, which shall specify the date on which the books of the Corporation shall close, or a record date shall be established, for determining holders of Common Stock entitled to receive such stock dividends or other distribution of such rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, dissolution or winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders of Common Stock of record shall be entitled to receive securities or other property deliverable upon such action, if any such date is to be fixed. Such notice shall be mailed, in the case of any action covered by clauses (i), (ii) or (v) above, at least 20 days prior to the record date for determining holders of Common Stock for purposes of receiving such payment or offer, and, in the case of any action covered by clause (iii) above, at least 20 days prior to the date upon which such action takes place, and, in the case of any action covered by clause (iv) above, at least 20 days prior to the date on which the Corporation closes its books or takes a record for determining rights to vote with respect to any event covered by clause (iv) and 20 days prior to any record date to determine holders of Common Stock entitled to receive such securities or other property. C. Failure and Defects. Failure to file any certificate or notice or to mail any notice, or any defect in any certificate or notice, pursuant to this Section 6, shall not affect the legality or validity of the adjustment of the Exercise Price and/or number of shares of Common Stock subject to this Warrant pursuant to Section 2. Section 8. Definitions. The following terms have meanings set forth below: "Certificate of Designation" shall mean the Certificate of Designation of Series A Convertible Preferred Stock in the form attached to the Purchase Agreement as Exhibit B. "Common Stock" means, collectively, the Corporation's Common Stock, par value $.01 per share. "Convertible Securities" shall have the meaning set forth in the Certificate of Designation. "Date of Issuance" means the date of initial issuance of this Warrant regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant shall be issued. "Excluded Securities" shall have the meaning set forth in the Certificate of Designation. "Exercise Period" shall have the meaning set forth in Section 1(A) hereof. "Exercise Price" shall have the meaning set forth in Section 2 hereof. "Exercise Time" shall have the meaning set forth in Section 1(B) hereof. "Majority Warrant Holders" means, at any time, the holders of Warrants representing the right to purchase a majority of the aggregate number of shares of unissued Common Stock then issuable upon exercise of all Warrants. "Market Price Per Share of Common Stock" means the average closing bid price (or closing sales price, as applicable) per share for the Company's Common Stock on NASDAQ (or such national stock exchange upon which the Corporation's Common Stock is then listed), for a period of 30 consecutive trading days ending on the last trading day immediately preceding the Exercise Time. "Organic Change" shall have the meaning set forth in Section 3 hereof. "Person" means an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Purchaser" shall mean the Person(s) to whom shares of Common Stock are issued pursuant to the exercise of this Warrant. "Registered Holder" with respect to this Warrant means the Person to whom the Warrant was initially issued or any assignee of such Person as to whom the Corporation has received an executed Assignment substantially in the form of Exhibit II hereto, and "Registered Holders" at any time means all Registered Holders of Warrants then outstanding. Section 9. No Voting Rights; Limitations of Liability. Prior to the exercise of this Warrant and except as otherwise specifically provided herein, this Warrant shall not entitle the holder hereof to any rights as a stockholder of the Corporation. No provision hereof, in the absence of affirmative action by the Registered Holder to purchase Common Stock, and no enumeration herein of the rights or privileges of the Registered Holder shall give rise to any liability of such holder for the exercise of Warrants hereunder or as a stockholder of the Corporation. Section 10. Warrant Exchangeable for Different Denomination. This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Corporation, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. Section 11. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the Registered Holder being reasonably satisfactory) of the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Corporation, or in the case of any such mutilation, upon surrender and cancellation of such certificate, the Corporation shall, at its expense, execute and deliver in lieu of such certificate a new certificate of like tenor and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 12. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable express courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so delivered, sent or deposited in the U. S. Mail (i) to the Corporation, at its principal executive offices or to its registered office in its state of domicile and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Corporation (unless otherwise indicated by any such holder). Section 13. Amendment and Waiver. Except as otherwise provided herein, the provisions of the Warrants may be amended and the Corporation may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if and only if the Corporation has obtained the written consent of the Majority Warrant Holders. Section 14. Descriptive Headings; Governing Law. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to any choice of law or conflict provision or rule that would cause the application of the laws of any jurisdiction other than the State of the Commonwealth of Massachusetts. Section 15. Certain Expenses. The Corporation shall pay all expenses incurred by it in connection with, and all taxes and other governmental charges that may be imposed in respect of, the issuance, sale and delivery of the Warrants or the shares of Common Stock. Section 16. Registered Holders. The Corporation shall be entitled to treat the Register Holder of this Warrant as the only holder of this Warrant for all purposes. IN WITNESS WHEREOF, the Corporation has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. CTC COMMUNICATIONS CORP. [CORPORATE SEAL] By: ______________________________ Name: ________________________ Title: ________________________ EXHIBIT I EXERCISE AGREEMENT To: _______________________________ Dated: ________________ The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-10), hereby agrees to subscribe for the purchase of _________ shares of the Common Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. _________________________________ Name: ___________________________ Address: __________________________ __________________________________ __________________________________ EXHIBIT II ASSIGNMENT FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-10, with respect to the number of shares of the Common Stock covered thereby set forth below, unto: Names of Assignee Address No. of Shares Date: _______________, 199 ____________________________________ Name: ______________________________ ____________________________________ (Witness) EX-10.22 4 LEASE - 220 BEAR HILL RD., WALTHAM MA EXHIBIT 10.22 LEASE Article I 1.1 COVER PAGE: Parties: Landlord (Lessor) 220 Bear Hill Road Realty Trust Tenant (Lessee) CTC Communications Corp. 360 Second Avenue Waltham, MA 02451 State of Incorporation: Massachusetts Date of Incorporation: 6/3/81 Federal ID Number: 04-2731202 Address for Notice & Payments Lessor: Vincent A. Messina, Trustee P.O. Box 89 Wolfeboro, NH 03894 Lessee: Same as above Attention: Michael Donnellan Vice President Operations Commencement Date for Lessee To Start Lessee's Buildout: August 24, 1998 Lessee will have access to rear space on August 10, 1998, and remaining space on August 24, 1998. Term: Commencement Date for Rent Commencement: October 1, 1998 Expiration Date: September 30, 2004 Building and Leased Premises Building: 220 Bear Hill Road Premises: Building and Land Building Address: 220 Bear Hill Road City, State and Zip Code: Waltham, MA 0245 Size of Space Leased: Approximately 27,884 Square Feet Security Deposit: $75,000 Use of Premises: Office, Warehouse & Related Uses Rent: Annually Monthly Adjusted Net Base Rent $304,166.66 $25,347.23 Plus: Operating Expense Contribution 7,500.00 625.00 Real Estate Tax Contribution 57,354.15 4,779.50 __________________________________________________________ TOTAL ANNUAL PAYMENT $369,020.81 TOTAL MONTHLY PAYMENT $30,751.70 Rental Due Date: Rent is due in advance of the first day of each month. Late Payment Charge & Interest: The Lessee will pay a late charge equal to five (5) percent of any payment not received by the Lessor within ten(10) days of the due date thereof. Interest on any delinquencies will be charged at the rate of one and one-half (1-1/2)percent per month. Pro Ratio Percentages: Approximate Square Feet of Building: 27,884 Approximate Square Feet of Premises Leased: 27,884 Pro-Rate Percentage attributable to Premises: 100% Operating and Other Expenses 100% Taxes & Assessments Base Year Calculation: The Lessee will be responsible for the above percentages in Operating cost, and Real Estate Tax and assessments. Insurance Requirements: Lessee will carry Liability Insurance in the amount of $1,000,000-$5,000,000 and Property Damage in the amount of $1,000,000. Lessor will be named as additional insured. 1.2 EXHIBITS: These are incorporated as part of this Lease: EXHIBIT A: Description of Area Leased EXHIBIT B: Additional Terms Between Lessor Lessee EXHIBIT C: Option to Renew Executed as a sealed instrument in two or more counterparts on the day and year first above written. These Cover Pages: 1,2 and 3. Landlord: (Lessor) _____________________________ Vincent A. Messina, Trustee 220 Bear Hill Road Realty Trust Tenant: (Lessee) _____________________________ CTC Communications Corp Steve Milton - President Chief Operating Officer Date of Lease Execution: July 28, 1998 TABLE OF ARTICLES AND SECTIONS I. REFERENCE DATA PAGE 1.1 Cover Pages 1,2,3 1.2 Exhibits At End 1.3 Table of Articles & Sections 4,5,6 II. PREMISES, TERM & RENT 2.1 The Premises 8 2.2 Rights to Use Common Facilities 8 2.3 Lessor's Reservations 8 2.4 Habendum 9 2.5 Rent, When Due; Where Paid; Late Payments 9,10 2.6 Adjustment to Rent, Real Property Taxes, Assessments 10,11 2.7 Adjustments to Rents, Operating Cost Increases 11,12,13 2.8 Definition of Lot ` 13,14 2.9 Due Date of Additional Rent Payments 14 2.10 Change of Accounting Periods 14 2.11 Unlawful Charges 14 III. CONSTRUCTION 3.1 Plans and Specifications for the Building and for Lessee's Space 15 3.2 Preparation of Premises for Occupancy 15 3.3 Alterations and Additions 15,16 3.4 General Provisions Applicable to Construction 17 IV. LESSOR'S COVENANTS: INTERRUPTIONS AND DELAYS 4.1 Lessor's Covenants 18 4.2 Interruptions and Delays in Services and Repairs, etc. 18 V. LESSEE'S COVENANTS 5.1 Payments 19 5.2 Repair and Yield Up 19 5.3 Use 19,20 5.4 Obstructions, Items Visible from Exterior, Rules and Regulations 20 5.5 Safety Appliance; Licenses 20 5.6 Assignment, Sublease 20,21,22,23 5.7 Indemnity 23 5.8 Right of Entry 23 5.9 Floor Load, Prevention of Vibrations and Noise 23,24 5.10 Personal Property Taxes 24 5.11 Payment of Litigation Expenses 24 5.12 Insurance of Lessee's Property 24,25 5.13 HVAC Maintenance 25 VI. CASUALTY AND TAKING 6.1 Termination of Restoration; Rent Adjustment 26,27 6.2 Eminent Domain Damages Reserved 27 6.3 Temporary Taking 27 VII. DEFAULT 7.1 Events of Default 28,29 7.2 Damages 29,30 VIII.MISCELLANEOUS 8.1 Titles of Articles, Recording; Consent; Notice; Binding Effect 31 8.2 Notice of Lease; Consent or Approval Notices; Bind & Insure; Trust Estate 31,32 8.3 Lessor's Failure to Enforce or Cancellation 32 8.4 Acceptance of Partial Payments of Rent 32 8.5 Cumulative Remedies 33 8.6 Partial Invalidity 33 8.7 License for Support 33 8.8 Self Help 33,34 8.9 Lessee's Estoppel Certificate 34 8.10 Waiver of Subrogation 34 8.11 Governing Law 35 8.12 Brokerage 35 8.13 Assignment of Rent 35 IX. SUBORDINATION 9.1 Lease Subordinate to Mortgage Indebtedness 36 9.2 Implementation of Article IX 36 ARBITRATION 10.1 Method of Appointment of Arbiters; Award; Costs 37,38 XI. SECURITY DEPOSIT 11.1 Amount, Application 39 XII. LESSOR'S LIENS 12.1 Leins for Lessor 40 Exhibit A 41 Exhibit B 42,43 Exhibit C 44,45 ARTICLE II PREMISES, TERM AND RENT 2.1 The Premises. The Lessor (designated in Section 1.1 of Article I) hereby leases to Lessee and Lessee hereby hires from Lessor, Lessee's Space (identified in Article I) in the building excluding the common stairways, stairwells, elevators and elevator wells, if included in building, the exterior faces of the exterior wells, and the pipes, ducts, conduits, wires and appurtenant fixtures serving exclusively or in common other parts of the building. Lessee's Space with such exclusions is hereinafter referred to as "the Premises". 2.2 Rights to Use Common Facilities, if any. Lessee shall have, as appurtenant to the Premises, rights to use in common with other tenants and occupants of the Building, subject to reasonable rules of general applicability to Lessees of the building, from time to time made by Lessor of which Lessee is given notice: (a) The common lobbies, hallways, stairways and elevators of the building, and the pipes, ducts, conduits, wires and appurtenant equipment serving the Premises in common with others, (b) Walkways and driveways necessary for access to the Building, and (c) The common toilets and other common facilities in the central core of such floor. 2.3 Lessor's Reservations. Lessor reserves the right from time to time, without unreasonable interference with Lessee's use: (a) To expand the building, construct other buildings on the lot, or to rent part of the lot, to install, use, maintain, repair, replace and relocate for service to the Premises and other parts of the building, of either pipes, ducts, conduits, wires and appurtenant fixtures wherever located in the Premises or building, and (b) To alter or relocate any other common facility, provided that substitutions are substantially equivalent or better. Installations, replacements and relocation's referred to in clause (a) above shall be located so far as practicable in the core area above ceiling surfaces, below floor surfaces or within perimeter walls of the premises. 2.4 Habendum. Lessee shall have and hold the Premises for a period commencing on the commencement date set forth in Article I, Section 1.1 and shall continue for the lease term unless sooner terminated as provided in Section 6.1 of Article VI. 2.5 Rent; When Due: Where Paid. All monies payable by Lessee to Lessor under this Lease shall be deemed to be rent and shall be payable and recoverable as rent in the manner herein provided and Lessor shall have all rights against Lessee for default in any such payment. Rent shall be paid to Lessor in advance, on the first day of each calendar month, during the entire term of this Lease, without deduction or set-off, in legal tender of the jurisdiction in which the Building is located at the address of Lessor as set forth, or to such other person or to such other address as Lessor may designate in writing. Lessee's obligation to pay all rent due under this Lease shall survive the expiration or earlier termination of this Lease. Should this Lease commence on a day other than the first day of the month or terminate on a day other than the last day of the month, the rent for such partial month shall be pro-rated based on a 365-day year. The payment of rent will commence on the rent commencement date of this lease, which is October 1, 1998. A. Base Rent Lessee agrees to pay Lessor the Rent as set forth on the Cover Pages of this Lease. The total Base Rent will never be lower than the amount shown on the Cover Pages of this Lease. (1) Adjusted Net Base Rent for purposes of this lease. The base rent is $312,500 annually. (ii) The Lessor has given the Lessee and annual allowance of $8,333.33 (50,000/6=8,333.333) per year for repairs and improvements the Lessee will perform at Lessee's expense. (See Exhibit B) (iii) The adjusted Net Base Rent annually is $304,166.67 B. Interest Rate on Delinquencies. If Lessee shall fail to pay any rent when due, such unpaid amounts shall bear interest at the rate set forth on the Cover Pages of this Lease. C. Late Payment Charge. If Lessee shall fail to pay rent when due, Lessee shall pay to Lessor, in addition to the interest provided for in Section 2.5 B, a late payment charge for each occurrence of an amount as set forth on the Cover Pages of this Lease. 2.6 Adjustments to Rent; Real Property Taxes, Assessments. Lessee shall pay its pro-rata share of all Real Property Taxes and Assessments levied and assessed upon the Building and the Land upon which the Building is situated monthly. The real estate tax bill for the fiscal year ended June 30, 1998 is $57,354.15. (a) Real Property Tax Contests Lessor shall use its best efforts to keep the assessed value of the real property of which the Premises are a part at the lowest possible level and shall, if Lessor deems necessary, employ attorneys, accountants, appraisers and consultants for such purpose. Lessee agrees to pay its pro-rata share of all amounts paid by Lessor to such persons; however, Lessee's pro-rata share shall not exceed the amount Lessee's pro-rata share of the increase in Real Property Taxes would have been if the assessed value had not been contested. (b) Adjustments to Rent; Real Property Taxes Caused by Lessee Improvements. In the event that an increase in Real Property Taxes is caused by the Lessee's improvements made to the Premises, Lessee shall pay the increase attributable to such improvements. (c) Adjustments to Rent; Rental Tax Lessee shall pay any excise, transaction, sales, business or privilege tax (except income tax) attributed to or measured by rental which is now or subsequently imposed upon Lessor by any government or unit thereof. (c) Adjustment to Estimated Tax Payment for Actual Tax. Within 90 days of receipt by Lessor of the actual tax bill for the current fiscal year during the term hereof, Lessor shall deliver to Lessee a written statement setting forth the actual cost for the fiscal tax year. If such cost for any year is higher then the estimated payment made by Lessee monthly, Lessor shall bill Lessee for such difference. Lessee shall pay the pro rata share of such excess within thirty (30) days after receipt of such statement. If such amount is lower then the estimated amount, then Lessor shall credit or reimburse Lessee. 2.7 Adjustments to Rents; Operating Cost Increases and Other Expenses. Lessee shall pay monthly as additional rent its pro-rata share of Lessor's total building operating costs, maintenance, and improvements. (a) Definitions BASE YEAR: Calendar year during which this Lease commences. LEASE YEAR: Calendar year commencing January 1 and ending December 31. (a-1) OPERATING EXPENSES: The Lessee shall pay the Lessor for all expenses for water, sewer, and insurance. These expenses are estimated at $7,500 per year for the calendar year 1998. The Lessee will pay $625 per month during 1998. All Expenses and improvements paid or incurred by Lessor for maintaining, operating and repairing the building, the Land, and the personal property used in conjunction therewith, which in accordance with generally accepted accounting and management principals would be considered an expense of maintaining, operating or repairing the building. (a-2) All Other Expenses, Improvements, Repairs and Costs to be Paid Directly by Lessee: The Lessee is completely responsible for all operating expenses, replacement cost of all equipment, utilities servicing the Lessee's space, such as but not limited to electricity, heat, cleaning of its space, washing of windows, all maintenance, improvements, and repairs to Lessee's space, HVAC units, roof, and any and all other expenses or costs incurred for the use of Lessee's space and the lot. The Lessee will pay for these expenses directly to the suppliers. The space is being leased to the Lessee as is in its present condition. All costs are Lessee's responsibility at the commencement of this lease, during the lease, and during any option of this lease, except for the allowance given Lessee in Exhibit B. The intent of paragraph (a.1) and (a.2) in this lease is that this lease is a triple net lease. ACTUAL COSTS: The actual expenses paid or incurred by Lessor for operating expenses during any Lease Year of the term hereof. ESTIMATED COSTS: Lessor's estimate of actual Costs for the following lease year. BASE AMOUNT: The Actual Cost for the Base Year. (b) Adjustment for Estimated Costs Lessor shall furnish Lessee a written statement setting forth the estimated Costs for such Lease Year, and a statement showing one twelfth (1/12) of the amount, by which the Estimated Costs exceed the Actual Costs for the Base Year. Lessee shall pay its pro rata share of such increase monthly. (c) Actual Cost Within 90 days after the close of each Lease Year during the term hereof, Lessor shall deliver to Lessee a written statement setting forth the Actual Costs during the preceding Lease Year. If such costs for any Lease Year exceed the Estimated Costs paid by the Lessee to Lessor for such Lease Year, Lessee shall pay its pro rata share of such excess within thirty (30) days after receipt of such statement. (d) Adjustments to Rent; Variable Interest Rate on Encumbrance This Paragraph Intentionally Deleted From This Lease. (e) Adjustments to Rent-Consumer Price Index This Paragraph Intentionally Deleted From This Lease. 2.8 The Lot. The "Lot" means all, and also any parts of the land described in Exhibit A plus any addition thereto resulting from the change of any abutting street line. The Lessee shall have a right to park in the common parking area of this lot as designated by the Lessor. the Lessor has the right to sub divide the lot and or add to the building. The Lessee is allotted four (4) parking spaces per One Thousand (1000) square feet, for a total of 112 parking spaces. The Lessor retains the right to sub divide the lot, expand the building, lease or rent our part of the lot as long as it provides the 112 parking spaces to the Lessee. If Lessee shall add additional space to the building by means of adding to the mezzanine or by any other way, Lessor shall receive rent per square foot times the added space at a rate to be determined by agreement between Lessor and Lessee, taking into consideration the capital expenditure incurred by Lessee, and the fair market rent at the time of expansion. 2.9. Due Date of Additional Rent Payment. Except as otherwise specifically provided herein, any sum, amount, item or charge designated or considered as additional rent in this Lease shall be paid by Lessee to Lessor on the first day of the month following the date on which Lessor notifies Lessee of the amount payable or on the tenth (10) day after the giving of such notice, whichever shall be later. Any such notice shall specify in reasonable detail the basis of such additional rent. 2.10 Change of Accounting Periods. Lessor shall have the right from time to time to change the periods of accounting under Sections 2.6 & 2.7 above, or either of them, to any other annual period than a calendar year, and upon any such change, all items referred to in said Sections 2.6 and 2.7 shall be appropriately apportioned. In all statements rendered under Sections 2.6 & 2.7, amounts for periods partially within and partially without the accounting periods shall be appropriately apportioned, and any items which are not determinable at the time of a statement shall be included therein on the basis of Lessor's estimate and with respect thereto Lessor shall render promptly after determination a supplemental statement and appropriate adjustment shall be made according thereto. All statements shall be prepared on an accrual basis of accounting. 2.11 Unlawful Charges. If any charges imposed in this lease are found to be unlawful, then those charges will be automatically reduced to the maximum allowed charge and the difference refunded. ARTICLE III CONSTRUCTION 3.1 Plans and Specifications for the Building and for Lessee's Space. Lessor agrees that the improvements to the Building will be constructed in accordance with plans and specifications prepared by Lessee's Architect, at Lessee's expense. 3.2 Preparation of Premises for Occupancy. Lessor agrees to use due diligence to have Premises ready for Lessee to start its improvements on or before the Scheduled Term Commencement Date For Lessee to Start Lessee's Build Out. In case of delays due to governmental regulations, unusual scarcity of or inability to obtain labor or materials, labor difficulties, casualty or other causes reasonably beyond Lessor's control, the Scheduled Term Commencement Date For Lessee to Start Lessee's Build Out shall be extended for the period of such delays. If the Premises are not ready for Lessee to start its build out on or before the Scheduled Term Commencement Date For Lessee to Start Lessee's Build Out as it may be extended as aforesaid, Lessee shall have the right to terminate this Lease within thirty (30) days thereafter. Upon the giving of such notice of termination, there shall be no further liability or obligation upon either party hereto. Such right of termination shall be the sole and exclusive remedy, either at law or in equity, available to Lessee in the event of Lessor's failure to turn over the space. 3.3 Alterations and Additions. This Section 3.3 shall apply before and during the Lease Term. Lessee shall not make alterations or additions to Lessee's Space except in accordance with plans and specifications therefor first approved by Lessor. Lessor shall not be deemed unreasonable for withholding approval of any alterations or additions which will (a) delay completion of the Premises or Buildings, (b) require unusual expense to readapt the Premises to normal office use on Lease termination or increase the cost of construction or of insurance or taxes on the Buildings or of Lessor's services called for by Section 4.1 unless Lessee first gives assurances acceptable to Lessor for payment of such termination without expense to Lessor. All alterations and additions shall be part of the Buildings unless and until Lessor shall specify the same for removal pursuant to Section 5.2. All of Lessee's alterations and additions and installation of furnishings shall be coordinated with any work being performed by Lessor and in such manner as to maintain harmonious labor relations and not to damage the Buildings or lot or interfere with Building operation and, except for installation of furnishings, shall be performed by Lessor's general contractor or by contractors or workmen first approved by Lessor. Except for work by Lessor's general contractor, Lessee before its work is started shall: Secure all licenses and permits necessary therefor; deliver to Lessor a statement of the names of all its contractors and subcontractors and the estimated cost of all labor and material to be furnished by them and releases of all lien claims therefor; obtain from each contractor covenants running to Lessor and Lessee not to record or file for registration any notice of its contract; and cause each contractor to carry workmen's compensation insurance in statutory amounts covering all the contractors and subcontractors employees and comprehensive public liability insurance with such limits as Lessor may reasonably require, but in no event less than $1,000,000-$5,000,000, and property damage insurance with limits of not less than $1,000,000 (all such insurance to be written in companies approved by Lessor and insuring Lessor and Lessee as well as the contractors), and to deliver to Lessor certificates of all such insurance. Lessee agrees to pay promptly when due the entire cost of any work done on the Premises by Lessee, its agents, employees, or independent contractors, and not to cause or permit any liens for labor or materials performed or furnished in connection therewith to attach to the premises and immediately to discharge any such liens which may so attach. 3.4 General Provisions Applicable to Construction. All construction work done by Lessee, its agents, employees or independent contractors shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of governmental authority and insurers of the Building. Lessor may inspect such work at any time and shall promptly give notice to Lessee of any observed defects. ARTICLE IV LESSOR'S COVENANTS; INTERRUPTIONS AND DELAYS 4.1 Lessor's Covenants: Lessor has the right to make this Lease and that Lessee on paying the rent and performing the obligations in this Lease shall peacefully and quietly have, hold and enjoy the Premises, subject to all of the terms and provisions hereof. 4.2 Interruptions and Delays in Services and Repairs, etc. Lessor shall not be liable to Lessee except by an act of the Lessor, for any compensation or reduction of rent by reason of inconvenience or annoyance or for loss of business arising from the necessity of Lessor's entering the Premises for any of the purposes in this Lease authorized, or for repairing the Premises or any portion of the Building, however the necessity may occur. In case Lessor is prevented or delayed from making repairs, alterations or improvements, or furnishing any services or performing any other covenant or duty to be performed on Lessor's part, by reason of any cause set forth in Section 3.2 hereof as being reasonably beyond the Lessor's control, Lessor shall not be liable to Lessee therefor, nor, except as expressly otherwise provided in Section 6.1, shall Lessee be entitled to any abatement or reduction of rent by reason thereof, nor shall the same give rise to a claim in Lessee's favor that such failure constitutes actual or constructive, total or partial, eviction from the Premises. Lessor reserves the right to stop any service or utility system, when necessary by reason of accident or emergency, or until necessary repairs have been completed provided, however, that in each instance of stoppage, Lessor shall exercise reasonable diligence to eliminate the cause thereof. Except in case of emergency repairs Lessor will give Lessee reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid unnecessary inconvenience to Lessee by reason thereof. ARTICLE V LESSEE'S COVENANTS Lessee covenants during the Lease term and such further time as Lessee occupies any part of the Premises: 5.1 The Payments. To pay when due all fixed rent and additional rent and all charges to Lessor and also all other expenses, repairs, and improvements to the Premises and lot directly as Lessee incurs them to whomever Lessee owes for such items. 5.2 Repair and Yield Up. Except as otherwise provided in Article VI, to keep the Premises in good order, repair and condition, reasonable wear and tear only excepted, and all glass in windows and doors of the Premises whole and in good condition with glass of the same quality as that injured or broken, damaged by fire or other casualty not caused by Lessee's negligence or willful misconduct only excepted, and at the expiration or termination of the Lease peaceably to yield up the Premises and all alterations and additions thereto in good order, repair and condition, reasonable wear and tear expected, first removing all goods and effects of Lessee and, to the extent specified by Lessor by notice to Lessee given at least ten (10) days before such expiration or termination, all alterations and additions made by Lessee, and repairing any damage caused by such removal and restoring the Premises and leaving them clean and neat. 5.3 The Use. Continuously from the commencement of the Lease term to use and occupy the Premises for the Permitted Uses, and not to injure or deface the Premises, Buildings or Lot, not to permit in the Premises any auction sale, vending machine, or inflammable fluids or chemicals, or nuisance, or the emission from the Premises of any objectionable noise or odor, or any cooking or sleeping, nor to use or devote or permit the use of the Premises or any part thereof for any purpose other than the Permitted Uses, not to permit any use thereof which is improper, offensive, contrary to law or ordinance or liable to invalidate or increase the premiums for any insurance on the Building or its contents or liable to render necessary any alteration or addition to the Buildings. 5.4 Obstructions, Items Visible from Exterior; Rules and Regulations. Nor to obstruct in any manner any portions of the Building not hereby leased or any portion thereof or of the Lot used by Lessee in common with others; not to permit the painting or placing of any signs or the placing of any curtains, blinds, shades, awnings, aerials or flagpoles, or the like, visible from outside the Premises without the prior approval of Lessor not to be unreasonably withheld; and to comply with all reasonable Rules and Regulations now or hereafter made by Lessor, of which Lessee has been given notice for the case and use of the Buildings, Lot and their facilities and approaches, Lessor shall not be liable for the failure of other Lessee's of the Building to conform to such Rules and Regulations; 5.5 Safety Appliance; Licenses. To keep the Premises equipped with all safety appliances required by law or ordinance or any other regulation of any public authority because of any use made by Lessee other than normal office use, and to procure all other licenses and permits so required because of such use, and if requested by Lessor, to do any work so required because of such use, it being understood that the foregoing provisions shall not be construed to broaden in any way Lessee's Permitted Uses; 5.6 Assignment; Sublease. Not without prior written consent of Lessor, which will not be unreasonably withheld, to assign, mortgage, pledge or otherwise transfer this Lease or to make any sublease, or permit occupancy of the Premises or any part thereof by anyone other than the Lessee; in connection with any request by Lessee for such consent to assignment or subletting, to submit to Lessor in writing: (i) the name of the proposed assignee or subtenant, (ii) such information as to its financial responsibility and standing as Lessor may reasonably require, (iii) all of the terms and provisions upon which the proposed assignment or subletting is to be made and (iv) an option executed by Lessee to Lessor as provided in the immediately following sentence of this Section 5.6, provided that the Lessee shall not be obligated to give such option if the proposed assignment or sublease is to be made to an Affiliate of Lessee. Lessor shall have an option, except as aforesaid, to be exercised in writing within sixty (60) days after its receipt from Lessee of such request, information and option, to cancel and terminate this Lease, if the request is to assign the Lease or to sublet all of the Premises or, if the request is to sublet a portion of the Premises only, to cancel and terminate this Lease with respect to such portion, in each case as of the date set forth in Lessor's notice of exercise of such option, which shall be not less than fourteen (14) nor more than sixty (60) days following the giving of such notice; in the event Lessor shall exercise such option, Lessee shall surrender possession of the entire Premises, or the portion which is the subject of the option, as the case may be, on the date set forth in such notice in accordance with the provisions of this Lease relating to surrender of the Premises at the expiration of the Lease Term; if this Lease shall be canceled as to a portion of the Premises only, Annual Fixed Rent shall be abated proportionately according to the ration that the number of square feet in the portion of the space surrendered bears to the Rentable Floor Area of Lessee's Space, as additional rent, Lessee shall reimburse Lessor promptly for reasonable legal and other expenses incurred by Lessor in connection with any request by Lessee for consent to assignment or subletting. In the event Lessor shall not exercise its option to cancel this Lease pursuant to the foregoing provisions, provided that the terms and provisions of such assignment or subletting shall specifically make applicable to the assignee or sublease all of the provisions of this Section 5.6 so that Lessor shall have against the assignee or sub-lessee all rights with respect to any further assignment and subletting which are set forth herein, no assignment or subletting shall affect the continuing primary liability to Lessee (which, following assignment, shall be joint and several with assignee); no consent to any of the foregoing in a specific instance shall operate as a waiver in any subsequent instance; and no assignment shall be binding upon Lessor or any of Lessor's mortgages, unless Lessee shall deliver to Lessor an instrument in recordable form which contains a covenant of assumption by the assignee running to Lessor and all persons claiming by, through or under Lessor, but the failure or refusal of the assignee to execute such instrument so assumption shall not release or discharge assignee from its liability as Lessee hereunder. The term "Affiliate of Lessee" for purposes of this Section 5.6 shall mean (i) any corporation, partnership, trust, association or other business organization directly or indirectly (through other entities or otherwise) owning, controlling or holding, whether with or without power to vote, 30% or more of the entire beneficial interest in Lessee or any successor whether by merger, consolidation or acquisition of all of the assets of Lessee, (ii) any corporation or trust with transferable shares, 30% or more of whose outstanding capitol stock or shares of beneficial interest of any class is directly or indirectly (through other entities or otherwise) own, controlled or held, whether with or without the power to vote, by Lessee or any successor whether by merger, consolidation or acquisition of all or substantially all of the assets of Lessee or any corporation affiliated with Lessee or such successor as defined in (i) above, and (iii) any partnership, association or other business organization, 30% or more of the beneficial interest in which, whether with or without the power to vote, is directly or indirectly) through other entities or otherwise) owned, controlled or held by Lessee or such successor or any corporation affiliated with Lessee or such successor as defined in (i) above; 5.7 Indemnity. To defend with counsel first approved by Lessor, save harmless, and indemnify Lessor from any liability for injury, loss, accident or damage to any person or property, and from any claims, actions, proceedings and expenses and costs in connection therewith (including without limitation reasonable counsel fees), (i) arising from the omission, fault, willful act, negligence or other misconduct of Lessee or from any use made or thing done or occurring on the Premises not due to the omission, fault, willful act, negligence or other misconduct of Lessor, or (ii) resulting from the failure of Lessee to perform and discharge its covenants and obligations under this Lease; 5.8 Right of Entry. To permit Lessor and Lessor's agents and designees to examine the Premises at reasonable times and, if Lessor shall so elect, to make any repairs or replacements Lessor may deem necessary, to remove at Lessee's expense, any alterations, additions, signs, curtains, blinds, shades, awnings, aerials, flagpoles, or the like not consented to in writing by Lessor, and to show the Premises to prospective Lessees during the twelve (12) months preceding expiration of the Lease Term and to prospective purchasers and mortgagees at all reasonable times; 5.9 Floor Load; Prevention of Vibration and Noise. Not to place a load upon the Premises exceeding the live load for which the floors have been designed; and not to move any safe, vault or other heavy equipment in, about or out of the Premises except in such manner and at such times as Lessor shall in each instance authorize; and to isolate and maintain all of Lessee's business machines and mechanical equipment, which cause or may cause airborne or structure-borne vibration or noise, whether or not it may be transmitted to any other leased space in the Building, in such manner acceptable to Lessor so as to eliminate such vibration or noise; 5.10 Personal Property Taxes. To pay promptly when due all taxes which may be imposed upon personal property (including without limitation, fixtures and equipment) in the Premises to whomsoever assessed; 5.11 Payment of Litigation Expenses. In case Lessor shall, without any fault on its part, be made party to any litigation commenced by or against Lessee or by or against any party or parties in possession of the Premises or any part thereof claiming under Lessee, to pay, as additional rent, all cost, including without limitation, reasonable counsel fees incurred by or imposed upon Lessor in connection with such litigation, and, as additional rent, also to pay all such costs and fees incurred by Lessor in connection with the successful enforcement by Lessor of any obligations of Lessee under this Lease; 5.12 Insurance of Lessee's Property. To procure, keep in force and pay for comprehensive public liability insurance indemnifying Lessor and Lessee against all claims and demands for injury to or death of persons or damage to property which may be claimed to have occurred upon the Premises in the amounts which shall, at the time Lessee and/or its agents or contractors enter the Premises in accordance with Article III of this Lease, be not less than One Million Dollars ($1,000,000) for property damage, and Five Million Dollars($5,000,000) for injury or death of more than one person in a single accident, and from time to time thereafter shall not be less than such higher amounts if procurable, as may be reasonably required by Lessor and are customarily carried by responsible office lessees in the Metropolitan Boston Area. Such insurance shall be effected with insurers authorized to do business in Massachusetts as stock or mutual companies having a minimum combined Capital and Surplus of $1,000,000 under valid and enforceable Policies. Such policies shall name Lessor and Lessee as the insured as their respective interests may appear and certificates of all such insurance shall be delivered to Lessor. Such insurance shall provide that it shall not be canceled without at least ten (10) days prior written notice to each insured named therein. On or before the time Lessee and/or its contractors enter the Premises in accordance with Article III of the Lease and thereafter not less than fifteen (15) days prior to the expiration date of each expiring policy, original copies of the policies provided for herein issued by the respective insurers or certificates of such policies setting forth in full the provisions thereof and issued by such insurers shall be delivered by Lessee to Lessor and certificates as aforesaid of such policies shall, upon request of Lessor, be delivered by Lessee to the holder of any mortgage affecting the Premises. In addition to and not in limitation of the foregoing, Lessee covenants and agrees that all merchandise, furniture, fixtures and property of every kind, nature and description of Lessee or Lessee's employees, agents, contractors, invitees, visitors or guests which may be in or upon the Premises or Buildings, in the public corridors, or on the sidewalks areaways and approaches adjacent thereto, during the term hereof, shall be at the sole risk and hazard of Lessee, and that if the whole or any part thereof shall be damaged, destroyed, or stolen or removed by reason of any cause or reason whatsoever, other than the negligence or willful default of Lessor, no part of said damage or less shall be charged to or borne by Lessor. 5.13 HVAC Maintenance. Lessee will be responsible for maintaining all HVAC units and annually provide Lessor with a copy of a preventive maintenance agreement for each unit, from an authorized service company, that is acceptable to Lessor. ARTICLE VI CASUALTY AND TAKING 6.1 Termination of Restoration; Rent Adjustment. In case during the Lease Term all or any substantial part of the Premises or the Buildings or the Lot are damaged materially by fire, force majeure, civil commotion, war, or other casualty or by action or public or other authority or a consequence thereof, or are taken by eminent domain or Lessor receives compensable damage by reason of anything lawfully done in pursuance of public or other authority, this Lease shall terminate at Lessor's election, which may be made notwithstanding Lessor's entire interest may have been divested, by notice given to Lessee within forty five (45) days after the election to terminate arises specifying the effective date of termination. In case of such taking of part of the Premises, if the remainder is insufficient for use for Lessee's purposes, and the Lessor receives with the notice hereinafter referred to a certificate to the effect signed by Lessee, or in case of such damage or taking if the time needed to do the construction work necessary to put the Premises or such remainder in proper condition for use and occupation is reasonably estimated by Lessor to exceed six (6) months, Lessee may terminate this Lease by notice given to Lessor within sixty (60) days after the right to terminate arises specifying the effective date of termination. In case of such damage or taking, Lessor shall notify Lessee within thirty (30) days after the occurrence thereof if Lessor's estimate of the time needed to do the construction work necessary to put the Premises or such remainder in proper condition for use and occupancy. The effective date of termination specified by either Lessor or Lessee shall not be less than fifteen (15) nor more than thirty (30) days after the date of notice of such termination. If in any such case the Premises are rendered unfit for use and occupancy and the Lease is not so terminated, Lessor shall use due diligence (following the expiration of all periods in which either party may terminate this Lease pursuant to the foregoing provisions of this Section 6.1) to put the Premises, or in case of taking what may remain thereof (excluding any terms installed or paid for by Lessee which Lessee may be required to remove pursuant to Section 5.2), into proper condition for use and occupancy and a just proportion of the fixed rent and additional rent according to the nature and extent of the injury shall be abated until the Premises or such remainder shall have been put by Lessor in such condition; and in case of taking which permanently reduces the area of the premises, a just proportion of the fixed rent and additional rent shall be abated for the remainder of the Lease Term. 6.2 Eminent Domain Damages Reserved. Lessor reserves to itself any and all rights to receive awards made for damages to the Premises, the Buildings and Lot and the leasehold hereby created, or any one or more of them, accruing by reason of exercise of eminent domain or by reason of anything lawfully done in pursuance of public or other authority. Lessee hereby releases and assigns to Lessor all Lessee's rights to such awards, and covenants to deliver such further assignments and assurances thereof as Lessor may from time to time request, hereby irrevocably designating and appointing Lessor as its attorney-in- fact to execute and deliver in Lessee's name and behalf all such further assignments thereof. 6.3. Temporary Taking. In the event of any taking of the Premises or any part thereof for temporary use, (i) this Lease shall be and remain unaffected thereby, and (ii) Lessee shall be entitled to receive for itself such portion or portions of any award made for such use with respect to the period of the taking which is within the Lease Term, provided that if such taking shall remain in force at the expiration of earlier termination of this Lease, Lessee shall then pay to Lessor a sum equal to the reasonable cost of performing Lessee's obligations under Section 5.2 with respect to surrender of the Premises and upon such payment shall be excused from such obligations. ARTICLE VII DEFAULT 7.1 Events of Default. This Lease is made upon this condition, that if the Lessee shall neglect or fail to perform any one or more of its covenants contained herein and any such neglect or failure continues after notice, in case of fixed rent or additional rent for more than ten (10) days, or in any other case for more than thirty (30) days and such additional time, if any, as is reasonably necessary to cure the default if the default is of such a nature that it cannot reasonably be cured in said thirty (30) days; or if Lessee or any guarantor of any of Lessee's obligations under this Lease makes any assignment for the benefit of creditors, commits any act of bankruptcy or files a petition under any bankruptcy or insolvency law; or if such a petition filed against Lessee or such guarantor is not dismissed within ninety (90) days; or if a receiver or similar officer becomes entitled to Lessee's leasehold hereunder and it is not returned to Lessee within ninety (90) days; or if such leasehold is taken on execution or other process of law in any action against Lessee, then in any case, whether or not the Lease Term shall have begun, Lessor may immediately, or at any time while such default exists and without further notice, terminate this Lease by notice to Lessee, specifying a date not less than (10) days after the giving of such notice on which this Lease shall terminate and this Lease shall come to an end on the date specified therein as fully and completely as if such date were the date herein originally fixed for the expiration of the Lease Term, and Lessor, at its election, may lawfully or at any time thereafter and without further notice, enter into and upon the premises or any part thereof in the name of the whole, and repossess the same as of Lessor's former estate and expel Lessee and those claiming through or under Lessee and remove their effects (forcibly if necessary) without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of rent or any other preceding breach of covenant and Lessor may, at its election, store any effects so removed in a public warehouse or otherwise for the amount of, and at the expense of, Lessee, and upon termination of this Lease as aforesaid or under any provision of any statute, whether or not Lessor enters the Premises, Lessee will then quit and surrender the Premises to Lessor, but Lessee shall remain liable as hereinafter provided. 7.2 Damages. In the event that this Lease is terminated under any of the provisions contained in Section 7.1 or shall be otherwise terminated for breach of any obligation of Lessee, Lessee covenants to pay forthwith to Lessor, as compensation, the excess of the total rent reserved for the residue of the Lease Term over the rental value of the Premises for said residue of the Lease Term. In calculating the rent reserved there shall be included, in addition to the Fixed Rent and all Additional Rent, the value of all other considerations agreed to be paid or performed by Lessee for said residue. Lessee further covenants as an additional and cumulative obligation after any such ending to pay punctually to Lessor all the sums and perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated. In calculating the amounts to be paid by Lessee under the next foregoing covenant Lessee shall be credited with any amount paid to Lessor as compensation as in this Section 7.2 provided and also with the net proceeds of any rent obtained by Lessor by reletting the Premises after deducting all Lessor's expenses in connection with such reletting, including without limitation, all repossession costs, brokerage commissions, fees for legal services and expenses of preparing the Premises for such reletting, it being agreed by Lessee that Lessor may (i) relet the Premises or any part or parts thereof, for a term or terms which may at Lessor's option be equal to or less than exceed the period which would otherwise have constituted the balance of the Lease Term and may grant such concessions and free rent as Lessor in its sole judgement considers advisable or necessary to relet the same and (ii) make alterations, repairs and decorations in the premises as Lessor in its sole judgment considers advisable or necessary to relet the same, and no action of Lessor in accordance with the foregoing or failure to relet or to collect rent under reletting shall operate or be construed to release or reduce Lessee's liability as aforesaid. In lieu of any other damages or indemnity and in lieu of full recovery by Lessor of all sums payable under all the foregoing provisions of this Section 7.2, Lessor may by written notice to Lessee, at any time after this Lease is terminated under any of the provisions contained in Section 7.1 or is otherwise terminated for breach of any obligation of Lessee and before such full recovery, elect to recover, and Lessee shall thereupon pay, as liquidated damages, an amount equal to the aggregate of the Fixed Rent and Additional Rent accrued under Sections 2.5, 2.6 and 2.7 in the twelve (12) months ended next prior to such termination plus the amount of Fixed Rent and Additional Rent of any kind accrued and unpaid at the time of termination and less the amount of any recovery by Lessor under the foregoing provisions of this Section 7.2 up to the time of payment of such liquidated damages. Nothing in this Lease shall limit or prejudice the right of Lessor to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. In the event the Lessor becomes involved in bankruptcy, insolvency, or assignment for the benefit of creditors by the Lessor, the Lessee shall have the right to cancel this Lease, provided that said conditions are not cured within sixty (60) days. ARTICLE VIII MISCELLANEOUS 8.1 Titles of Articles; Recording; Consent; Notice; Binding Effect. This Lease shall not be recorded. Upon request of either party, both parties The Titles of the Articles are for convenience only and not to be considered in constructing this Lease. shall execute and deliver after this Lease Term begins a notice of this Lease in form appropriate for recording or registration, and if this Lease is terminated before this Lease expires, an instrument in such form acknowledging the date of termination. Except as otherwise provided in Section 5.6, whenever any approval or consent shall not be delayed or withheld unreasonably. Whenever any notice, approval, consent, request or election is given or made pursuant to this Lease it shall be in writing. Communications and payments shall be addressed if to Lessor to Lessor's Original Address or at such other address as may have been specified by prior notice to Lessee, and if to Lessee, at Lessee's Original Address or at such other place as may have been specified by prior notice to Lessor. Any communication so addressed shall be deemed duly served if mailed by registered or certified mail, return receipt requested. If Lessor by notice to Lessee at any time designates some other person to receive payments or notices, all payments and notices thereafter by Lessee shall be paid or given to the agent so designated until notice to the contrary is received by Lessee from Lessor. The obligations of this Lease shall run with the land, and this Lease shall be binding upon and insure to the benefit of the parties hereto and their respective successors and assigns, except that only the original Lessor named herein shall be liable for obligations accruing before the beginning of the Lease Term, and thereafter the original Lessor names herein and each successive owner of the Premises shall be liable only for obligations accruing during the period of their ownership. 8.2 Notice of Lease; Consent or Approval Notices; Bind and Insure; Trust Estates. No assignment of this Lease and no agreement to make or accept any surrender, termination or cancellation of this Lease and no agreement to modify so as to reduce the rent, change the Lease Term, or otherwise materially change the rights of Lessor under this Lease, or to relieve Lessee of any obligations or liability under this Lease, shall be valid unless consented to by Lessor's mortgagees of record, if any, in each instance, if any, in which such consent is required pursuant to the terms of the mortgage. The delivery of keys to any employee of Lessor or to Lessor's agent or any employee thereof shall not operate as a termination of this Lease or a surrender of the Premises. 8.3 Lessor's Failure to Enforce. The failure of Lessor or of Lessee to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or, with respect to such failure of Lessor, any of the Rules and Regulations referred to in Section 5.4, whether heretofore or hereafter adopted by Lessor, shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation, nor shall the failure of Lessor to enforce any of said Rules and Regulations against any other Lessee in the Building be deemed a waiver of any such Rules and Regulations. The receipt by Lessor of Fixed Rent or Additional Rent with knowledge of the breach of any covenant of this Lease shall not be deemed to have been waived by Lessor, or by Lessee unless such waiver be in writing signed by the party to be charged. No consent or waiver, express or implied, by Lessor or Lessee to or of any breach of any agreement or duty shall be construed as a waiver or consent to or any other breach of the same or any other agreement or duty. 8.4 Acceptance of Partial Payments of Rent. No acceptance by Lessor of a lesser sum than the fixed rent and additional rent then due shall be deemed to be other than on account of the earliest installment of such rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessors right to recover the balance of such installment or pursue any other remedy in this Lease provided. 8.5 Cumulative Remedies. The specific remedies to which Lessor may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled in case of any breach or threatened breach by Lessee of any provisions of this Lease. In addition to the other remedies provided in this Lease, Lessor shall be entitled to the restraint by injunction of the violation or attempted or threatened of any of the covenants, conditions or provisions of this Lease or to a decree compelling specific performance of any such covenants, conditions or provisions. 8.6 Partial Invalidity. If any term of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Lease shall be valid and enforceable to the fullest extent permitted by law. 8.7 License for Support. If an excavation shall be made upon land adjacent to property of Lessor of which the Premises are a part, or shall be authorized to be made, Lessee shall afford to the person causing or authorized to cause such excavation, license to enter upon the Premises for the purpose of doing such work as said person shall deem necessary to preserve the wall of the Buildings from injury or damage and to support the same by proper foundations without any claims for damages or indemnity against Lessor, or diminution or abatement of rent. 8.8 Self Help. If Lessee shall at any time default in the performance of any obligation under this Lease, Lessor shall have the right, but shall not be obligated, to enter upon the Premises and to perform such obligation notwithstanding the fact that no specific provision for such substituted performance by Lessor is made in this Lease with respect to such default. In performing such obligation, Lessor may make any payment of money or perform any other act. All sums so paid by Lessor (together with interest at the rate of 18% per annum) and all necessary incidental costs and expenses in connection with the performance of any such act by Lessor, shall be deemed to be Additional Rent under this Lease and shall be payable to Lessor immediately on demand. Lessor may exercise the foregoing rights without waiving any other of its rights or releasing Lessee from any of its obligations under this Lease. 8.9 Lessee's Estoppel Certificate. Lessee agrees from time to time, upon not less than fifteen (15) days prior written request by Lessor, to execute, acknowledge and deliver to Lessor a statement in writing certifying that this Lease is unmodified and in full force and effect and that Lessee has no defenses, offsets or counterclaims against its obligations to pay the Fixed Rent and Additional Rent and to perform its other covenants under this Lease (or if there have been any modifications that the same is in full force and effect so modified and stating the modifications and, if there are any defenses, offsets, counterclaims, or defaults, setting them forth in reasonable detail), and the dates to which the Fixed Rent, Additional Rent and other charges have been paid. Any such statement delivered pursuant to this Section 8.9 may be relied upon by any prospective purchaser or mortgages of the Premises or any prospective assignee of any mortgage of the Premises. 8.10 Waiver of Subrogation. Any insurance carried by either party with respect to the Premises and property therein or occurrences thereon shall, if the other party so requests and if it can be so written without additional premium, or with an additional premium which the other party agrees to pay, include a clause or endorsement denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to occurrence of injury or loss. Each party, notwithstanding any provisions of this Lease to the contrary, hereby waives any rights of recovery against the other for injury or loss due to hazards covered by insurance containing such clause or endorsement to the extent of the indemnification received thereunder. 8.11 Governing Law. This Lease shall be governed exclusively by the provisions hereof and by the laws of the Commonwealth of Massachusetts, as the same may from time to time exist. 8.12 Brokerage. Lessee warrants and represents that it has dealt with no brokers or brokerage firms in relation to this transaction other than Mike Ripp of Lynch Murphy Walsh & Partners and Casler and Company. Commissions will be detailed in a separate agreement between the brokers and the Lessor. 8.13 Assignment of Rent. With reference to any assignment by Lessor of Lessor's interest in this Lease, or the rents payable hereunder, conditional in nature or otherwise, which assignment is made to the holder of the first mortgage on the Premises, the Lessee agrees: (a) that the execution thereof by Lessor and the acceptance thereof by the holder of such mortgage shall never be deemed an assumption by such holder of any of the obligations of the Lessor hereunder, unless such holder shall, by written notice sent to Lessee, specifically otherwise elect; and (b) that, except as aforesaid, such holder shall be treated as having assumed the Lessor's obligations hereunder only upon foreclosure of such holder's mortgage all of its duties and obligations hereunder. (c) that notwithstanding any assignment of mortgage, the Lessor shall discharge all of its duties and obligations hereunder. ARTICLE IX SUBORDINATION 9.1 Lease Subordinate to Mortgage Indebtedness. This Lease is also subordinate to certain mortgages on the Buildings and Lot and shall be subordinate to any other mortgage hereafter on the Buildings and Lot and to each advance made or hereafter to be made under any such mortgages and to all renewals, modifications, consolidations, replacements and extensions thereof and all substitutions therefor. In the event that any mortgagee or its respective successor in title shall succeed to the interest of Lessor then, at the option of such mortgagee or successor, the Lease shall nevertheless continue in full force and effect and Lessee shall and does hereby agree in such event to adhere to such mortgagee or successor and to recognize such mortgagee or successor as its Lessor, provided such mortgagee or successor agrees not to disturb the tenancy of the Lessee. 9.2 Implementation of Article IX. Lessee agrees on request of Lessor to execute and deliver from time to time any agreement which may reasonably be deemed necessary to implement the provisions of this Article IX. ARTICLE X ARBITRATION 10.1 Method of Appointment of Arbiters; Awards; Costs. In the event of a dispute between Lessor and Lessee with respect to any matter set forth in Sections 3.1 or 3.2 hereof, such dispute shall be arbitrated by three arbitrators appointed as follows: Lessor and Lessee shall each appoint a fit and impartial person as arbitrator who shall have at least ten (10) years experience in the Metropolitan Boston Area in a calling connected with the subject matter of the dispute. Written notice of such appointment shall be given by each party to the other within fifteen (15) days of the date upon which written notice is given by one party to the other demanding arbitration and the arbitrators so appointed shall appoint a third arbitrator who shall likewise have ten (10) years of experience in the Metropolitan Boston Area in a calling connected with the subject matter of the dispute, and if the arbitrators fail to agree upon a third arbitrator within fifteen (15) days of the date upon which the later of such written notices of appointment of the first two arbitrators is given, such third arbitrator shall be appointed by a Justice of the Superior Court of the Commonwealth of Massachusetts in Middlesex County upon ten (10) days notice of the institution proceedings for such court appointment, or by any other Court sitting in Middlesex County succeeding to the jurisdiction and functions exercised by the Superior Court of the Commonwealth of Massachusetts. Any award that shall be made in such arbitration by the arbitrators or a majority of them shall be binding and shall have the same force and effect as a judgment made in a court of competent jurisdiction and both Lessor and Lessee shall have the right to apply to the Superior Court of the Commonwealth of Massachusetts in Middlesex County, or to any other court sitting in Middlesex County succeeding to the jurisdiction and functions exercised by the Superior Court of the Commonwealth of Massachusetts, for a decree, judgment or order upon said arbitration or award upon ten (10) days notice to the other party. The fees, costs and expenses of arbitration, other than fees of attorneys for the parties, expert witnesses and other witness' fees, shall be borne equally between the parties unless the arbitrators determine that some other division shall under the circumstances be more equitable. ARTICLE XI SECURITY DEPOSIT 11.1 Amount; Application. Lessee has deposited with Lessor the sum of Seventy Five Thousand Dollars ($75,000) as security for the performance by Lessee of its covenants and obligations hereunder. Such Security Deposit shall not bear interest and shall not be considered and advance payment of rental or a measure of Lessor's damages in case of default by Lessee. If Lessee defaults in the performance of any of the covenants and obligations to be performed by it, Lessor may, from time to time, without prejudice to any remedy, use such Security Deposit to the extent necessary to make good any arrearages in Rent or any sum as to which Lessee is in default including any damages or deficiency may accrue before or after termination of this Lease. Following any such application of the Security Deposit, Lessee shall pay to Lessor on demand the amount so applied in order to restore the Security Deposit to its original amount. If Lessee is not then in default hereunder, any remaining balance of Security Deposit shall be returned by Lessor to Lessee upon termination of this Lease and after delivery of possession of the premises to Lessor in accordance with the Lease. If Lessor assigns its interest in the premises during the Lease Term, Lessor shall have no further liability for the return of such Security Deposit and Lessee agrees to look solely to the new Lessor for the return of the Security Deposit. This provision shall apply to every transfer or assignment made of the Security Deposit to a new Lessor. Lessee agrees that it will not assign or encumber or attempt to assign or encumber the monies deposited as security and that Lessor and its successors and assigns shall not be bound by any such actual or attempted assignment or encumbrance. Lessee has also paid the first month's rent at the time of the signing of this Lease. ARTICLE XII LESSOR'S LIEN 12.1 Liens for Lessor. The statutory lien for rent is not waived. EXHIBIT A DRAWING OF BUILDING AT 220 BEAR HILL ROAD. EXHIBIT B Additional Terms Between Lessor and Lessee Lease Between 220 Bear Hill Road Realty Trust, Lessor, and CTC Communications Corp., Lessee. Lessee has agreed to lease the building in an "as is" condition. Lessor has informed Lessee that the HVAC units in the lobby and grand ballroom areas need to be replaced. Also, that there are a total of nine (9) roof top units, two space heaters and one roof top space heater. Lessor has also informed Lessee that the hot water system has been disconnected and that Lessee will need to install new hot water tanks. Lessor also pointed out to Lessee that when pictures, etc., are removed from walls, there will be holes in those walls and that some electrical and plumbing connections are exposed. The Lessee has inspected the building several times with contractors and architects and is aware of the "as is" condition. Lessee has indicated to Lessor that Lessee plans on demolishing most of the existing walls and plans on building out new office space. Lessee and Lessor have agreed that a back-flow regulator will need to be installed on the sprinkler system. Lessee has informed Lessor that it intends to install a number of windows in the space and has requested Lessor to help in this capital expenditure. Lessee agrees to install at least 15 windows in the space. Lessor has already reduced the base rent since Lessee is leasing the space in the "as is" condition; however, as additional consideration to the Lessee, Lessor has agreed to give Lessee a total of Fifty Thousand Dollars ($50,000) to be deducted at a rate of Eight Thousand Three Hundred Thirty Three Dollars and Thirty Three Cents ($8,333.33) per year over the six years of the original lease for all of the above items since Lessee will pay for all of the above work as part of Lessees buildout. The final net annual base rent after deductions is $304,166.67 payable monthly at the rate of $25,347.23. Lessor will leave ceiling tiles as is throughout the building. EXHIBIT C OPTION TO EXTEND LEASE THIS EXHIBIT, to be made part of a lease between 220 Bear Hill Road Realty Trust, Vincent A. Messina, Trustee, hereinafter called Lessor and CTC Communication Corporation, hereinafter called Lessee. WHEREAS, the Lessor and Lessee have entered into a certain lease for the rental of square feet of office space at the Premises constructed on 220 Bear Hill Road, Waltham, Massachusetts; and WHEREAS, the said parties have mutually agreed upon the inclusion of the following additional provisions and covenants in said Lease; NOW, THEREFORE, for mutual valuable consideration, receipt and benefit of which is acknowledged by both parties, it is agreed that the following shall be included and added to said Lease, which in all other particulars remains unchanged, and that said following language is hereby incorporated by reference and made a part of said Lease: If Lessee shall have fully and promptly complied with all the terms and provisions of this Lease, and shall not be in default in the performance or observance of any of the terms and conditions of this Lease to be performed and observed by Lessee, the Lessee shall have the right, at its election to extend the term of this Lease for two (2) additional periods of six (6) years commencing upon the expiration of the term on the same terms and conditions by notice in writing to Lessor 365 days prior to the end of the term, except that for the extended term the rent for the demised premises shall be at ninety-five (95%) of the then fair market rental rate for comparable space in similar quality buildings in the surrounding area. Fair market rental rate should take into account rental rates, tenant improvement allowances, commissions, and concessions prevalent in the market for comparable space for tenants of similar size and credit worthiness. The Lessee and Lessor will have a period of sixty days to negotiate the new market rent. If no agreement can be reached between parties then, the Lessor will be free to lease the space to another party; therefore, if the parties reach an agreement; the new agreement must be signed prior to Three hundred (300) days to the end of the term of this lease. The Lessee during the extended term of this Lease shall pay the operating and tax expenses in the same manner as set forth in the original term of this Lease in addition to the foregoing provision. The Lessor will not continue the base rent allowance during the option period. EX-10.23 5 WARRANT ISSUED 9/1/98 TO GOLDMAN SACHS EXHIBIT 10.23 WARRANT GOLDMAN SACHS & CO "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 662,600 SHARES OF COMMON STOCK CTC COMMUNICATIONS CORP., a Massachusetts corporation (the "Company"), hereby certifies that, for value received, Goldman Sachs & Co., a New York limited partnership, or its registered transferees, successors or assigns (each, a "holder"), is the registered holder of warrants (the "Warrants") to subscribe for and purchase Six Hundred Sixty Two Thousand and Six Hundred (662,600) 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 Six Dollars and Seventy-Five Cents ($6.75) (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 September 1, 1998, 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 and the warrant of even date herewith, issued to Fleet National Bank ("Fleet") for 311,812 shares of Common Stock (the "Fleet Warrant"), are being issued pursuant to that certain Loan and Security Agreement (the "Loan Agreement") of even date herewith by and among the Company, Goldman Sachs Credit Partners L.P., and Fleet. As used herein, (a) the term "Series Warrants" shall mean this Warrant and the Fleet Warrant collectively, and (b) the term "Series Warrant Shares" shall mean the aggregate of the shares of Common Stock issuable upon the exercise of this Warrant and the Fleet Warrant (which amount initially totals 974,412 shares). 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 September 1, 2003 (the "Expiration Date"); provided, however, that in the event that 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 (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 Date. 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)(1) 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 Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this 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 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 an ending market price of $6.75 per share of Common Stock and before giving effect to the issuance of any of the Series Warrants or Series Warrant Shares, totaled 12,017,745 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 the 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 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 Secretary or Assistant Secretary) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights, 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 fifty-one percent (51%) of the Series Warrant Shares issuable under outstanding Series 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, 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 such 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 Sections 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 such convertible or exchangeable securities, (iii) the Series 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 the previous 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 of 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 Secretary or Assistant Secretary, 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 fifty-one percent (51%) of the Series Warrant Shares issuable under outstanding Series 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)(1), the Board of 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 Secretary or Assistant Secretary, 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 fifty-one percent (51%) of the Series Warrant Shares issuable under outstanding Series 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 the Board of Directors of the Company, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary. 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 fifty-one percent (51%) of all of the Series Warrant Shares issuable under outstanding Series 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 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 connection 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 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 not 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 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 Series Warrants and/or the Series Warrant Shares (collectively, the "Securityholders") constituting at least thirty percent (30%) of the Series Warrant Shares (determined on an as-exercised basis) not already sold pursuant to Section 9 of any Series Warrant or Rule 144 under the Act, to have the Company register the Series 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 Series 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 the Series Warrants. Notwithstanding the foregoing, the Company shall not be obligated to effect any registration pursuant to Section 9.1(a) of any Series Warrant if it has already effected two registrations under Section 9.1(b) of the Series 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 Series 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 within thirty (30) days of the Company's receipt of such registration request, the Company shall cause to be included in such registration all Registrable Securities requested to be included therein by any such Securityholder within fifteen (15) days after such Registration Notice is effective (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) 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 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 the Series Warrants or (ii) one (1) registration pursuant to Section 9.1(a) of any Series Warrant and one (1) registration pursuant to Section 9.1(b) of any Series 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 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 registration statement such number of Registrable Securities as they may request (other than Registrable 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 the 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 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) securities proposed to be included by the Company shall be excluded and, (iv) fourth, 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 9.1(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 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 included 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 delivered 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; (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 registration effective the number of days for which the effectiveness thereof was suspended pursuant to this Section 9.3(b). c. 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 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 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 accountants 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, whether commenced or threatened in respect thereof), or expense arises out of or is based upon an untrue 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 not be liable in any such case 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 whether commenced or threatened 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, 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 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 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 party, and after notice from the indemnifying party to such indemnified party of its 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 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(f) 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 50,000 Series Warrants, Series 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. 10.2 Board Representation. a. Election of Initial Holder Designee. Promptly following Goldman Sachs & Co.'s ("Goldman") designation of a Holder Designee under Section 10.2(e)(i) below, the Board of Directors of the Company (the "Board") shall increase the number of directors constituting the Board by one (1) and shall elect the Holder Designee (as defined below) to the Board to fill the vacancy created by such increase. b. Future Elections of Holder Designee. Provided that Goldman has designated an initial Holder Designee under Section 10.2(e)(i) below and continuously designates Holder Designees as required under Section 10.2(e)(ii) and Section 10.2(e)(iii) below, in connection with any annual meeting or other meeting of stockholders of the Company at which directors are to be elected (an "Annual Meeting"), the Company, its management or the Board nominates, recommends, or solicits proxies to be voted for the election to the Board of a particular group of individuals ("Management Nominees"), the Management Nominees shall include the Holder Designee. The Company, its management and the Board shall each use all reasonable efforts to cause the Holder Designee to be elected to the Board at each Annual Meeting, whether or not there are Management Nominees for such Annual Meeting, and to maintain the Holder Designee in such position. c. Vacancy. If a vacancy on the Board shall occur as a result of the death, resignation or removal of a director elected to the Board by reason of having been a Holder Designee and such vacancy is to be filled by the vote of the remaining members of the Board, such remaining members of the Board shall vote for the election of the Holder Designee to fill such vacancy to the extent permitted under the Company's Charter, by-laws and applicable law. d. Observer Rights. During any time that a Holder Designee is not a member of the Board, whether during the time before Goldman has initially nominated a director under Section 10.2(e), or due to the failure of a Holder Designee to be elected by the stockholders of the Company, the failure of Goldman to timely nominate a Holder Designee under Section 10.2(e) or otherwise, the Company shall invite a representative of Goldman to attend, in a non-voting observer capacity, all meetings of the Board and all meetings of the Committees of the Board. The Company shall provide to such representative copies of all notices, minutes, consents, and other materials that it provides to its directors at the same time as such materials are provided to the directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company may withhold any information and exclude such representative from any meeting or portion thereof if the Company reasonably believes, based upon the advice of its counsel, that such exclusion is reasonably necessary to preserve an attorney-client privilege of the Company that is material to the Company. e. Holder Designee. For the purposes of this Section 10.2, "Holder Designee" shall mean an individual so designated by Goldman (and no other party or transferee of Goldman), which designation shall be made as follows: (i) Goldman, within sixty (60) days following the execution and delivery of this Warrant, shall, at Goldman's election, notify the Company in writing of the name of the Holder Designee to be elected to the Board, (ii) sixty (60) days prior to each Annual Meeting (unless the Holder Designee then a Director is otherwise serving a term not expiring at such meeting), Goldman shall notify the Company in writing of the name of the Holder Designee to be elected to the Board at such meeting, and (iii) if a vacancy on the Board shall occur as a result of the death, resignation or removal of a director elected to the Board by reason of having been a Holder Designee, Goldman shall, within thirty (30) days after receiving written notice from the Company of such vacancy (twenty (20) days in the case of the resignation or removal of a Holder Designee who continues on as an employee of Goldman), notify the Company in writing of the name of the Holder Designee to be elected to the Board to fill such vacancy. f. Termination of Rights. The rights of Goldman under this Section 10.2 shall terminate upon the earlier of (i) September 1, 2001 or (ii) the date that Goldman or its affiliates no longer beneficially own, in the aggregate, at least 50% of the Warrant, the Warrant Shares or any combination thereof. For the purpose of this Section 10.2(f), the term "affiliates" shall include any individual, 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, Goldman. 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. 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; 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 5.8 to the Loan Agreement. All of the outstanding shares of the Company have been validly issued and are fully paid, nonassessable shares and have not been issued in violation of any applicable preemptive rights; g. Except as set forth on Schedule 5.8 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 party 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. 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 and the board representation rights contained in Section 10.2 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 65% of the Series 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.] 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 September 1, 1998 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 tenders herewith payment of the purchase price of such shares in full. 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) 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 1 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, 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 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 Closing Stock Price on 8/4/98 of: $6.75 Shares Outstanding - public 6,175,798 Shares Outstanding - Bob Fabricatore 2,715,974 Shares Outstanding - all other officers 1,096,725 Total Primary Shares Outstanding 9,988,497 Outstanding Options: Options in the Money 1,462,507 Proceeds from Options $5,494,058 Average exercise price $3.76 Shares to be purchased 813,935 Incremental Shares 648,572 Total Shares outstanding pre Spectrum 10,637,070 Spectrum Convertible Preferred Stock 1,333,333 Spectrum warrants in the money 0 Spectrum shares from 9% dividend accreted to 8/31/98 47,342 Total shares due to Spectrum 1,380,675 Total Shares outstanding Pre Series Warrants (on a Fully Diluted Basis) 12,017,745 Series Warrants % of Fully Diluted Shares 7.50% New Fully Diluted Shares Outstanding 12,992,157 Incremental Series Warrant Shares 974,412 Goldman's participation (68%) 662,600 Fleet's participation (32%) 311,812 EX-10.24 6 WARRANT ISSUED 9/1/98 TO FLEET NATIONAL BANK EXHIBIT 10.24 WARRANT FLEET NATIONAL BANK "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 311,812 SHARES OF COMMON STOCK CTC COMMUNICATIONS CORP., a Massachusetts corporation (the "Company"), hereby certifies that, for value received, Fleet National Bank, a national banking association, with a place of business located at One Federal Street, Boston, Massachusetts 02110, or its registered transferees, successors or assigns (each, a "holder"), is the registered holder of warrants (the "Warrants") to subscribe for and purchase Three Hundred Eleven Thousand and Eight Hundred Twelve (311,812) 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 Six Dollars and Seventy-Five Cents ($6.75) (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 September 1, 1998, 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 and the warrant of even date herewith, issued to Goldman Sachs & Co. ("Goldman") for 662,600 shares of Common Stock (the "Goldman Warrant"), are being issued pursuant to that certain Loan and Security Agreement (the "Loan Agreement") of even date herewith by and among the Company, Goldman Sachs Credit Partners L.P., and holder. As used herein, (a) the term "Series Warrants" shall mean this Warrant and the Goldman Warrant collectively, and (b) the term "Series Warrant Shares" shall mean the aggregate of the shares of Common Stock issuable upon the exercise of this Warrant and the Goldman Warrant (which amount initially totals 974,412 shares). 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 September 1, 2003 (the "Expiration Date"); provided, however, that in the event that 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 (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 Date. 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)(1) 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 Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this 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 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 an ending market price of $6.75 per share of Common Stock and before giving effect to the issuance of any of the Series Warrants or Series Warrant Shares, totaled 12,017,745 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 the 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 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 Secretary or Assistant Secretary) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights, 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 fifty-one percent (51%) of the Series Warrant Shares issuable under outstanding Series 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, 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 such 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 Sections 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 such convertible or exchangeable securities, (iii) the Series 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 the previous 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 of 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 Secretary or Assistant Secretary, 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 fifty-one percent (51%) of the Series Warrant Shares issuable under outstanding Series 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)(1), the Board of 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 Secretary or Assistant Secretary, 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 fifty-one percent (51%) of the Series Warrant Shares issuable under outstanding Series 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 the Board of Directors of the Company, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary. 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 fifty-one percent (51%) of all of the Series Warrant Shares issuable under outstanding Series 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 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 connection 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 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 not 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 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 Series Warrants and/or the Series Warrant Shares (collectively, the "Securityholders") constituting at least thirty percent (30%) of the Series Warrant Shares (determined on an as-exercised basis) not already sold pursuant to Section 9 of any Series Warrant or Rule 144 under the Act, to have the Company register the Series 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 Series 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 the Series Warrants. Notwithstanding the foregoing, the Company shall not be obligated to effect any registration pursuant to Section 9.1(a) of any Series Warrant if it has already effected two registrations under Section 9.1(b) of the Series 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 Series 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 within thirty (30) days of the Company's receipt of such registration request, the Company shall cause to be included in such registration all Registrable Securities requested to be included therein by any such Securityholder within fifteen (15) days after such Registration Notice is effective (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) 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 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 the Series Warrants or (ii) one (1) registration pursuant to Section 9.1(a) of any Series Warrant and one (1) registration pursuant to Section 9.1(b) of any Series 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 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 registration statement such number of Registrable Securities as they may request (other than Registrable 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 the 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 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) securities proposed to be included by the Company shall be excluded and, (iv) fourth, 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 9.1(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 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 included 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 delivered 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; (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 registration effective the number of days for which the effectiveness thereof was suspended pursuant to this Section 9.3(b). c. 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 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 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 accountants 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, whether commenced or threatened in respect thereof), or expense arises out of or is based upon an untrue 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 not be liable in any such case 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 whether commenced or threatened 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, 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 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 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 party, and after notice from the indemnifying party to such indemnified party of its 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 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(f) 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 50,000 Series Warrants, Series 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; 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 5.8 to the Loan Agreement. All of the outstanding shares of the Company have been validly issued and are fully paid, nonassessable shares and have not been issued in violation of any applicable preemptive rights; g. Except as set forth on Schedule 5.8 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 party 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. 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 and the board representation rights contained in Section 10.2 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 65% of the Series 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.] 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 September 1, 1998 EXHIBIT A NOTICE OF EXERCISE To: CTC COMMUNICATIONS CORP. 2. The undersigned hereby elects to purchase _____ shares of Common Stock of CTC COMMUNICATIONS CORP. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 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) 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 1 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: (g) 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"). (h) 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. (i) 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. (j) 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, 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 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. (k) 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. (l) 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 Closing Stock Price on 8/4/98 of: $6.75 Shares Outstanding - public 6,175,798 Shares Outstanding - Bob Fabricatore 2,715,974 Shares Outstanding - all other officers 1,096,725 Total Primary Shares Outstanding 9,988,497 Outstanding Options: Options in the Money 1,462,507 Proceeds from Options $5,494,058 Average exercise price $3.76 Shares to be purchased 813,935 Incremental Shares 648,572 Total Shares outstanding pre Spectrum 10,637,070 Spectrum Convertible Preferred Stock 1,333,333 Spectrum warrants in the money 0 Spectrum shares from 9% dividend accreted to 8/31/98 47,342 Total shares due to Spectrum 1,380,675 Total Shares outstanding Pre Series Warrants (on a Fully Diluted Basis) 12,017,745 Series Warrants % of Fully Diluted Shares 7.50% New Fully Diluted Shares Outstanding 12,992,157 Incremental Series Warrant Shares 974,412 Goldman's participation (68%) 662,600 Fleet's participation (32%) 311,812 EX-99.1 7 RISK FACTORS Exhibit 99.1 Limited History as an ICP; Risks Relating to Implementation of New Strategy Although the Company has sold integrated telecommunications services for over 14 years, it sold local telephone services as an agent for Bell Atlantic Corp. ("Bell Atlantic") until December 1997 and only began offering such services as an integrated communications provider ("ICP") under its own brand name after that time. As a result of the Company terminating its agency relationship with Bell Atlantic, agency revenues, which accounted for approximately 73% of the Company's revenues for the six month period ended September 30, 1998 are no longer material. For the six month period ended September 30, 1998, total revenues increased from approximately $23,500,000 to approximately $27,351,000. There can be no assurance that the Company's prior experience in the sale of telecommunications services as a sales agent will result in the Company generating sufficient cash flow to service its debt obligations or to compete successfully under its new strategy. The Company plans to deploy its own Integrated Communications Network (''ICN''). The Company has no experience in deploying, operating and maintaining a telecommunications network. The Company's ability to successfully deploy its ICN will require the negotiation of interconnection agreements with incumbent local exchange carriers (''ILECs''), which can take considerable time, effort and expense and which are subject to federal, state and local regulation. There can be no assurance that the Company will be able to successfully negotiate such agreements or to effectively deploy, operate or maintain its facilities or increase or maintain its cash flow from operations by deploying a network. Further, there can be no assurance that the packet-switched design of the network will provide the expected functionality in serving its target market or that customers will be willing to migrate the provision of their services onto the Company's network. The Company has engaged a network services integrator to design, engineer and manage the buildout of the ICN in the Company's existing markets. Any failure or inability by the network integrator to perform these functions could cause delays or additional costs in providing services to customers and building out the Company's ICN in specific markets. Any such failure could materially and adversely affect the Company's business and results of operations. If the Company fails to effectively transition to an ICP platform, fails to obtain or retain a significant number of customers or is unable to effectively deploy, operate or maintain its network, such failure could have an adverse effect on the Company's business, results of operations and financial condition. In addition, the implementation of its new strategy and the deployment of its network has increased and will continue to increase the Company's expenses significantly. Accordingly, the Company expects to incur significant negative cash flow during the next several years as it implements its business strategy, penetrates its existing markets as an ICP, enters new markets, deploys its ICN and expands its service offerings. There can be no assurance that the Company will achieve and sustain profitability or positive net cash flow. Capital Requirements The timing and amount of the Company's actual capital requirements may be materially affected by many factors, including the timing and actual cost of expansion into new markets and deployment of the ICN, the extent of competition and pricing of telecommunications services in its markets, acceptance of the Company's services, technological change and potential acquisitions. Additional sources of funding the Company's capital requirements may include public offerings or private placements of equity or debt securities, vendor financing and bank loans. There can be no assurance that future financing will be available to the Company or, if available, that it can be obtained on a timely basis and on terms acceptable to the Company. Failure to obtain financing when required could result in the delay or abandonment of the Company's business plans which could have a material adverse effect on the Company. High Leverage; Possible Inability to Service Indebtedness As a result of obtaining both the Fleet/Goldman Sachs credit facility and the Cisco vendor financing facility, the Company is highly leveraged. The degree to which the Company is leveraged could have important consequences to the Company's future prospects, including the following: (i) limiting the ability of the Company to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes; (ii) limiting the flexibility of the Company in planning for, or reacting to, changes in its business; (iii) leveraging the Company more highly than some of its competitors, which may place it at a competitive disadvantage; (iv) increasing its vulnerability in the event of a downturn in its business or the economy generally; and (v) requiring that a substantial portion of the Company's cash flow from operations be dedicated to the payment of principal and interest on its debt and not be available for other purposes. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. There can be no assurance that the Company's business will generate sufficient cash flow from operations or that anticipated revenue growth and operating improvements will be realized or will be sufficient to enable the Company to service its indebtedness, or to fund its other liquidity needs. There can be no assurance that the Company will be able to refinance all or a portion of its indebtedness on commercially reasonable terms or at all. If the Company does not generate sufficient cash flow to meet its debt service and working capital requirements, the Company may need to examine alternative strategies that may include actions such as reducing or delaying capital expenditures, restructuring or refinancing its indebtedness, the sale of assets or seeking additional equity and/or debt financing. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. Dependence on In-House Billing and Information System The accurate and prompt billing of the Company's customers is essential to the Company's operations and future profitability. The Company's expected growth and deployment of its ICN could give rise to additional demands on the CTC Information System, and there can be no assurance that it will perform as expected. The failure of the Company to adequately identify all of its information and processing needs (including Year 2000 compliance), the failure of the CTC Information System or the failure of the Company to upgrade the CTC Information System as necessary could have a material adverse effect on the Company and its results of operations. Dependence on Supplier Provided Timely and Accurate Call Data Records; Billing and Invoice Disputes In its reseller business, the Company is dependent upon the timely receipt and accuracy of call data records provided to it by its suppliers. There can be no assurance that accurate information will consistently be provided by suppliers or that such information will be provided on a timely basis. Failure by suppliers to provide timely and accurate detail would increase the length of the Company's billing and collection cycles and adversely effect its operating results. The Company pays its suppliers according to the Company's calculation of the charges applicable to the Company based on supplier invoices and computer tape records of all such calls provided by suppliers which may not always reflect current rates and volumes. Accordingly, a supplier may consider the Company to be in arrears in its payments until the amount in dispute is resolved. There can be no assurance that disputes with suppliers will not arise or that such disputes will be resolved in a manner favorable to the Company. In addition, the Company is required to maintain sophisticated billing and reporting systems to service the large volume of services placed over its networks. As resale volumes increase, there can be no assurance that the Company's billing and management systems will be sufficient to provide the Company with accurate and efficient billing and order processing capabilities. Dependence on Network Infrastructure and Products and Services of Others The Company does not currently own any part of a local exchange or long distance network and depends entirely on facilities-based carriers for the transmission of customer traffic. After the deployment of the ICN, it will still rely, at least initially, on others for circuit switching of local voice calls and on fiber optic backbone transmission facilities. There can be no assurance that such switching or transmission facilities will be available to the Company on a timely basis or on terms acceptable to the Company. The Company's success in marketing its services requires that the Company provide superior reliability, capacity and service. Although the Company can exercise direct control of the customer care and support it provides, most of the services that it currently offers are provided by others. Such services are subject to physical damage, power loss, capacity limitations, software defects, breaches of security (by computer virus, break-ins or otherwise) and other factors, certain of which have caused, and will continue to cause, interruptions in service or reduced capacity for the Company's customers. Such problems, although not the result of failures by the Company, can result in dissatisfaction among its customers. In addition, the Company's ability to provide complete telecommunications services to its customers will be dependent to a large extent upon the availability of telecommunications services from others on terms and conditions that are acceptable to the Company and its customers. There can be no assurance that government regulations will continue to mandate the availability of some or all of such services or that the quality or terms on which such services are available will be acceptable to the Company or its customers. Customer Attrition The Company's operating results may be significantly affected by its customer attrition rates. There can be no assurance that customers will continue to purchase long distance or other services through the Company in the future or that the Company will not be subject to increased customer attrition rates. The Company believes that the high level of customer attrition in the industry is primarily a result of national advertising campaigns, telemarketing programs and customer incentives provided by major competitors. There can be no assurance that customer attrition rates will not increase in the future, which could have a material adverse effect on the Company's operating results. Ability to Manage Growth; Rapid Expansion of Operations The Company is pursuing a new business plan that, if successfully implemented, will result in rapid growth and expansion of its operations, which will place significant additional demands upon the Company's current management. If this growth is achieved, the Company's success will depend, in part, on its ability to manage this growth and enhance its information, management, operational and financial systems. There can be no assurance that the Company will be able to manage expanding its operations. The Company's failure to manage growth effectively could have a material adverse effect on the Company's business, operating results and financial condition. Potential Impact of the Bell Atlantic Litigation In December 1997, the Company filed suit against Bell Atlantic for breaches of its agency contract, including the failure of Bell Atlantic's retail division to pay $14 million in agency commissions (approximately $11.5 million as of November 10, 1998) owed to the Company. The Company is vigorously pursuing this suit. Although the Company believes the collection of the agency commissions sought in the suit is probable, there can be no assurance that the Company will be successful in collecting these commissions. If the Company fails to collect any of the amounts sought or if their collection becomes less than probable, the Company would be required to write off the amounts reflected in its financial statements that it is unable to collect or for which collection becomes less than probable. Delay in the collection or write-off of the agency commissions sought may also adversely affect the Company. In addition, the Company must use Bell Atlantic infrastructure for nearly all of the local telephony services that it currently provides and, although Bell Atlantic is prohibited by federal law from discriminating against the Company, there can be no assurance that the litigation with Bell Atlantic will not negatively affect the Company's relationships with Bell Atlantic's wholesale division. Dependence on Key Personnel The Company believes that its continued success will depend to a significant extent upon the abilities and continued efforts of its management, particularly members of its senior management team. The loss of the services of any of such individuals could have a material adverse effect on the Company's results of operations. The success of the Company will also depend, in part, upon the Company's ability to identify, hire and retain additional key management as well as highly skilled and qualified sales, service and technical personnel. Competition for qualified personnel in the telecommunications industry is intense, and there can be no assurance that the Company will be able to attract and retain additional employees and retain its current key employees. The inability to hire and retain such personnel could have a material adverse effect on the Company's business. Competition The Company operates in a highly competitive environment and has no significant market share in any market in which it operates. The Company expects that it will face substantial and growing competition from a variety of data transport, data networking and telephony service providers due to regulatory changes, including the continued implementation of the Telecommunications Act of 1996 (the ''Telecommunications Act''), and the increase in the size, resources and number of such participants as well as a continuing trend toward business combinations and alliances in the industry. The Company faces competition for the provision of integrated telecommunications services as well as competition in each of the individual market segments that comprise the Company's integrated approach. In each of these market segments, the Company faces competition from larger, better capitalized incumbent providers, which have long standing relationships with their customers and greater name recognition than the Company. Regulation The Company's local and long distance telephony service, and to a lesser extent its data services, are subject to federal, state, and, to some extent, local regulation. The Federal Communications Commission (the ''FCC'') exercises jurisdiction over all telecommunications common carriers, including the Company, to the extent that they provide interstate or international communications. Each state regulatory commission retains jurisdiction over the same carriers with respect to the provision of intrastate communications. Local governments sometimes impose franchise or licensing requirements on telecommunications carriers and regulate construction activities involving public right-of-way. Changes to the regulations imposed by any of these regulators could affect the Company. While the Company believes that the current trend toward relaxed regulatory oversight and competition will benefit the Company, the Company cannot predict the manner in which all aspects of the Telecommunications Act will be implemented by the FCC and by state regulators or the impact that such regulation will have on its business. The Company is subject to FCC and state proceedings, rulemakings, and regulations, and judicial appeal of such proceedings, rulemaking and regulations, which address, among other things, access charges, fees for universal service contributions, ILEC resale obligations, wholesale rates, and prices and terms of interconnection and unbundling. The outcome of these rulemakings, judicial appeals, and subsequent FCC or state actions may make it more difficult or expensive for the Company or its competitors to do business. Such developments could have a material effect on the Company. The Company also cannot predict whether other regulatory decisions and changes will enhance or lessen the competitiveness of the Company relative to other providers of the products and services offered by the Company. In addition, the Company cannot predict what other costs or requirements might be imposed on the Company by state or local governmental authorities and whether or not any additional costs or requirements will have a material adverse effect on the Company. Risks Associated With Possible Acquisitions As it expands, the Company may pursue strategic acquisitions. Acquisitions commonly involve certain risks, including, among others: difficulties in assimilating the acquired operations and personnel; potential disruption of the Company's ongoing business and diversion of resources and management time; possible inability of management to maintain uniform standards, controls, procedures and policies; entering markets or businesses in which the Company has little or no direct prior experience; and potential impairment of relationships with employees or customers as a result of changes in management. There can be no assurance that any acquisition will be made, that the Company will be able to obtain any additional financing needed to finance such acquisitions and, if any acquisitions are so made, that the acquired business will be successfully integrated into the Company's operations or that the acquired business will perform as expected. The Company has no definitive agreement with respect to any acquisition, although from time to time it has discussions with other companies and assesses opportunities on an ongoing basis. Year 2000 Compliance The Company has assessed its systems and expects all of them to be year 2000 compliant by the end of 1998. However, there can be no assurance that all systems will function adequately until the occurrence of year 2000. In addition, if the systems of other companies on whose services the Company depends or with whom the Company's systems interface are not year 2000 compliant, there could be a material adverse effect on the Company. Control By Principal Shareholders; Voting Agreement As of November 9, 1998, the officers and directors and parties affiliated with or related to such officers and directors controlled approximately 48.5% of the outstanding voting power of the Common Stock. Robert J. Fabbricatore, the Chairman and Chief Executive Officer of the Company, beneficially owns approximately 27.5% of the outstanding shares of Common Stock. Consequently, the officers and directors will have the ability to exert significant influence over the election of all the members of the Company's Board, and the outcome of all corporate actions requiring stockholder approval. In addition, Mr. Fabbricatore has agreed to vote the shares beneficially owned by him in favor of the election to the Company's Board of Directors of up to two persons designated by the holders of a majority of the Series A Convertible Preferred Stock. Impact Of Technological Change The telecommunications industry has been characterized by rapid technological change, frequent new service introductions and evolving industry standards. The Company believes that its long-term success will increasingly depend on its ability to offer integrated telecommunications services that exploit advanced technologies and anticipate or adapt to evolving industry standards. There can be no assurance that (i) the Company will be able to offer new services required by its customers, (ii) the Company's services will not be economically or technically outmoded by current or future competitive technologies, (iii) the Company will have sufficient resources to develop or acquire new technologies or introduce new services capable of competing with future technologies or service offerings (iv) all or part of the ICN or the CTC Information System will not be rendered obsolete, (v) the cost of the ICN will decline as rapidly as that of competitive alternatives, or (vi) lower retail rates for telecommunications services will not result from technological change. In addition, increases in technological capabilities or efficiencies could create an incentive for more entities to become facilities-based ICPs. Although the effect of technological change on the future business of the Company cannot be predicted, it could have a material adverse effect on the Company's business, results of operations and financial condition. Possible Volatility Of Stock Price The stock market historically has experienced volatility which has affected the market price of securities of many companies and which has sometimes been unrelated to the operating performance of such companies. In addition, factors such as announcements of developments related to the Company's business, or that of its competitors, its industry group or its customers, fluctuations in the Company's results of operations, a shortfall in results of operations compared to analysts' expectations and changes in analysts' recommendations or projections, sales of substantial amounts of securities of the Company into the marketplace, regulatory developments affecting the telecommunications industry or data services or general conditions in the telecommunications industry or the worldwide economy, could cause the market price of the Common Stock to fluctuate substantially. Absence Of Dividends The Company has not paid and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company intends to retain its earnings, if any, for use in the Company's growth and ongoing operations. In addition, the Goldman Sachs/Fleet Loan and Security Agreement provides that without the Lenders' prior written consent, the Company may not make any distribution or declare any dividends in cash or property other than stock during the three-year term of the Loan and Security Agreement. In addition, the terms of the Series A Convertible Preferred Stock restrict, and the terms of future debt financings are expected to restrict, the ability of the Company to pay dividends on the Common Stock. Potential Effect Of Anti-takeover Provisions And Issuances Of Preferred Stock Certain provisions of the Company's Articles of Organization and Bylaws and the Massachusetts Business Corporation Law may have the effect of delaying, deterring or preventing a change in control of the Company or preventing the removal of incumbent directors. The existence of these provisions may have a negative impact on the price of the Common Stock and may discourage third party bidders from making a bid for the Company or may reduce any premiums paid to stockholders for their Common Stock. In addition, the Company's Board of Directors has the authority without action by the Company's stockholders to issue shares of the Company's Preferred Stock and to fix the rights, privileges and preferences of such stock, which may have the effect of delaying, deterring or preventing a change in control. Certain provisions of the Company's outstanding Series A Convertible Preferred Stock which provide for payment of the liquidation preference in cash upon the consummation of certain transactions may have the effect of discouraging third parties from entering into such transactions.
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