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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock.
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $38,228,190, on July 10, 1998, based on the closing
sale price of the registrant's Common Stock as reported on the Nasdaq National
Market as of such date.
At July 10, 1998, 9,978,142 shares of the Registrant's Common Stock, $.01 par
value, were outstanding.
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PART I
Certain statements regarding the Company contained in this Annual Report on Form
10-K including, without limitation, certain statements under the headings
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" relating to the Company's business plan, future
profitability, expansion, deployment of facilities, future operations and
availability of capital and other future plans, events and performance and other
statements located elsewhere herein, are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. No assurance can be given
that the future results covered by the forward looking statements will be
achieved. All forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those expressed or implied in the
forward-looking statements for a variety of reasons. These reasons include, but
are not limited to, factors outlined in Exhibit 99.1 filed with this Annual
Report on Form 10-K. The Company does not undertake to update or revise its
forward-looking statements publicly even if experience or future changes make it
clear that any projected results expressed or implied therein will not be
realized.
ITEM 1. BUSINESS
OVERVIEW
CTC Communications Corp. ("CTC" or 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 181-member direct sales force and 85 customer care
representatives located in 16 branch offices throughout the region. As of March
31, 1998, after only three months as an ICP, the Company had sold 21,613 local
access lines of which 17,637 lines had already been provisioned.
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, the Company managed relationships with approximately 7,000
customers who purchased in excess of $200 million of annual local
telecommunications services for calendar year 1997, representing an estimated
280,000 local access lines at year end. In December 1997, the Company left the
Bell Atlantic agency program to become an ICP using its well-developed franchise
and infrastructure to capitalize on market opportunities created by
deregulation. As an ICP, the Company is utilizing 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.
The Company plans to expand geographically and add facilities assuming the
availability of financing. The Company intends to expand within its existing
markets and into six additional states in the Boston-Washington, D.C. corridor,
plans to open more than 20 new branch offices and hire more than 200 additional
sales personnel. In addition, beginning in late 1998, the Company intends to
deploy a state-of-the-art, data centric, packet-switched Integrated
Communications Network ("ICN"), initially in the Company's existing markets and
in new markets as customer demand and concentrations warrant.
INTERIM CREDIT FACILITY COMMITMENT. The Company has obtained a commitment
for an interim credit facility (the "Interim Facility") from the lender under
the Company's existing credit facility (the "Credit Facility"). The Interim
Facility, which would mature on June 30, 1999, would provide secured revolving
loans of up to $20 million to refinance the Credit Facility, to fund capital
expenditures and operating losses and for general corporate purposes. Borrowing
for capital expenditures in excess of $1 million would be limited to the extent
of collection of the Bell Atlantic agency commissions under dispute and by
financial covenants. The commitment, which is subject to certain conditions,
extends to September 30, 1998. The Company also agreed to reduce availability
under the Credit Facility to $9 million, and the lender has extended its
waiver of existing covenant defaults through September 30, 1998. The Company
paid fees in connection with obtaining this commitment and waiver of $500,000
and an additional fee of $300,000 would be payable if the Company draws on the
Interim Facility. If the Interim Facility is outstanding at various dates from
October 31, 1998 through June 30, 1999, the Company has agreed to issue to the
lender warrants to purchase in the aggregate up to 5% of the Company's
outstanding Common Stock on a fully diluted basis at exercise prices equal to
the market value on the respective dates of issuance.
SPECTRUM COMMITMENT. To satisfy a condition of the Interim Facility, the
Company has obtained a commitment from Spectrum Equity Investors II L.P.
("Spectrum") that at any time prior to June 30, 1999, Spectrum will upon the
request of the Company, purchase an additional $5 million in Preferred Stock,
which would have the same terms as the Series A Convertible Preferred Stock (the
"Interim Spectrum Financing"). In consideration of this commitment, the Company
has agreed to issue to Spectrum five-year warrants to purchase 55,555 shares of
Common Stock, exercisable at $9 per share.
SERVICES
The Company offers the following services:
LOCAL TELEPHONE SERVICES. The Company's services include the connections
between customers' telecommunications equipment and the local telephone network
and/or multiple company locations. For customers with multiple locations served
from the same central office, the Company offers a wide array of Centrex
products and services. For large customers or customers with specific
requirements, the Company integrates customer-owned Private Branch Exchange
("PBX") systems with analog or digital PBX trunks. In addition to providing
standard dial
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tone services, the Company provides all associated call processing features as
well dedicated private lines for both voice and data applications.
LONG DISTANCE SERVICES. The Company offers a full range of domestic
(interLATA and intraLATA) and international long distance services including
"1+" outbound calling, inbound toll free service, standard and customized
calling plans and related services such as calling cards, operator assistance,
and conference calling.
HIGH SPEED DATA SERVICES. The Company offers a wide array of dedicated and
switched high speed digital data services. Dedicated services include DDS, DS-1
(T-1), Fiber Distributed Data Interface ("FDDI") and DS-3. Switched or virtual
digital services include Integrated Services Digital Network ("ISDN"), Frame
Relay and ATM.
INTERNET SERVICES. The Company offers dedicated high speed Internet access
and services via DDS, Frame Relay, T-1 and T-3 connections. In addition, the
Company offers switched digital access to the Internet via ISDN. In support of
these connections, the Company provides the necessary communications hardware,
configuration support, domain registration as well as other support services on
a 24-hour, 7-day a week basis.
WHOLESALE SERVICES TO ISPS. The Company supplements its core end user
product offerings by providing a full array of local services to Internet
Service Providers ("ISPs"), including telephone numbers and switched and
dedicated access to the Internet.
POSSIBLE FUTURE SERVICES. Once its ICN is deployed, the Company plans to
offer systems integration, consulting and network monitoring services,
customized Virtual Private Networks ("VPNs") utilizing IP, data network product
packages and voice over IP services.
SALES AND CUSTOMER CARE
SALES AND SERVICE INFRASTRUCTURE. The Company markets telecommunications
services by seeking to develop long-term business relationships with its
customers and offering them comprehensive management of their telecommunications
requirements. Each customer of the Company is assigned a local dedicated Company
team consisting of a sales executive and a customer care coordinator. This team
provides a single point of contact for the customer's needs, working together to
design, implement and maintain an integrated telecommunications solution. The
team also reviews and updates the customer's services on a regular basis.
The Company's services are currently provided through 181 sales
executives and 85 customer care coordinators located in 16 branch sales
offices servicing markets throughout Connecticut, Maine, Massachusetts, New
Hampshire, New York, Rhode Island and Vermont. In addition, the Company
maintains an agency office in California with an additional five sales and
service personnel.
CUSTOMER SALES AND SERVICE MODEL. Sales executives meet with prospective
customers to understand their business and telecommunications requirements and
analyze their current usage and costs. Sales executives outline the range of
services and potential savings offered by the Company, discuss the benefits of
the Company's comprehensive customer care program and develop Account
Telemanagement Plans for potential customers designed to balance network expense
and utility. Sales executives work with their existing customers through regular
telephone calls and meetings to review the customers' telecommunications usage
and requirements and to update their suite of services and network design. This
relationship-centered sales approach assists sales executives in monitoring
customers' demands and selling additional services into customers' consumption
patterns.
Sales executives regularly participate in training programs on subjects
such as solution-oriented sales, comprehensive customer care, network design and
other technical features of the Company's services. The Company seeks to
motivate and retain its sales executives through extensive training as well as a
commission structure which
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currently bases approximately 45% of a sales executive's compensation on
annualized billing revenues and 25% on customer satisfaction.
CUSTOMER CARE. Customer care coordinators trained in the Company's service
offerings work in direct support of sales executives in each branch location.
The Company's reiterative, multi-step customer care process provides an ongoing
and comprehensive service program ranging from long-term consultative planning
to day-to-day handling of service issues.
CTC's customer care program is designed to provide prompt action in
response to customer inquiries and complaints and a dedicated team approach to
sales and service. The local branch offices are staffed 12 hours a day, 5 days a
week. At other times, incoming calls automatically roll over to a central
customer care center which is staffed 24 hours a day, 7 days a week. If the
customer care coordinator assigned to a particular account is not available, the
customer's request is accommodated by another customer service representative.
The Company believes that its customer care coordinators are motivated to
provide the highest level of customer care as a significant portion of their
compensation is based on customer satisfaction.
THE CTC INFORMATION SYSTEM
The CTC Information System is comprised of five central applications which
fully integrate the Company's sales and account management, customer care,
provisioning, billing and financial processes. Automation of each of these
processes is designed to provide for high volume and accurate throughput, timely
installation, accurate billing feeds and quality customer service. Data entered
in one application is simultaneously exported into all other applications. Each
branch office is served by a LAN connected via Frame Relay to the central
processor. From their branch desktops or docking stations, the Company's
employees have online access to all of the Company's operational systems and
applications. The system also interfaces with the Company's network suppliers
for ordering, repair, status reporting and billing feeds.
When an order is placed by a sales executive, the CTC Information System
electronically directs it to the appropriate supplier(s) and monitors and
reports any delays in the provisioning. Once the order is completed, the CTC
Information System automatically removes it from the in-process order file,
updates the customer's service inventory and network configuration, initiates
billing, posts the sales executive's commission and updates the branch office,
area and Company financial reports.
Sales and Account Management. The CTC Account Management System, the hub of
the CTC Information System, stores all customer-related information, such as
location detail, contact information, transaction history and account profile.
The CTC Account Management System also feeds CTC's Customized Sales System, a
fully-integrated database which provides sales personnel with access to
information for pricing services, generating customized proposals and customer
correspondence, tracking sales performance, referencing methods and procedures,
service descriptions, competitive information and historical profiles, which
include details of installed services, recent transactions and billing history,
for current and prospective customers. The CTC Customized Sales System can be
used both on- and off-line, and all entries made while off-line are
automatically updated to the central processor and all relevant data is
simultaneously exported to the other central applications each time a laptop is
reconnected to the network.
Customer Care. Through the CTC Account Care System, customer care
coordinators can review installed services, make additions, changes and
deletions to accounts, initiate and track repair and service work and review
past billing for any customer. This closed loop application provides automatic
follow up and records all transactions in the customer history file. The orders
and repair requests input through the CTC Account Care System are automatically
fed into the CTC Provisioning System.
Provisioning. Through the CTC Provisioning System, customer orders are
directed electronically to the Company's suppliers via file transfer or
electronic data interchange. All orders are tracked through the CTC Account
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Care System from initiation through completion, and an exception is noted when
an order or process has not been fulfilled in the estimated time frame. The
proactive nature of the system affords the sales executive or customer care
coordinator the opportunity to get the installation process back on track, or at
least notify the customer of the delay. Once the order has been fulfilled, the
information is automatically fed to the CTC Billing System to initiate billing
for the newly provisioned services.
Billing and Customer Interface. The CTC Billing System is a fully-
convergent system, billing all of the services the Company provides to its
customers on a single bill. The CTC Billing System, available to customers on
both diskette and CD-Rom with accompanying software, allows the customer to
review historic bill detail, perform customized usage analyses and download
information directly to their own accounting applications. Through the
IntelliVIEW application, a secure Web-based application, customers have near
real-time online access to the CTC Billing System via the Internet and are able
to review and analyze their bills online. Paper statements generated by the CTC
Billing System offer the Company's customers different telemanagement formats.
The CTC Billing System was launched in October 1997, billing long distance
services and subsequently Internet access, private data services and Frame Relay
services and began billing local services in January 1998 when the Company began
operations as an ICP.
Financial. Data from the CTC Billing System is automatically exported to
the CTC Financial System. Through its integration with the other applications,
the CTC Financial System tracks and prepares reports on sales activity,
commissions, branch operations, branch profitability, cash flows and compiles
all of this data in preparing the Company's periodic financial reports. The
system also provides for internal controls for revenue tracking and costing. The
integrated nature of the CTC Information System allows the Company to operate
each branch as a separate profit and loss center.
THE CTC INTEGRATED COMMUNICATIONS NETWORK
The Company's ICN is being designed as a state-of-the-art digital network
with data and long distance services The ICN is expected to be comprised of data
and long distance switches capable of handling Asynchronous Transfer Mode
("ATM"), Internet Protocols ("IP"), and Ethernet and Frame Relay protocols
interconnected by leased transmission facilities. The ICN is being designed to
provide customers with dedicated DS-1 or other broadband access and to bundle a
variety of voice and data services on one digital platform. The data services
planned for the ICN include point-to-point private line, Frame Relay, Internet
access and virtual private network services for on-net data traffic as well as
network-to-network interface points to other data carrier networks and Internet
service providers for traffic which must travel off-net. The Company plans to
lease local dialtone services until these services can be fully integrated into
a packet-switched network architecture.
During the initial phase of network deployment, CTC intends to deploy a
network operations center and data and long distance toll switching equipment in
hub and node locations in the New England and New York region where the Company
has an established customer base. As the Company expands into new markets, it
plans to deploy its network as customer demand and concentrations warrant.
In May 1998, the Company signed agreements with a network services
integrator to design, engineer and manage the buildout of the ICN in the
Company's existing markets. Under the terms of the agreements, the network
integrator will (i) provide an initial evaluation of the Company's proposed
network, (ii) create a detailed network design, (iii) assist the Company in
acquiring network components and network operations center system components,
(iv) develop the appropriate software interfaces to the Company's Operational
Support System, and (v) supervise construction, testing and validation of the
ICN in the Company's existing markets, primarily on a fixed fee basis.
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
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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.
Competition for Provision of Integrated Telecommunications Services. The
current regulatory trend toward fostering competition and opening markets, as
well as the continued consolidation of telecommunication service providers, has
increased the number of competitors able to provide integrated
telecommunications services similar to those provided by the Company. Many
facilities-based ICPs and long distance carriers have committed substantial
resources to building their networks or to purchasing ICPs or Interexchange
Carriers ("IXCs") with complementary facilities. By building or purchasing a
network or entering into interconnection agreements or resale agreements with
Incumbent Local Exchange Carriers ("ILECs"), including Regional Bell Operating
Companies ("RBOCs"), a facilities-based provider can offer single source local
and long distance services similar to those offered or to be offered by the
Company. Such additional alternatives may provide such competitors with greater
flexibility and a lower cost structure than the Company. In addition, some of
these ICPs and other facilities-based providers of local exchange service are
acquiring or being acquired by IXCs that are not subject to joint marketing
restrictions.
Once the RBOCs are allowed to offer widespread in-region long distance
services under the terms of Section 271 of the Telecommunications Act, both they
and the largest IXCs will be in a position to offer single-source local and long
distance services similar to those offered by the Company. Currently, no RBOC is
permitted to provide in-region long distance services, although there is no
assurance that this will continue to be the case. The availability of broad-
based local resale and introduction of facilities-based local competition are
required before the RBOCs may provide in-region interLATA long distance
services. In 1997, the FCC denied the applications of several RBOCs for in-
region interLATA long distance authority. Further FCC rulings may be complicated
by a Texas Federal District Court ruling on December 31, 1997 (the "Wichita
Falls Decision") that Section 271 of the Telecommunications Act is
unconstitutional. On February 11, 1998, this court granted a request by the FCC
and a number of long distances carriers to stay the decision pending an appeal
to the United States Court of Appeals for the Fifth Circuit. If this decision is
upheld and/or repeated in other jurisdictions, RBOC entry into the in-region
interLATA long distance markets may occur much more rapidly than envisioned
under the Telecommunications Act. Although the outcomes of court actions cannot
be predicted, decisions permitting early entry of the RBOCs into in-region,
interLATA long distance could have a material adverse effect on the Company's
business.
Although the Telecommunications Act and other federal and state regulatory
initiatives will afford the Company new business opportunities, regulators are
likely to provide the ILECs with an increased degree of flexibility with regard
to pricing of their services as competition increases. If the ILECs elect to
lower their rates and sustain lower rates over time, this may adversely affect
the revenues of the Company and place downward pressure on the rates the Company
can charge. The Company believes the effect of lower rates may be offset by the
increased revenues available by offering new services to its target customers,
but there can be no assurance that this will occur. In addition, if future
regulatory decisions afford the Local Exchange Carriers ("LECs") excessive
pricing flexibility or other regulatory relief, such decisions could have a
material adverse effect on the Company.
Competition for Provision of Local Exchange Services. In the local exchange
market, ILECs, including RBOCs, continue to hold near-monopoly positions. The
Company also faces competition or prospective competition from one or more ICPs,
many of which have significantly greater financial resources than the Company,
and from other competitive providers, including non-facilities-based providers.
Various carriers have entered into interconnection agreements with ILECs and
either have begun or in the near future likely will begin offering local
exchange service in each of the Company's markets, subject to joint marketing
restrictions. The largest long distance carriers (AT&T, MCI, Sprint and any
other carrier with 5% or more of the pre-subscribed access lines), however, are
prevented under the Telecommunications Act from bundling local services resold
from an RBOC in a particular state with their long
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distance services until the earlier of (i) February 8, 1999 or (ii) the date on
which the RBOC whose services are being resold obtains in-region long distance
authority in that state. In the event the RBOCs soon begin offering in-region
long distance service, the largest long distance carriers will be permitted to
bundle local and long distance services that much earlier, removing one of the
competitive advantages currently enjoyed by the Company. In addition to these
long distance service providers, entities that currently offer or are
potentially capable of offering switched services include ICPs, cable television
companies, electric utilities, other long distance carriers, microwave carriers,
wireless telephone system operators and large customers who build private
networks.
Wireless telephone system operators have become competitors in the
provision of local services because the FCC has authorized cellular, personal
communications service, and other Commercial Mobile Radio Services ("CMRS")
providers to offer wireless services to fixed locations, rather than just to
mobile customers. This authority to provide fixed as well as mobile services
will enable CMRS providers to offer wireless local loop service and other
services to fixed locations (e.g., office and apartment buildings) in direct
competition with the Company and other providers of traditional fixed telephone
service. In addition, the FCC recently auctioned substantial blocks of spectrum
for fixed use including, among other things, local exchange service.
Exploitation of this spectrum is expected to increase competition in the local
market.
The World Trade Organization ("WTO") recently concluded an agreement (the
"WTO Agreement") that could result in additional competitors entering the U.S.
local and long-distance markets. Under the WTO Agreement, the United States
committed to open telecommunications markets to foreign-owned carriers. The FCC
has adopted streamlined procedures for processing market entry applications from
foreign carriers, making it easier for such carriers to compete in the U.S.
There can be no assurance that the WTO Agreement will not have a material impact
on the Company's business.
Competition for Provision of Long Distance Services. The long distance
market is significantly more competitive than the local exchange market with
numerous entities competing for the same customers. In addition, customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives by competitors, resulting in a high average
churn rate. Prices in the long distance market have declined significantly in
recent years and are expected to continue to decline. Competition in this market
will further increase once RBOCs are permitted to offer interLATA long distance
services.
Data and Internet Services. The market for high speed data services and
access to the Internet is highly competitive, and the Company expects that
competition will continue to intensify. The Company's competitors in this market
will include ISPs, other telecommunications companies. Many of these competitors
have greater financial, technological and marketing resources than those
available to the Company. In addition, various RBOCs have filed petitions to the
FCC requesting regulatory relief in connection with the provision of their own
data services.
GOVERNMENT 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 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.
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The Company is subject to FCC and state proceedings, rulemakings, and
regulations, and judicial appeal of such proceedings, rulemakings 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
proceedings, 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.
Federal Legislation
The Telecommunications Act requires that local and state barriers to entry
into the local exchange market be removed and has established broad uniform
standards under which the FCC and the state commissions are to implement local
competition and co-carrier arrangements in the local exchange market. Under
certain conditions and subject to certain exceptions, major ILECs are now
required to make available at a discount for resale by new entrants all services
offered by the LEC on a retail basis. The Telecommunications Act also imposes
significant obligations on the RBOCs and other ILECs, including the obligation
to interconnect their networks with the networks of competitors. Each ILEC is
required not only to open its network but also to "unbundle" various elements of
the network, such as the local loop and switching or transport functions. States
have begun, and in a number of cases completed, regulatory proceedings to
determine the pricing of these unbundled network elements and services, and the
results of these proceedings will determine whether it is economically
attractive to use these elements.
All LECs, including Competitive Local Exchange Carriers ("CLECs"), must
fulfill various obligations so as not to impede the ability of other carriers to
provide services. These include the duty to permit resale of their services, the
duty to provide number portability and dialing parity, the duty to provide
access for competitors to poles, ducts, conduits and rights-of-way, and the duty
to provide reciprocal compensation for the transport and termination of
telecommunication traffic to and from other LEC's networks.
Section 271 of the Telecommunications Act provides that the RBOCs must
fulfill additional conditions before they will be permitted to offer in-region
interLATA toll services: (1) the RBOC must have met the requirements of the
Telecommunications Act's 14-point competitive checklist and (2) the RBOC must
have entered into an approved interconnection agreement with one or more
unaffiliated, facilities-based competitors in some portion of the state pursuant
to which such competitors provide both business and residential service (or that
by a date certain no such competitors have "requested" interconnection as
defined in the Telecommunications Act). If the FCC determines, after
consultation with the Department of Justice and the relevant state commissions,
that these requirements have been met and that the RBOC's provision of in-region
long distance services in a state is in the public interest, the FCC must
authorize the RBOC to provide such services. In 1997, the FCC denied the
application of several RBOCs for in-region long distance authority. Unless
rendered moot as a result of the Wichita Falls Decision, the Company anticipates
that a number of RBOCs will file additional applications in 1998. As noted
above, however, the Wichita Falls Decision found Section 271 of the Act, among
others, to be unconstitutional. Accordingly, the Wichita Falls Decision, to the
extent that it is upheld, may reduce the incentive that RBOCs have to open their
networks to competition.
The Telecommunications Act is meant to eliminate state and local statutory
and regulatory barriers to entry, thus accelerating the process of creating a
competitive environment in all markets. This preemption of state laws barring
local competition and the relaxation of regulatory restraints should enhance the
Company's ability to expand its service offerings nationwide. At the same time,
the Telecommunications Act will also substantially increase the competition the
Company will face in its various markets.
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Federal Regulation
The FCC has issued a variety of regulations pursuant to the
Telecommunications Act and may issue numerous additional such regulations. The
outcome of these various ongoing FCC rulemaking proceedings or judicial appeals
of such proceedings could materially affect the Company's operations.
In May 1997, the FCC issued new regulations regarding the implementation of
the universal service program and the assessment of access charges on carriers
obtaining access to local exchange networks. All telecommunications carriers,
including the Company, that provide interstate services are required to
contribute, on a equitable and nondiscriminatory basis, to the preservation and
advancement of universal service pursuant to a universal funding service
mechanism established by the FCC. Mandatory contribution amounts are revised
regularly and in May 1997 both the access charge and universal service regimes
were substantially revised. As a result of these changes, the costs of business
and multiple residential telephone lines are expected to increase. In addition,
the new regulations require a reseller, such as the Company, to begin
contributing to the universal service programs for low-income consumers and
high-cost, rural and insular areas on the basis of the reseller's interstate and
international revenues.
The Telecommunications Act provides that individual state utility
commissions can, consistent with FCC regulations, prohibit resellers from
reselling a particular service to specific categories of customers to whom the
ILEC does not offer that service at retail. In August 1996, the FCC issued
detailed regulations providing that many such limitations are presumptively
unreasonable and that states may enact such prohibitions on resale only in certa
in limited circumstances.
The Telecommunications Act also provides that state commissions shall
determine the wholesale rates for local telecommunications services (i.e., the
rates charged by ILECs to ICPs such as the Company) on the basis of retail rates
less "avoided costs," i.e., marketing, billing, collection and other
administrative costs avoided by the ILEC when it sells at wholesale. In August
1996, the FCC issued detailed regulations establishing an interim default
discount of between 17% to 25%. Although this portion of the FCC's rules has
been overturned on appeal (see below), in practice state commissions have
generally adopted discount percentages that fall within the 17-25% default
range.
In August 1996, the FCC issued regulations that, among other things, set
minimum standards governing the terms and prices of interconnection and access
to unbundled ILEC network elements and mandating that ILECs negotiate
interconnection or resale arrangements in good faith. These regulations
indirectly affect the price at which the Company's new facilities-based
competitors may ultimately provide service. The Telecommunications Act provides
that state commissions shall determine the rates charged for such unbundled
elements on the basis of cost plus a reasonable profit. The Company is unable to
predict the final form of such state regulation, or its potential impact on the
Company or the local exchange market in general.
In 1997, the U.S. Court of Appeals for the Eighth Circuit vacated certain
portions of FCC regulations, including, among other things, provisions
addressing the availability of certain services for resale, establishing a
methodology for pricing interconnection and unbundled network elements, a rule
permitting new entrants to "pick and choose" among various provisions of
existing interconnection agreements, and the obligation of incumbent LECs to
combine network elements. The U.S. Supreme Court has agreed to review the Eighth
Circuit's decision. If upheld, the rulings could make it more difficult for the
Company to take advantage of ILEC services.
The FCC recently issued regulations to eliminate the ability of nondominant
carriers such as the Company to file interstate long-distance tariffs of rates
and operating procedures and permitting (but not requiring) non-dominant local
carriers such as the Company to withdraw their tariffs for interstate services.
Various carriers have filed suit to overturn the FCC regulations, and the U.S.
Court of Appeals for the D.C. Circuit has stayed the regulations pending its
decision in that appeal, which is not expected until sometime later this year.
In the meantime, however, the FCC issued a Reconsideration Order (on August 20,
1997), which reverses certain aspects of the FCC's previous regulations. The
Reconsideration Order would still significantly limit the ability of carriers to
tariff long distance
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<PAGE>
services. When not allowed to tariff the long distance services it may seek to
provide, the Company would be required to provide service through a contract and
forego legal rights pertaining to reliance on a "filed rate."
In August 1997, the FCC issued rules transferring responsibility for
administering and assigning local telephone numbers from the RBOCs and a few
other LECs to a neutral entity in each geographic region in the United States.
In August 1996, the FCC issued new numbering regulations that (a) prohibit
states from creating new area codes that could unfairly hinder LEC competitors
(including the Company) by requiring their customers to use 10 digit dialing
while existing ILEC customers use 7 digit dialing, and (b) prohibit ILECs (which
are still administering central office numbers pending selection of the neutral
administrator) from charging "code opening" fees to competitors (such as the
Company) unless they charge the same fee to all carriers including themselves.
In addition, each carrier is required to contribute to the cost of numbering
administration through a formula based on net telecommunications revenues. In
July 1996, the FCC released rules requiring all LECs, including CLECs, to have
the capability to permit both residential and business consumers to retain their
telephone numbers when switching from one local service provider to another
(known as "number portability").
In August 1996 the FCC promulgated regulations that classify CMRS providers
as telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act as
other non-LEC telecommunications carriers, including the Company.
State Regulation
Certain local and long distance services have historically been classified
as intrastate and therefore subject to state regulation. As its local service
business and product lines expand, the Company will offer more intrastate
service and become increasingly subject to state regulation. The
Telecommunications Act maintains the authority of individual state utility
commissions to preside over rate and other proceedings, as discussed above, and
impose their own regulation of local exchange and interexchange services so long
as such regulation is not inconsistent with the requirements of the
Telecommunications Act. For instance, states impose tariff and filing
requirements, consumer protection measures and obligations to contribute to
universal and other funds.
The Company has state regulatory authority to provide competitive local
exchange services and interexchange services in the seven states in its current
market. The Company also has state regulatory authority to provide
interexchange services in approximately 16 additional states. In certain
states, in which the Company has or has had de minimis intrastate interexchange
revenues, the Company has not obtained authorization to provide such
interexchange services or has allowed such authorization to lapse. The Company
has either subsequently obtained, or is in the process of applying to obtain,
the appropriate authorization in these states.
Local Government Regulation
Should the Company decide to operate its own transport or other facilities
over public rights-of-way, it may be required to obtain various permits and
authorizations from municipalities in which it operates such facilities and
grant rights of way to other carriers. Some municipalities may impose such
restrictions regardless of whether an entity operates such facilities. The
actions of municipal governments in imposing conditions on the grant of permits
or other authorizations, or their failure to act in granting such permits or
authorizations, except as preempted by the FCC, could have a material adverse
effect on the Company's business.
EMPLOYEES
As of June 30, 1998, the Company employed 341 persons. None of the
employees is represented by a collective bargaining agreement.
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<PAGE>
ITEM 2. PROPERTIES
The Company is headquartered in leased space in Waltham, Massachusetts. The
Company also leases one office in California, two in Connecticut, five in
Massachusetts, two in Maine, one in New Hampshire, four in New York and one in
Vermont. Although the Company believes that its leased facilities are adequate
at this time, the Company expects to lease a significant number of additional
sales facilities in connection with its planned expansion in existing markets
and into new markets.
ITEM 3. LEGAL PROCEEDINGS
(a) Pending Legal Proceedings.
In December 1997, the Company terminated its agency contract and filed suit
(the "Bell Atlantic Litigation") against Bell Atlantic in federal court in the
Southern District of Maine for breaches of the contract, including the failure
of Bell Atlantic's retail division to pay $14 million in agency commissions
(approximately $11.3 million as of July 10, 1998) owed to the Company. The
Company also asserted violations by Bell Atlantic of antitrust laws and the
Telecommunications Act. Bell Atlantic filed counterclaims in federal court in
the Southern District of New York 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 (the "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. This prohibition will
terminate in December 1998, or upon the earlier dissolution of the TRO. The
Company has made a motion to dissolve the TRO and the federal court in Maine has
held a hearing to consider the Company's motion. Bell Atlantic's counterclaims
have been consolidated with the Company's suit in the federal court in the
Southern District of Maine. The Company estimates that the TRO applies to less
than 5% of the Company's target customers in its current markets. The Company
continues to provide many of these customers with other services such as long
distance and Internet access that are not covered by the terms of the TRO.
The Company is otherwise party to suits arising in the normal course of
business which management believes are not material individually or in the
aggregate.
(b) Legal Proceedings Terminated in the Fourth Quarter.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the symbol
"CPTL." The following tables set forth the ranges of the high and low sale
prices for the Company's outstanding Common Stock for the periods indicated.
-10-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended High Sale Low Sale
- ------------------ --------- --------
<S> <C> <C>
June 30, 1996 $18.00 $9.75
September 30, 1996 $13.75 $8.00
December 31, 1996 $11.75 $6.38
March 31, 1997 $ 9.13 $6.38
June 30, 1997 $10.00 $6.88
September 30, 1997 $ 9.75 $7.06
December 31, 1997 $15.94 $8.00
March 31, 1998 $14.94 $5.13
</TABLE>
As of July 10, 1998, there were 357 holders of record of the Company's
Common Stock. The Company believes there were in excess of 1,500 beneficial
holders of the Common Stock as of such date.
The Company has never paid a cash dividend on its Common Stock and has no
present intention of paying dividends in the foreseeable future. The Company
intends to retain earnings, if any, to develop and expand its business. 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 Common Stock.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The following selected financial data have been derived from the Company's
financial statements. The following data should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
Report on Form 10-K. All earnings per share and weighted average share
information included in the accompanying financial statements have been restated
to reflect the 25% stock split effected in Fiscal 1995, and the three-for-two
stock split and the two-for-one stock split effected in Fiscal 1996.
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands, except per share information)
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Agency revenues....................................... $14,483 $18,898 $25,492 $29,195 $24,775
Telecommunications revenues........................... 462 3,038 5,383 11,095 16,172
Total revenues................................... 14,945 21,936 30,875 40,290 40,947
Cost of telecommunications revenue.................... 369 2,451 4,242 8,709 14,038
Selling, general and administrative................... 14,484 17,319 20,009 23,820 31,492
Income (loss) from operations......................... 92 2,166 6,624 7,761 (4,583)
Income (loss) before income taxes..................... 141 2,322 6,830 7,960 (4,370)
Net income (loss)..................................... 75 1,472 4,094 4,683 (2,884)
Earnings (loss) per share
Basic............................................ 0.01 0.18 0.43 0.49 (0.29)
Diluted.......................................... 0.01 0.17 0.38 0.43 (0.29)
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands)
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............................. $ 1,239 $ 2,391 $ 3,942 $ 6,406 $ 2,168
Total assets.......................................... 5,399 7,726 12,509 20,186 30,967
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total long-term debt.................................. --- --- --- --- ---
Stockholders' equity.................................. 3,871 5,526 9,495 14,292 11,580
</TABLE>
ITEM 7. 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 is a rapidly growing ICP with a 14-year track record of
telecommunications marketing, sales and service experience. Building upon its
substantial experience in providing sophisticated telecommunications solutions,
the Company designs, sells and implements fully-integrated voice and data
solutions tailored to meet its customers needs. The Company offers local, long
distance, Internet access, Frame Relay and other data services on a single
integrated bill. The Company currently serves small to medium-sized business
customers primarily in seven Northeastern states through its 181-member direct
sales force and 85 customer care representatives located in 16 branch offices
throughout the region.
Since 1984, the Company has on several occasions successfully realigned its
strategy to capitalize on market opportunities and respond to change. CTC
originally sold key systems and PBX telephone systems. In 1984, after the
divestiture of AT&T, the Company became the first agent for any RBOC in the
United States. As an agent, CTC focused on selling point-to-point data
services, Centrex and NYNEX Corporation network-based local telecommunications
services primarily to medium size business customers. In 1994, the Company
added the sale of long distance services and subsequently, Frame Relay, Internet
access and other data services under its own brand name. In December 1997, the
Company left the Bell Atlantic agency program to become an ISP and sell local
telecommunications services under its own brand name as a complement to the
other services it offers.
Historically, CTC's revenues had consisted of agency revenues earned as an
agent, primarily for Bell Atlantic, and of telecommunications revenues earned
from the sale of long distance, Frame Relay, Internet access and other
communications services. For the nine months ended December 31, 1997, agency
revenues accounted for approximately 71% of the Company's revenues and
telecommunications revenues accounted for the remainder. As a result of the
Company's termination of its agency contract with Bell Atlantic in December
1997, the Company will no longer earn agency revenues from Bell Atlantic.
Telecommunications revenues are not expected to be affected in any material way
by the change in status. In addition, since becoming an ICP the Company has
derived, and expects to continue to derive, telecommunications revenue from the
sale of local telephone service under its own brand name.
Although management believes that the Company's facilities-based ICP
strategy will have a positive effect on the Company's results of operations over
the long term, this strategy is expected to have a negative effect on the
Company's financial condition and results of operations over the short term. The
Company anticipates significant losses and negative cash flow at least through
the fiscal year ending March 31, 1999, which the Company expects will be
primarily attributable to the deployment of the ICN and expected expansion of
operations.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
The results for the fiscal year ended March 31, 1998 ("Fiscal 1998")
reflect the Company's decision to terminate its agency relationship with Bell
Atlantic in December 1997 and commence operations as an ICP. This decision
adversely affected revenues and expenses to a certain extent in the third
quarter as the Company prepared for this transition and significantly affected
revenues in the fourth quarter after the transition had been effected. Total
revenues of $40,947,000 for Fiscal 1998 were essentially flat as compared to
$40,290,000 for the fiscal year ended March 31, 1997 ("Fiscal 1997"). Agency
revenues decreased 15% to $24,775,000 for Fiscal 1998 from $29,195,000 in Fiscal
1997, primarily as a result of fourth quarter revenues of only $194,000, as
compared to $8,354,000 for the same period of Fiscal 1997. This decrease
reflects the fact that the Company left the Bell Atlantic agency program in
December 1997, and thus no Bell Atlantic agency revenues were reported in the
fourth quarter of Fiscal 1998. Telecommunications revenues increased 46% to
$16,172,000 for Fiscal 1998 from $11,095,000 for Fiscal 1997. This increase
reflects the increased sales of long distance, Internet access, and frame relay
data services as well the commencement of the Company's sale of local
telecommunications services as an ICP in the fourth quarter of Fiscal 1998.
Although local telecommunications sales increased during the fourth quarter,
they were significantly less than expected by the Company as a result of the
imposition of the TRO in February 1998, thereby requiring the Company to sell
these local services only to new
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<PAGE>
customers, resulting in a longer sales cycle.
Costs of telecommunications revenues increased 61% to $14,039,000 for
Fiscal 1998 from $8,709,000 for Fiscal 1997. As a percentage of
telecommunications revenues, cost of telecommunications revenues was 87% for
Fiscal 1998 as compared to 78% for Fiscal 1997. This overall increase was due
primarily to increased sales of telecommunications services and increased costs
for those services sold. Due largely to the initiation of local
telecommunications sales in the fourth fiscal quarter, cost of
telecommunications revenues for this period increased 127% to $5,944,000 from
$2,615,000 for the same period in Fiscal 1997. These increases as a percentage
of revenues were attributable to fixed costs associated with the sale of local
telecommunications services, lower long distance rates extended to customers in
advance of rate decreases from CTC's long distance supplier, increased costs
associated with adding new customers and services, and costs associated with
phasing out the Company's debit card program. As a result, the Company believes
that gross margins for the fourth quarter are not representative and expects
gross margins to improve in future quarters.
Selling, general and administrative expenses increased 32% to $31,492,000
in Fiscal 1998 from $23,820,000 in Fiscal 1997. This increase was a result of
the increased number of sales and service employees hired in connection with the
strategy shift, increased payments of commission and bonuses, increased
corporate and administrative expenses, increased depreciation associated with
greater capital expenditures, expenses related to new branch openings and a
$1,200,000 charge for estimated costs of the Bell Atlantic litigation.
The Company reported a loss of $2,884,000 for Fiscal 1998 as compared to
net income of $4,683,000 for Fiscal 1997, primarily as the result of a
$6,008,000 loss in the fourth quarter.
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Total revenues for Fiscal 1997 increased 30% to $40,290,000 as compared to
$30,876,000 for the fiscal year ended March 31, 1996 ("Fiscal 1996"). Agency
revenues increased 15% to $29,195,000 in Fiscal 1997 as compared to $25,493,000
for Fiscal 1996 due to the addition of new customers, increased sales to
existing customers and the addition of new services to the Company's portfolio.
Effective January 1996, NYNEX reduced certain fees and commissions payable under
its 1996 agency agreement with the Company. As a result, although unit sales of
Centrex and Data Products, two flagship NYNEX products, increased 30% and 66%,
respectively, revenues increased only 15% as stated above.
Telecommunications revenues increased 106% to $11,095,000 for Fiscal 1997
from $5,383,000 for Fiscal 1996. This increase can be attributed to the addition
of new customers to the service, as well as the introduction of new products,
primarily Internet access.
Selling, general and administrative expenses increased 19% to $23,820,000
for Fiscal 1997 from $20,009,000 for Fiscal 1996. As a percentage of revenues,
these expenses were 59% for Fiscal 1997, as compared to 65% for Fiscal 1996. The
increase in selling, general and administrative expenses is attributable to the
increase in variable sales commission and bonus expenses incurred in connection
with the substantial increase in revenues. In addition, the Company increased
the number of sales offices, particularly in the Northeast, hired additional
sales executives, expanded the facilities at several of its existing sales
branches and made additional investments in its Information System in Fiscal
1997.
Net income increased to $4,683,000 in Fiscal 1997 from $4,094,000 in Fiscal
1996, as a result of revenue growth primarily in the Northeast, combined with a
continuing effort to control operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company funded its working capital and operating
expenditures primarily from cash flow from operations. Principally as a result
of Bell Atlantic's failure to pay approximately $14 million (approximately $11.3
million as of July 14, 1998) in agency commissions which the Company believes it
is owed under its former agency contract and losses incurred in connection with
CTC's transition to an ICP strategy, the Company required additional working
capital from outside sources. As of July 14, 1998, the Company borrowed $8.3
million under the Credit Facility, which CTC entered into in November 1997 in
anticipation of its transition to an ICP strategy. In April 1998, the Company
sold $12 million of Series A Convertible Preferred Stock and warrants (the
"Spectrum Financing") to Spectrum and other private investors in a private
placement.
The Company has sued Bell Atlantic and believes the collection of the
agency commissions is probable. However, there is no assurance that the Company
will be successful in collecting those commissions. If the Company fails to
collect any of the agency commissions sought or if their collection becomes less
than probable, the Company would be required to write off the amounts reflected
in its financial statements that it is unable to collect or for which collection
becomes less than probable. Delay in the collection of, or the write-off of, the
agency commissions may adversely affect the Company.
As of March 31, 1998, the Company was not in compliance with certain
covenants under the Credit Facility as a result of $6 million of net losses
incurred in the fourth quarter of Fiscal 1998 in conmnection with the Company's
transition to an ICP strategy. The Company has obtained waivers of these
defaults through September 30, 1998 and has agreed to reduce availability under
the Credit Facility to $9 million.
The Company has obtained a commitment for the Interim Facility from its
current lender. The Interim Facility, which would mature on June 30, 1999, would
provide secured revolving loans of up to $20 million to refinance the Credit
Facility, to fund capital expenditures and operating losses and for general
corporate purposes. The commitment, which is subject to certain conditions,
extends to September 30, 1998. To satisfy one of those conditions, the Company
has received a commitment from Spectrum to purchase $5 million of Preferred
Stock which extends until June 30, 1999. The Company believes that the Interim
Facility and the Interim Spectrum Financing, if required, together with cash on
hand would be sufficient to refinance the Credit Facility and to fund the
Company's existing operations for at least the next 12 months. However, CTC
would be required to delay its proposed geographic expansion and deployment of
facilities or to obtain additional financing within the next 6 months.
The implementation of the Company's business plan to further penetrate its
existing markets as an ICP, deploy the ICN in its existing markets, expand its
sales presence into six additional states in the Boston-Washington D.C. corridor
and enhance the CTC Information System and the repayment of the Credit Facility
will require the Company to raise significant capital. The Company does not
expect to consummate the $125 million private offering of senior discount notes
and warrants under Rule 144A which it has been seeking and is actively engaged
in the negotiation of commitments with alternative sources of capital to fund
its business plans. Although the Company is highly optimistic that it will be
successful in obtaining such financing based upon its negotiations, there can be
no assurance that the Company will be able to consummate financing in the
amount, on the terms and on the schedule required to implement the Company's
business plan, if at all.
The timing and amount of the Company's actual capital requirements may be
materially affected by many factors, including the timing and availability of
financing, 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.
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<PAGE>
YEAR 2000 COMPLIANCE
The Company has evaluated the effect of the year 2000 date on its
information systems and is implementing plans to ensure its systems and
applications will effectively process information necessary to support ongoing
operations of the Company in the year 2000 and beyond. The Company currently
expects that its systems will be year 2000 compliant by the end of 1998. Based
on management's current estimates, the costs of system modifications and
enhancements, which have been and will be expensed as incurred, are not expected
to be material to the results of operation or the financial position of the
Company.
The Company has made inquiries with its significant suppliers to determine
the extent to which the Company's interface systems and operations are
vulnerable to those third parties' failure to rectify their own year 2000
issues. There can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted and will not have an adverse
effect on the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements and Notes thereto comprising
a portion of this Annual Report on Form 10-K on pages F-1 to F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
<TABLE>
<CAPTION>
Other Capacities
Period Served in Which
Age as Director Currently Serving
--- ------------- -----------------
<S> <C> <C> <C>
Robert J. Fabbricatore 55 Since 1980 Chairman and Chief Executive Officer
Richard J. Santagati 54 Since 1991 None
J. Richard Murphy 53 Since 1995 None
Henry Hermann 56 Since 1996 Consultant
Ralph C. Sillari 43 Since 1997 None
William P. Collatos 44 Since 1998 None
Kevin J. Maroni 35 Since 1998 None
</TABLE>
Mr. Robert Fabbricatore, a founder of the Company and a Director since its
inception in 1980, became Chairman of the Board of Directors in March 1983 and
served as President from October 1993 to August 1995. Robert Fabbricatore is
the brother of Thomas Fabbricatore.
Mr. Santagati became a director of the Company in September 1991. He has
been the President of Merrimack College in North Andover, Massachusetts since
1994. Mr. Santagati was a partner of Lighthouse Management, Inc., a private
investment firm located in Boston, Massachusetts from 1991 to 1993 and, from
1991 to February 1994, the Chairman of the Board, Chief Executive Officer and
President of Artel Communications Corp., a publicly held data communications
firm located in Hudson, Massachusetts.
Mr. Murphy became a Director of the Company in August 1995. Mr. Murphy has
been the Director of the Financial Consulting Group of Moody, Cavanaugh and
Company, LLP, a North Andover, Massachusetts public accounting firm, since April
1996. Mr. Murphy was an officer, director and principal stockholder (ii) from
1990 to 1995 of Arlington Data Corporation, a systems integration company
located in Amesbury, Massachusetts; (ii) from 1992 to 1996 of Arlington Data
Consultants, Inc., a company engaged in the installation and maintenance of
computer systems and hardware; and (iii) from 1994 to 1996 of Computer Emporium,
Inc., a company engaged in processing parking violations for municipalities. In
June 1996, Arlington Data Corporation filed for bankruptcy under Chapter 11 of
the Bankruptcy Code.
Mr. Hermann became a director of the Company in September 1996. Since
November 1997, he has operated Hermann Companies, a financial services company
engaged in portfolio management, securities analysis and financial consulting.
Mr. Hermann is registered as an Investment Advisor with the State of Texas, a
Chartered Financial Analyst and, as an independent contractor, offers general
securities through Brokers Transaction Services. From May 1997 to November 1997,
he was employed by Kuhns Brothers & Company, Inc., as a principal and Executive
Vice President. For the previous nine years, he was employed by WR Lazard,
Laidlaw and Luther, Inc., a securities brokerage firm, as Vice President,
Securities Analyst and Portfolio Manager. Mr. Hermann has been an NASD Board of
Arbitrators Member since 1991. Mr. Hermann has provided financial consulting
services to the Company since 1993.
Mr. Sillari became a director of the Company in October 1997. Since 1991,
Mr. Sillari has been employed by Fleet National Bank where he is currently
Executive Vice President in the Business and Entrepreneurial Services Division
in Boston, Massachusetts.
Mr. Collatos became a director of the Company in April 1998 as a condition
to the Spectrum Financing. Mr.
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<PAGE>
Collatos is a founding General Partner of Spectrum. Prior to founding Spectrum
in 1994, Mr. Collatos was a founding General Partner of Media/Communications
Partners and a General Partner of TA Associates. Mr. Collatos is a director of
Galaxy Telecom Inc., TSR Paging Inc., Golden Sky Systems Inc., ITXC Corp. and
Internet Network Services Holdings Ltd.
Mr. Maroni became a director of the Company in April 1998 as a condition to
the Spectrum Financing. Mr. Maroni is a General Partner of Spectrum, which he
joined in 1994. Prior to joining Spectrum, he served as Manager, Finance and
Development at Time Warner Telecommunications, where he was involved in
corporate development projects. Mr. Maroni is a director of Pathnet, Inc.,
Formus Communications, Inc., WNP Communications, Inc. and American Cellular
Corp.
Pursuant to Section 50A of Chapter 156B of the Massachusetts General Laws
and as provided in the Company's Amended and Restated By-laws, the Board of
Directors is classified into three classes, as nearly as equal in number as
possible, so that each director (after a transitional period) will serve for
three years, with one class of directors being elected each year. The board is
currently comprised of two Class I Directors (Messrs. Hermann and Sillari), two
Class II Directors (Messrs. Murphy and Santagati) and three Class III Directors
(Messrs. Fabbricatore, Maroni and Collatos). The terms of the Class I, Class II
and Class III Directors expire upon the election and qualification of successor
directors at annual meetings of stockholders held following the end of fiscal
years 1998, 1999 and 2000, respectively.
DIRECTOR COMPENSATION
Directors of the Company who are employees do not receive compensation for
their services as directors. Directors who are not employees receive an annual
retainer of $10,000. On May 16, 1997, the Company granted to Messrs. Hermann,
Murphy and Santagati stock options to purchase 10,000, 10,000 and 15,000 shares,
respectively, of its Common Stock at a purchase price of $7.44 per share. On
October 20, 1997, the Company granted to Mr. Sillari a stock option to purchase
10,000 shares of its Common Stock at a purchase price of $8.25 per share upon
his becoming a director of the Company. These options were repriced on March 20,
1998 to $7.19 per share.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Audit Committee, Compensation Committee and
a Nominating Committee.
The Audit Committee consists of Messrs. Murphy and Hermann. The Audit
Committee is responsible for reviewing the internal accounting controls of the
Company, meeting and conferring with the Company's certified public accountants
and reviewing the results of the accountants' auditing engagement.
The Compensation Committee consists of Messrs. Maroni, Santagati and
Murphy. The Compensation Committee establishes compensation and benefits for the
Company's senior executives. The Committee also determines the number and terms
of stock options granted to employees, directors and consultants of the Company
under the Company's stock option plans.
The Nominating Committee consists of Messrs. Santagati, Murphy and Sillari.
The Nominating Committee recommends candidates for nomination to the Board of
Directors. The Committee also reviews and makes recommendations regarding
compensation for non-employee directors.
VOTING AGREEMENT
Pursuant to a Voting Agreement dated April 10, 1998 between Robert J.
Fabbricatore and certain of his affiliates and Spectrum, Mr. Fabbricatore and
certain of his affiliates agreed to vote at each annual or special meeting at
which directors of the Company are to be elected all of the shares of Common
Stock held by them in favor of persons designated by a majority of the
outstanding shares of Series A Preferred Stock as nominees for directors,
subject to certain limitations based on the number of shares of Series A
Preferred Stock outstanding at any time.
-16-
<PAGE>
(b) Identification of Executive Officers
<TABLE>
<CAPTION>
Name Age Current Office Held
- ---- --- -------------------
<S> <C> <C>
Robert J. Fabbricatore 55 Chairman, Chief Executive Officer
Steven P. Milton 44 President, Chief Operating Officer
Steven C. Jones 35 Executive Vice President, Chief Financial Officer and
Director of Corporate Development
John D. Pittenger 45 Executive Vice President-Finance and
Administration, Treasurer and Clerk
David E. Mahan 56 Vice President-Market and Strategic Planning
Michael H. Donnellan 44 Vice President - Operations
Thomas Fabbricatore 39 Vice President - Regulatory and Electronic Media
Anthony D. Vermette 37 Vice President - Sales
</TABLE>
Mr. Milton has been employed by the Company since 1984 and has served as
President and Chief Operating Officer since August 1995. Prior to that, he held
various positions within the Company including Branch Manager, District Manager,
Regional Manager and, most recently, Vice President-Sales and Marketing.
Mr. Jones joined the Company in early 1998 and has served as an Executive
Vice President and Chief Financial Officer since April 1998. From 1994 to April
1998, Mr. Jones worked in the telecommunications investment banking division of
Merrill Lynch & Co., most recently as a Vice President. From 1991 to 1994, Mr.
Jones was an Associate at BT Securities Corp.
Mr. Pittenger has served as Executive Vice President-Finance and
Administration since April 1998 and as Treasurer and Clerk of the Company since
August 1989. Mr. Pittenger served as Vice President-Finance from 1991 until
April 1998, and as Chief Financial Officer from 1989 to April 1998.
Mr. Mahan joined the Company in October 1995 as Vice President-Marketing
and Strategic Planning and in June 1996 became an executive officer of the
Company. Prior to joining the Company, Mr. Mahan held a number of senior
management level positions with NYNEX, most recently as Vice President-Sales
Channel Management from 1993 to 1995.
Mr. Donnellan has been employed by the Company since 1988 in a number of
positions. He was named Vice President-Operations in 1995 and became an
executive officer of the Company in October 1997.
Mr. Thomas J. Fabbricatore joined the Company in 1982. He was named Vice
President-Regulatory and Electronic Media in 1991 and became an executive
officer of the Company in October 1997. Thomas Fabbricatore is the brother of
Robert J. Fabbricatore.
Mr. Vermette has been employed by the Company in a variety of positions
since 1987. Mr. Vermette was named Vice President-Sales in 1996 and became an
executive officer in October 1997.
For a description of the business background of Mr. Robert Fabbricatore see
"Identification of Directors" above.
-17-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the four other most highly paid executive
officers of the Company ("Named Executive Officers") during the fiscal year
ended March 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities
Other Underlying All
Name and Salary Bonus Annual Options Other
Principal Position Year ($) ($) Compensation($) (#)(1) Compensation
- ------------------- ---- --- --- --------------- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Fabbricatore, 1998 240,000 60,000 - 150,000 $19,550
Chairman and Chief 1997 240,000 60,000 - - 18,075
Executive Officer 1996 240,000 60,000 - - 16,100
Steven P. Milton, 1998 100,000 40,000 5,200 150,000 4,200
President and Chief 1997 100,000 40,000 5,200 - 4,075
Operating Officer 1996 100,000 40,000 5,200 - 4,200
Anthony D. Vermette, 1998 86,647 58,424 4,000 100,000 3,456
Vice President 1997 80,000 54,198 4,000 - 3,776
1996 80,000 28,000 4,000 - 3,240
Michael H. Donnellan, 1998 92,500 4,000 4,000 80,000 3,975
Vice President of 1997 80,000 32,000 4,000 - 3,360
Operations 1996 63,000 132,119 4,000 - 3,887
David E. Mahan, Vice 1998 100,000 40,000 5,004 260,000 4,075
President - Market 1997 100,000 40,000 5,004 - 4,075
Planning & Development 1996(3) 50,000 20,000 2,500 100,000 -
</TABLE>
(1) On March 20, 1998, the Company repriced all previously granted options that
had an exercise price in excess of $7.00 per share. Includes 75,000,
75,000, 50,000, 40,000 and 180,000 shares underlying options previously
granted to Messrs. Fabbricatore, Milton, Vermette, Donnellan, and Mahan,
respectively, that were canceled as a result of the repricing.
(2) Includes 50% matching contributions in the amounts of $4,750, $4,200,
$4,200, $3,456, $3,975 and $4,075 accrued on behalf of Messrs.
Fabbricatore, Milton, Vermette, Donnellan, and Mahan, respectively, to the
CTC Communications Corp. 401(k) Savings Plan. Also included is the
actuarial benefit in the amount of approximately $14,800 on the "split-
dollar" life insurance policy for the benefit of Mr. Fabbricatore.
(3) Mr. Mahan commenced employment with the Company on October 1, 1995.
The following table sets forth information concerning option grants and
option holdings for the fiscal year ended March 31, 1998 with respect to the
Named Executive Officers.
-18-
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
No. of Options as Assumed Annual Rates
Securities Granted to of Stock Price Appreciation
Underlying Employees Exercise for Option Term
----------------------------
Option in Fiscal Price Expiration
Name Granted (#) Year ($/Sh) Date 5%($) 10%($)
---- ----------- ---- ------ ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Robert J. Fabbricatore 75,000(1) 3% $8.18 5/16/2002 $98,339 $284,788
75,000 3% 7.91 5/16/2002 95,033 275,216
Steven P. Milton 75,000(1) 3% 7.44 5/16/2002 154,124 340,573
75,000 3% 7.19 5/16/2002 148,943 329,126
Anthony D. Vermette 50,000(1) 2% 7.44 5/16/2002 102,749 227,049
50,000 2% 7.19 5/16/2002 99,296 219,417
Michael H. Donnellan 40,000(1) 1% 7.44 5/16/2002 82,199 181,639
40,000 1% 7.19 5/16/2002 79,436 175,534
David E. Mahan 80,000(1) 3% 7.44 5/16/2002 164,399 363,278
80,000 3% 7.19 5/16/2002 158,873 351,068
100,000 4% 7.19 10/02/2000 198,391 438,835
</TABLE>
__________________
(1) Canceled as a result of option repricing.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of
options by the Named Executive Officers during the fiscal year ended March 31,
1998 and the March 31, 1998 aggregate value of unexercised options held by each
of the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Options at Fiscal Fiscal Year End ($)
Shares Year End (#)(1) (1)(2)
------------------------------------------------
acquired on Exercisable/ Exercisable/
Name exercise (#) Value Realized($) Unexercisable Unexercisable
- ---- ------------ ---------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Fabbricatore..... ___ ___ 25,167 83,389 143,704 106,401
Anthony D. Vermette........ 13,251 142,484 59,649 69,500 412,913 209,731
Michael H. Donnellan....... ___ ___ 77,626 61,750 545,503 208,188
Steven P. Milton........... ___ ___ 27,000 84,000 161,487 166,329
David E. Mahan............. ___ ___ 50,000 130,000 75,000 195,000
</TABLE>
(1) All shares and amounts, as necessary, have been adjusted to reflect the 25%
Common Stock dividend effected in March 1995, the three-for-two stock split
effect in July 1995 and the two-for-one stock split effected in October
1995.
(2) Assumes a fair market value of the Common Stock of the Company at March 31,
1998 of $8.69 per share.
-19-
<PAGE>
EMPLOYMENT AGREEMENT
Mr. Jones is currently employed as Executive Vice-President, Chief
Financial Officer and Director of Corporate Development pursuant to an agreement
dated as of February 27, 1998. The agreement provides for an initial term of
three years and will automatically be extended for additional one-year periods
on the anniversary of the Effective Date (as defined therein) provided that
neither Mr. Jones nor the Company gives notice of termination 90 days prior to
any such anniversary. Under this agreement, Mr. Jones is entitled to receive an
annual salary of $150,000. Mr. Jones is eligible to receive an annual bonus of
at least $75,000 based upon the achievement of certain performance objectives.
Pursuant to his employment agreement, Mr. Jones was granted options to purchase
300,000 shares of Common Stock exercisable at $7.06 per share and vesting over a
three year period. If the Company terminates Mr. Jones without cause, or Mr.
Jones terminates the agreement for (i) ''good reason'' as defined therein or
(ii) in connection with a change of control, Mr. Jones is entitled to a
severance payment equal to a lump sum amount in cash, equal to the sum of (i)
two year's base salary at the highest annual base salary then in effect and (ii)
the greater of twice his highest annual bonus or $150,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of July 10, 1998 with
respect to each stockholder known by the Company to beneficially own more than
5% of the outstanding shares of the Company's Common Stock, the beneficial
ownership of the Company's Common Stock by each director and named executive
officer of the Company, and by all of the directors and officers of the Company
as a group. Based on the information furnished by the beneficial owners of the
Common Stock listed below, the Company believes that each such stockholder
exercises sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------
NAME NUMBER PERCENT OF CLASS
- ---- ---------------------------
<S> <C> <C>
Robert J. Fabbricatore(1)......... 2,759,891 27.5%
Spectrum Equity
Investors II, L.P.(2)............. 1,476,454 12.9
Henry Hermann(3).................... 215,922 2.2
Richard J. Santagati(4).............. 84,500 *
J. Richard Murphy(5)................. 14,334 *
Ralph C. Sillari........................ 500 *
William P. Collatos(2)............ 1,476,454 12.9
Kevin J. Maroni(2)................ 1,476,454 12.9
Steven P. Milton(6)..................436,682 4.4
David E. Mahan (7).................. 133,100 1.3
Michael H. Donnellan(8)............. 107,340 1.1
Anthony J. Vermette(9)............... 98,057 1.0
All Officers and Directors as
as Group(14 persons)(10).......... 5,832,932 48.5
</TABLE>
- ---------------------
* Less than 1%.
(1) Includes 62,498 shares owned by Mr. Fabbricatore as trustee of a trust
for his children and 1,133,239 shares as a general partner of a family
partnership; also includes 43,917 shares issuable upon exercise of
options exercisable within 60 days of July 10, 1998. Mr.
Fabbricatore's address is c/o CTC Communications Corp., 360 Second
Avenue, Waltham, Massachusetts 02154.
(2) Includes 131,511 shares issuable upon the exercise of a warrant
exercisable within 60 days of July 10, 1998 and 1,344,943 shares
issuable upon conversion of Series A Preferred Stock as of July 10,
1998. As general partners of Spectrum, each of Mr. Collatos, Mr.
Maroni and Brion B. Applegate may be deemed to be beneficial owners of
the shares beneficially owned by Spectrum. The address of Spectrum and
its general partners is One International Place, 29th Floor, Boston,
Massachusetts 02110.
(3) Includes 9,750 shares held by Mr. Hermann's spouse and 10,334 shares
issuable upon the exercise of options exercisable within 60 days of
July 10, 1998.
-20-
<PAGE>
(4) Includes 9,500 shares issuable upon the exercise of options
exercisable within 60 days of July 10, 1998.
(5) Includes 1,000 shares owned by Mr. Murphy as trustee of a trust for
his spouse and 13,334 shares issuable upon the exercise of options
exercisable within 60 days of July 10, 1998.
(6) Includes 4,500 shares owned by Mr. Milton as trustee of a trust for
his children and 45,750 shares issuable upon the exercise of options
exercisable within 60 days of July 10, 1998.
(7) Includes 70,000 shares issuable upon the exercise of options
exercisable within 60 days of July 10, 1998.
(8) Includes 87,626 shares issuable upon the exercise of options
exercisable within 60 days of July 10, 1998.
(9) Includes 72,149 shares issuable upon the exercise of options
exercisable within 60 days of July 10, 1998.
(10) Includes the shares described in footnotes (1) through (9) above.
PREFERRED STOCK
As of July 10, 1998, Spectrum Equity Investors II, L.P., located at One
International Place, Boston, MA 02110, owned 657,555 of the 666,666 shares, or
98.6%, of the Series A Preferred Stock outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases from trusts, of which Robert J. Fabbricatore, the
Company's Chairman and Chief Executive Officer, is a beneficiary, office space
in Springfield, Massachusetts and southern New Hampshire. Rental payments under
the leases totaled approximately $134,000, $133,000 and $133,000 in Fiscal 1996,
Fiscal 1997 and Fiscal 1998, respectively. The Company subleases part of its
Waltham facility at its cost to Comm-Tract Corp., a company in which Mr.
Fabbricatore is a principal stockholder. Sublease income totaled $73,417,
$80,416 and $119,416 for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively.
The Company also contracts with Comm-Tract Corp. for the installation of
telephone lines and for the service and maintenance of equipment marketed by the
Company. During Fiscal 1996, Fiscal 1997 and Fiscal 1998, Comm-Tract Corp.
provided the Company with services, inventory and equipment aggregating $40,880,
$97,190 and $233,034, respectively. The Company believes that the payments to
the trusts and Comm-Tract Corp. are comparable to the costs for such services,
inventory and equipment, and for rentals of similar facilities, which the
Company would be required to pay to unaffiliated individuals in arms-length
transactions.
In connection with the exercise of Company stock options in Fiscal 1995,
Steven P. Milton was advanced the sum of $135,825 by the Company, which remained
outstanding at March 31, 1998. The loan is payable on demand and bears interest
at 8.0% per annum.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission (the "Commission") initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and, with respect to its officer and directors,
written representations that no other reports were required, during Fiscal 1998,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than tem percent beneficial owners were complied with. In making the
foregoing statement, the Company has relied on the written representations of
its directors and officers and copies of the reports that have been filed with
the Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a)(1) The following financial statements are included in Part II, Item 8:
-21-
<PAGE>
Balance Sheets
March 31, 1998 and 1997
Statements of Income
Years Ended March 31, 1998, 1997 and 1996
Statements of Stockholders' Equity
Years Ended March 31, 1998, 1997 and 1996
Statements of Operations
Years Ended March 31, 1998, 1997 and 1996
Notes to Financial Statements
(a)(2) The following financial statement schedule for the years
ended March 31, 1998, 1997 and 1996 is submitted
herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(b) Reports on Form 8-K.
On February 3, 1998, the Company filed a report on Form 8-K disclosing
the Fleet Credit Facility and the Bell Atlantic Litigation.
(c) Exhibits.
NUMBER DESCRIPTION OF EXHIBIT
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)
-22-
<PAGE>
10.15 Employment Agreement between the Company and Steve 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)
23.1 Consent of Ernst & Young LLP(7)
27 Financial Data Schedule(7)
99.1 Risk Factors(7)
___________________
(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 the Registrant's Current Report on Form 8-K
dated May 15, 1998 filed with the Commission on May 15, 1998.
(7) Filed herewith.
-23-
<PAGE>
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.
/S/ ROBERT J. FABBRICATORE
---------------------------
Robert J. Fabbricatore,
Chairman and CEO
Date: July 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/S/ ROBERT J. FABBRICATORE
---------------------------
Robert J. Fabbricatore, Chairman and Chief Executive Officer
/S/ STEVEN C. JONES
---------------------------
Steven C. Jones,
Executive Vice President, Chief Financial Officer and
Director of Corporate Development (principal financial officer)
/S/ JOHN D. PITTENGER
---------------------------
John D. Pittenger
Executive Vice President-Finance and Administration (principal
accounting officer)
/S/ RICHARD J. SANTAGATI
---------------------------
Richard J. Santagati, Director
/S/ J. RICHARD MURPHY
---------------------------
J. Richard Murphy, Director
/S/ HENRY HERMANN
---------------------------
Henry Hermann, Director
/S/ RALPH C. SILLARI
---------------------------
Ralph C. Sillari, Director
/S/ WILLIAM P. COLLATOS
---------------------------
William P. Collatos, Director
-24-
<PAGE>
/S/ KEVIN J. MARONI
---------------------------
Kevin J. Maroni, Director
Date: July 15, 1998
-25-
<PAGE>
CTC COMMUNICATIONS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Financial Statements
Report of Independent Auditors........................................... F-2
Balance Sheets as of March 31, 1998 and 1997............................. F-3
Statements of Operations for the years ended March 31, 1998, 1997 and
1996.................................................................... F-4
Statements of Stockholders' Equity for the years ended March 31, 1998,
1997 and 1996........................................................... F-5
Statements of Cash Flows for the years ended March 31, 1998, 1997 and
1996.................................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CTC Communications Corp.
We have audited the accompanying financial statements of CTC Communications
Corp., as of March 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CTC Communications Corp.
at March 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Ernst & Young LLP
Boston, Massachusetts
May 28, 1998, except for
Note 1, as to which the
date is July 15, 1998
F-2
<PAGE>
CTC COMMUNICATIONS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,167,930 $ 6,405,670
Accounts receivable, less allowance for doubtful
accounts of $492,000 in 1998 and $377,000 in
1997.............................................. 17,288,183 10,904,820
Prepaid expenses and other current assets.......... 791,736 447,441
Amounts due from officers and employees............ 84,754 46,112
Income tax receivable.............................. 2,152,579
----------- -----------
Total current assets............................. 22,485,182 17,804,043
Equipment:
Equipment.......................................... 13,376,970 7,268,372
Accumulated depreciation........................... (6,837,683) (5,565,650)
----------- -----------
6,539,287 1,702,722
Deferred income taxes................................ 1,834,000 566,000
Other assets......................................... 108,885 113,685
----------- -----------
$30,967,354 $20,186,450
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............. $ 8,958,476 $ 3,238,416
Accrued income taxes............................... 225,948
Accrued salaries and related taxes................. 756,159 2,423,825
Deferred revenue................................... 6,588
Current portion of obligations under capital
leases............................................ 231,796
Current portion of note payable to bank............ 1,196,400
----------- -----------
Total current liabilities........................ 11,142,831 5,894,777
Obligations under capital leases, net of current
portion............................................. 1,114,277
Note payable to bank, net of current portion......... 7,130,671
Commitments and contingencies........................
Stockholders' equity:
Series Preferred Stock--par value $1.00 per share;
authorized 1,000,000 shares, none outstanding.....
Common Stock, par value $.01 per share; authorized
25,000,000 shares, issued 9,980,661 and 9,629,407
shares in 1998 and 1997, respectively............. 99,806 96,294
Additional paid-in capital......................... 5,245,704 4,758,454
Deferred compensation.............................. (318,410)
Retained earnings.................................. 6,688,300 9,572,750
----------- -----------
11,715,400 14,427,498
Amounts due from stockholders...................... (135,825) (135,825)
----------- -----------
11,579,575 14,291,673
----------- -----------
$30,967,354 $20,186,450
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CTC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Agency............................... $24,775,420 $29,195,261 $25,492,511
Telecommunications................... 16,171,716 11,094,838 5,383,414
----------- ----------- -----------
40,947,136 40,290,099 30,875,925
Costs and expenses:
Cost of telecommunications revenues.. 14,038,565 8,709,122 4,241,575
Selling, general and administrative
expenses............................ 31,491,963 23,819,714 20,009,432
----------- ----------- -----------
45,530,528 32,528,836 24,251,007
----------- ----------- -----------
Income (loss) from operations.......... (4,583,392) 7,761,263 6,624,918
Other:
Interest income...................... 145,012 201,369 195,979
Interest expense..................... (106,465) (17,753) (604)
Other................................ 174,395 15,052 9,631
----------- ----------- -----------
212,942 198,668 205,006
----------- ----------- -----------
Earnings (loss) before income taxes.... (4,370,450) 7,959,931 6,829,924
Provision (benefit) for income taxes... (1,486,000) 3,277,000 2,736,000
----------- ----------- -----------
Net income (loss)...................... $(2,884,450) $ 4,682,931 $ 4,093,924
=========== =========== ===========
Earnings (loss) per common share:
Basic................................ $ (0.29) $ 0.49 $ 0.43
=========== =========== ===========
Diluted.............................. $ (0.29) $ 0.43 $ 0.38
=========== =========== ===========
Shares used in computing earnings
(loss) per common share:
Basic................................ 9,886,000 9,600,000 9,446,000
=========== =========== ===========
Diluted.............................. 9,886,000 10,773,000 10,712,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CTC COMMUNICATIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL AMOUNTS
-------------------- PAID-IN DEFERRED RETAINED TREASURY DUE FROM
SHARES PAR VALUE CAPITAL COMPENSATION EARNINGS STOCK STOCKHOLDERS TOTAL
--------- --------- ---------- ------------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1995................... 3,124,437 $31,244 $4,871,302 $ 796,734 $ (13,860) $(159,825) $ 5,525,595
Issuance of stock
pursuant to employee
stock purchase plan... 9,082 91 58,153 58,244
Exercise of employee
stock options......... 197,143 1,971 121,053 123,024
Acquisition of treasury
stock................. (329,125) (329,125)
Retirement of treasury
stock................. (25,454) (254) (342,731) 342,985
Settlement of amounts
due from
stockholders.......... 24,000 24,000
Issuance of stock upon
3 for 2 stock split... 1,560,742 15,607 (15,607) (839) (839)
Issuance of stock upon
2 for 1 stock split... 4,718,172 47,182 (47,182)
Net income............. 4,093,924 4,093,924
--------- ------- ---------- --------- ----------- --------- --------- -----------
Balance at March 31,
1996................... 9,584,122 95,841 4,644,988 4,889,819 0 (135,825) 9,494,823
Issuance of stock
pursuant to employee
stock purchase plan... 8,714 87 70,088 70,175
Exercise of employee
stock options......... 36,571 366 43,378 43,744
Net income............. 4,682,931 4,682,931
--------- ------- ---------- --------- ----------- --------- --------- -----------
Balance at March 31,
1997................... 9,629,407 96,294 4,758,454 9,572,750 0 (135,825) 14,291,673
Issuance of stock
pursuant to employee
stock purchase plan... 9,844 98 71,662 71,760
Exercise of employee
stock options......... 376,387 3,764 347,222 350,986
Acquisition of treasury
stock................. (271,072) (271,072)
Retirement of treasury
stock................. (34,977) (350) (270,722) 271,072
Deferred compensation.. 339,088 $(318,410) 20,678
Net loss............... (2,884,450) (2,884,450)
--------- ------- ---------- --------- ----------- --------- --------- -----------
Balance at March 31,
1998................... 9,980,661 $99,806 $5,245,704 $(318,410) $ 6,688,300 0 $(135,825) $11,579,575
========= ======= ========== ========= =========== ========= ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CTC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $(2,884,450) $ 4,682,931 $ 4,093,924
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 1,417,866 742,895 660,338
Provision for doubtful accounts...... 1,421,000 316,669 61,763
Deferred income taxes................ (1,268,000) (289,000) (124,000)
Stock compensation expense........... 20,678
Gain on sale of fixed asset.......... (143,333)
Changes in operating assets and
liabilities:
Accounts receivable................ (7,804,363) (4,664,260) (2,979,772)
Other current assets............... (382,937) (123,789) (231,642)
Income tax receivable.............. (2,152,579) 21,125 (21,125)
Other assets....................... 4,800 4,800 (90,200)
Accounts payable, accrued expenses,
accrued salaries and related
taxes............................. 4,052,394 2,657,149 1,103,061
Accrued income taxes............... (225,948) 225,948 (281,569)
Deferred revenue and other......... (6,588) (2,714) 1,128
----------- ----------- -----------
Net cash provided by (used in)
operating activities.................. (7,951,460) 3,571,754 2,191,906
INVESTING ACTIVITY
Additions to equipment, net............ (4,765,025) (1,221,879) (759,204)
----------- ----------- -----------
Net cash used in investing activity.... (4,765,025) (1,221,879) (759,204)
FINANCING ACTIVITIES
Proceeds from issuance of common
stock................................. 151,674 113,919 119,467
Borrowings under note payable to bank,
net of repayments..................... 8,327,071
Cash paid for fractional shares in
connection with stock splits.......... (839)
----------- ----------- -----------
Net cash provided by financing
activities............................ 8,478,745 113,919 118,628
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents........................... (4,237,740) 2,463,794 1,551,330
Cash and cash equivalents at beginning
of year............................... 6,405,670 3,941,876 2,390,546
----------- ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 2,167,930 $ 6,405,670 $ 3,941,876
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
CTC Communications Corp. (the Company) is an integrated communications
provider (ICP), which offers local, long distance, Internet access, Frame
Relay and other data services under its own brand name on a single integrated
bill. The Company serves small to medium-sized business customers in seven
Northeastern states. Prior to becoming an ICP in January 1998, the Company was
a sales agent for Bell Atlantic Corp. (Bell Atlantic) and other
telecommunications providers selling local telecommunications services as an
agent since 1984. The Company has also offered long distance and data services
under its own brand name since 1994. In late 1998, the Company plans to begin
deploying a data-centric network in its existing markets.
The Company has obtained a commitment for an interim credit facility (the
Interim Facility) from its current lender. The Interim Facility, which would
mature on June 30, 1999, would provide secured revolving loans of up to $20
million to refinance the Company's existing credit facility (the Credit
Facility), to fund capital expenditures and significant operating losses
expected to be incurred in connection with the Company's transition to an ICP
strategy and for general corporate purposes. The commitment, which is subject to
certain conditions, extends to September 30, 1998. To satisfy one of those
conditions, the Company has received a commitment from Spectrum to purchase $5
million of Preferred Stock which extends until June 30, 1999 (the Interim
Spectrum Financing). The Company believes that the Interim Facility and the
Interim Spectrum Financing, if required, together with cash on hand would be
sufficient to refinance the Credit Facility and to fund the Company's existing
operations for at least the next 12 months. However, CTC would be required to
delay its proposed geographic expansion and deployment of facilities or to
obtain additional financing within the next 6 months.
The implementation of the Company's business plan to further penetrate its
existing markets as an ICP, deploy the ICN in its existing markets, expand its
sales presence into six additional states in the Boston-Washington D.C. corridor
and enhance the CTC Information System and the repayment of the Credit Facility
will require the Company to raise significant capital. The Company has been
seeking and is actively engaged in the negotiation of commitments with
alternative sources of long-term financing to fund its business plans. Although
the Company is highly optimistic that it will be successful in obtaining such
financing based upon its negotiations, there can be no assurance that the
Company will be able to consummate financing in the amount, on the terms and on
the schedule required to implement the Company's business plan, if at all.
Agency revenues derived from commissions received from Bell Atlantic
represented 48%, 63% and 69% of the Company's total revenues in 1998, 1997 and
1996, respectively. Accounts receivable from Bell Atlantic amounted to 63% and
70% of total accounts receivable at March 31, 1998 and 1997, respectively. See
Note 2.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with maturities of less than
three months at the date of acquisition as cash equivalents.
EQUIPMENT
Equipment is stated on the basis of cost. Depreciation, including
amortization of capitalized leases, is computed using the straight-line
method. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.
REVENUE RECOGNITION
Telecommunications revenues are recognized as the usage accrues on the
network. Agency revenues are recognized when ordered and, if commissions are
based on usage, revenues are recognized as earned. Provisions for
cancellations are made at the time revenue is recognized and actual experience
prior to the developments described in Note 2 has consistently been within
management's estimates.
INCOME TAXES
The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred income taxes are recognized for the
future tax consequences of differences between the tax and financial
accounting bases of assets and liabilities at each year end. Deferred income
taxes are based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. Both SFAS 130 and SFAS 131 are
effective for fiscal years beginning after December 15, 1997. The Company
believes that the adoption of these new accounting standards will not have a
material impact on the Company's financial statements.
F-7
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated
to conform to the SFAS No. 128 requirements.
RISKS AND UNCERTAINTIES
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and trade receivables. The carrying amount of cash and cash equivalents
approximates fair value due to the short maturity of these instruments.
Significant Estimates and Assumptions
The financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates and
assumptions made by management affect the Company's provision for doubtful
accounts, cancellation of orders and certain accrued expenses. Actual results
could differ from those estimates.
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair market value of the shares at the
date of the grant (110% of the fair market value for owners of 20% or more of
the Company's Common Stock). The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided
for under SFAS No. 123, Accounting for Stock-Based Compensation, requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-8
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. BELL ATLANTIC LITIGATION
In December 1997, the Company terminated its agency contract and filed suit
against Bell Atlantic for breaches of contract, including the failure of Bell
Atlantic's retail division to pay $14 million in agency commissions
(approximately $12 million at March 31, 1998) owed to the Company. The Company
also asserted violations by Bell Atlantic of antitrust laws and the
Telecommunications Act. The Company intends to pursue this suit vigorously.
Although the Company believes the collection of the agency commissions sought
in the suit is probable, there can be no assurance that the Company will be
successful in collecting those commissions. If the Company fails to collect
any of the agency commissions sought or if their collection becomes less than
probable, the Company would be required to write off the amounts reflected in
its financial statements that it is unable to collect or for which collection
becomes less than probable. Delay in collection of, or the write-off of, the
agency commissions sought may adversely affect the Company.
3. RELATED-PARTY TRANSACTIONS
The installation of telephone systems is generally subcontracted to a
company controlled by the Chairman of the Company. Amounts paid to this
subcontractor which are based on fair market value amounted to $1,723, $28,217
and $1,089 in 1998, 1997 and 1996, respectively. Additionally, inventory and
equipment purchased from this subcontractor at fair market value amounted to
$231,052, $68,973 and $39,791 in 1998, 1997 and 1996, respectively.
The Company leases office space from trusts in which the Chairman is a
beneficiary. Rent expense for these facilities aggregated $132,656, $132,656
and $133,949 in 1998, 1997 and 1996, respectively. These office space leases
expire in fiscal 1998.
The Company subleases a part of its corporate facility to a company
controlled by the Chairman of the Company. Terms of the sublease are identical
with those included in the Company's lease. Sublease income totaled $119,416,
$80,416 and $73,417 in 1998, 1997 and 1996, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Trade accounts payable................................ $5,778,048 $2,015,409
Accrued cost of telecommunications revenue............ 888,031 790,039
Bell Atlantic litigation.............................. 1,200,000
Other................................................. 1,092,397 432,968
</TABLE>
5. NOTE PAYABLE TO BANK
In November 1997, the Company replaced its existing $5,000,000 revolving
line of credit agreement with a bank credit facility consisting of $15,000,000
revolving line of credit, a $5,000,000 equipment line of credit, and a
$5,000,000 working capital line of credit. The revolving line of credit bears
interest at Libor plus 1.5% to 3.00%, or prime rate plus up to 0.5%, depending
on certain coverage ratios of the Company and expires in September, 2000. The
equipment and working capital lines of credit bear interest at Libor plus
1.75% to 3.25%, or prime rate plus up to 1%, depending on certain leverage
ratios of the Company and expire in September 2000. At March 31, 1998,
$1,339,000 and $4,018,000 was available for borrowing under the revolving line
of credit, and the equipment line of credit, respectively, and no amounts were
available for borrowing under the working capital line of credit.
As of March 31, 1998, the Company was not in compliance with certain
covenants under its bank credit facility as a result of the Company's fourth
quarter net loss of approximately $6 million. The bank has waived
F-9
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
such covenant noncompliance under the Facility until September 30, 1998. See
Note 1.
Note payable to bank consisted of the following at March 31, 1998:
<TABLE>
<S> <C>
Revolving line of credit due September 1, 2000................. $ 2,345,071
Equipment line of credit due in annual principal installments
of $196,400 through January 2003 (7.44% at March 31, 1998).... 982,000
Working capital line of credit due in annual principal payments
of $1,000,000 through March 2003 (7.44% at March 31, 1998).... 5,000,000
-----------
8,327,071
Less: current portion.......................................... (1,196,400)
-----------
$ 7,130,671
===========
</TABLE>
Maturities of long-term debt are the following at March 31:
<TABLE>
<S> <C>
1999.............................................................. $1,196,400
2000.............................................................. 1,196,400
2001.............................................................. 3,541,471
2002.............................................................. 1,196,400
2003.............................................................. 1,196,400
</TABLE>
The bank has a security interest in and lien on all of the tangible and
intangible personal property and fixtures of the Company, including all
accounts receivable and equipment.
6. LEASES
The Company leases office facilities under long-term lease agreements
classified as operating leases. The following is a schedule of future minimum
lease payments, net of sublease income, for operating leases as of March 31,
1998:
<TABLE>
<CAPTION>
OPERATING SUBLEASE
LEASES INCOME NET
---------- --------- ----------
<S> <C> <C> <C>
Year ending March 31:
1999..................................... $1,399,383 $(107,766) $1,291,617
2000..................................... 1,098,624 (109,898) 988,726
2001..................................... 1,010,819 (111,420) 899,399
2002..................................... 937,665 (111,420) 826,245
2003..................................... 671,930 (111,420) 560,510
---------- --------- ----------
Net future minimum lease payments.......... $5,118,421 $(551,924) $4,566,497
========== ========= ==========
</TABLE>
Rental expense for operating leases amounted to $1,121,916, $1,001,919 and
$673,321 in 1998, 1997 and 1996, respectively. Sublease income amounted to
$119,416, $90,016 and $82,217 in 1998, 1997 and 1996, respectively.
F-10
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company leases equipment under capital leases. At March 31, 1998, the
Company has capitalized leased equipment totaling $1,346,073 with related
accumulated amortization of $134,607. The following is a schedule by year of
future minimum lease payments due under capital leases, together with the
present value of the minimum lease payments as of March 31, 1998:
<TABLE>
<S> <C>
Years ending March 31:
1999........................................................... $ 300,308
2000........................................................... 300,308
2001........................................................... 300,308
2002........................................................... 300,308
2003........................................................... 300,308
Thereafter..................................................... 25,026
----------
1,526,566
Less amount representing interest................................ (180,493)
----------
Present value of minimum lease payments.......................... 1,346,073
Less current portion of obligations under capital leases......... (231,796)
----------
Obligations under capital leases................................. $1,114,277
==========
</TABLE>
7. TELECOMMUNICATIONS AGREEMENTS
On January 15, 1996, the Company entered into a four-year nonexclusive
agreement with a long-distance service provider for the right to provide long
distance service to its customers at prices affected by volume attainment
levels during the term of the agreement. The Company is not obligated to
purchase any minimum levels of usage over the term of the agreement, but rates
may be adjusted due to the failure of achieving certain volume commitments.
These provisions had no effect on the financial statements for the years ended
March 31, 1998, 1997 and 1996.
On October 20, 1994, the Company entered into a three-year non-exclusive
agreement with a long-distance service provider for the right to provide long
distance service to its customers at fixed prices by service during the term
of the agreement. On October 11, 1996, the Company entered into an amendment
to the agreement which extended the term of the agreement by five years from
the date of the amendment. Over such extension period, the Company shall be
liable for a minimum aggregate usage commitment of $25 million. Furthermore,
the rates set forth under the aforementioned amendment may be adjusted due to
the failure of meeting certain periodic volume commitments. Due to existing
and expected usage, these provisions had no effect on the financial statements
for the years ended March 31, 1998 and 1997.
Prior to the execution of the agreements described above, and through March
31, 1998, the Company also provided long distance service to customers under
an informal non-exclusive arrangement with another long distance service
provider. The Company is not obligated to purchase any minimum level of usage
on the network, and there are no other performance obligations.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 13, 1995, the Board of Directors declared a 3 for 2 stock split in
the form of a dividend payable to shareholders of record on July 25, 1995. A
total of 1,560,742 shares of common stock were issued and $839 in cash was
paid for fractional share amounts.
On October 10, 1995, the Board of Directors declared a 2 for 1 stock split
in the form of a dividend payable to shareholders of record on October 23,
1995. A total of 4,718,172 shares of common stock were issued.
F-11
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PREFERRED STOCK
The dividends, liquidation preference, voting rights and other rights of
each series of preferred stock, when issued, are to be designated by the Board
of Directors prior to issuance.
9. BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution plan (401(k) plan) covering all
employees who meet certain eligibility requirements. Participants may make
contributions to the plan up to 15% of their compensation (as defined) up to
the maximum established by law. The Company may make a matching contribution
of an amount to be determined by the Board of Directors, but subject to a
maximum of 6% of compensation contributed by each participant. Company
contributions vest ratably over three years. Company contributions to the plan
were $310,788, $230,079 and $210,063 in 1998, 1997 and 1996, respectively.
Administrative costs paid by the Company were $5,960, $1,275 and $7,982 in
1998, 1997 and 1996, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (the ESPP) which enables
participating employees to purchase Company shares at 85% of the lower of the
market prices prevailing on the valuation dates as defined in the ESPP.
Individuals can contribute up to 5% of their base salary. The Company made no
contributions to the ESPP during the three years in the period ended March 31,
1998. Indicated below is a summary of shares of common stock purchased by the
ESPP. All share and per share amounts indicated below have been presented to
reflect the stock dividend and stock splits described above.
In July 1997 and February 1998, the ESPP purchased 5,438 shares at $6.48 per
share and 4,406 shares at $8.29 per share, respectively.
In July 1996 and February 1997, the ESPP purchased 2,998 shares at $11.05
per share and 5,716 shares at $6.48 per share, respectively.
In July 1995 and January 1996, the ESPP purchased 7,011 shares at $3.26 per
share and 2,345 shares at $11.05 per share, respectively.
STOCK OPTION PLANS
Under the terms of its 1993 Stock Option Plan and 1996 Stock Option Plan
(collectively, the Plans), the Company may grant stock options for the
purchase of Common Stock to all employees, directors and consultants. The
Plans generally provide that the exercise price for an incentive stock option
(which may only be granted to employees) will be fixed by a committee of the
Board of Directors but will not be less than 100% (110% for 10% stockholders)
of the fair market value per share on the date of grant. Nonqualified options
may also be granted under the Plans to directors, employees and consultants.
Nonqualified options under the 1993 Plan may be granted at an exercise price
of no less than 85% (110% for 10% stockholders) of the fair market value per
share on the date of grant and under the 1996 Plan may be granted with an
exercise price less than, equal to or greater than the fair market value per
share on the date of the grant. No options have a term of more than ten years
and options to 10% stockholders may not have a term of more than five years.
In the event of termination of employment, other than by reason of death,
disability or with the written consent of the Company, all options granted to
employees are terminated. Vesting is determined by the Board of Directors.
On March 20, 1998, the Board of Directors approved the repricing of
1,175,500 options with a new exercise price of $7.19 ($7.91 for 10%
stockholders).
F-12
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
STOCK-BASED COMPENSATION
Pro forma information regarding net income (loss) and earnings (loss) per
common share is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options and shares issued
pursuant to the ESPP under the fair value method of that Statement. The fair
value for these options and shares issued pursuant to the ESPP were estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
------------------- -------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)............. 2.96 3.98 3.49 0.50 0.50 0.50
Interest rate..................... 5.93% 6.28% 6.12% 5.43% 5.4% 6.48%
Volatility........................ 85.14 87.88 87.88 64.67 93.03 80.93
Dividend yield.................... 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net income (loss) and earnings (loss) per common share are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)............. $(4,973,000) $4,094,000 $3,550,000
Pro forma earnings (loss) per common
share.................................. $ (0.50) $ 0.39 $ 0.34
</TABLE>
The effects on 1996, 1997 and 1998 pro forma net income (loss) and earnings
(loss) per common share of expensing the estimated fair value of stock options
and shares issued pursuant to the ESPP are not necessarily representative of
the effects on reporting the results of operations for future years as the
periods presented include only one, two and three years of option grants under
the Company's plans.
A summary of the Company's stock option activity, and related information
for the years ended March 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,953,112 $4.36 1,995,878 $4.01 1,526,850 $1.45
Options granted....... 2,791,000 7.11 280,539 9.67 1,000,250 8.06
Options terminated.... 1,402,718 8.36 (286,734) 7.54 (290,689) 2.37
Options exercised..... 376,387 .93 (36,571) 1.20 (240,533) 0.51
--------- --------- ---------
Outstanding at end of
year................... 2,965,007 $5.50 1,953,112 $4.36 1,995,878 $4.01
========= ========= =========
Exercisable at end of
year................... 698,250 772,282 613,824
========= ========= =========
Weighted-average fair
value of options
granted during the
year................... $ 4.01 $ 6.43 $ 5.09
========= ========= =========
</TABLE>
F-13
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table presents weighted-average price and life information
about significant option groups outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.25 187,500 0.1 years $0.25 187,500 $0.25
0.53 86,397 0.6 years 0.53 86,397 0.53
0.90-
1.10 207,854 1.5 years 1.10 147,261 1.10
2.70-
2.98 257,056 2.0 years 2.74 189,792 2.74
6.00-
7.06 1,041,700 6.4 years 6.44 10,500 6.16
7.19 1,100,500 4.2 years 7.19 76,800 7.19
$7.91 75,000 4.1 years $7.91 0 $0.00
--------- -------
2,965,007 698,250
========= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) (numerator for
basic and diluted earnings (loss)
per common share).................. $(2,884,450) $ 4,682,931 $ 4,093,924
Denominator:
Denominator for basic earnings
(loss) per common share-weighted
average shares..................... 9,886,000 9,600,000 9,446,000
Effect of employee stock options.... 1,173,000 1,266,000
----------- ----------- -----------
Denominator for diluted earnings
(loss) per common share............ 9,886,000 10,773,000 10,712,000
=========== =========== ===========
Basic earnings (loss) per common
share................................ $ (0.29) $ 0.49 $ 0.43
=========== =========== ===========
Diluted earnings (loss) per common
share................................ $ (0.29) $ 0.43 $ 0.38
=========== =========== ===========
</TABLE>
10. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................... $ (218,000) $2,660,000 $2,135,000
State................................. 906,000 725,000
----------- ---------- ----------
(218,000) 3,566,000 2,860,000
Deferred tax benefit.................... (1,268,000) (289,000) (124,000)
----------- ---------- ----------
$(1,486,000) $3,277,000 $2,736,000
=========== ========== ==========
</TABLE>
F-14
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
as of March 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Deferred tax assets:
Depreciation......................................... $ 64,000 $191,000
Accruals and allowances.............................. 1,751,000 445,000
Net operating state loss carryforward................ 96,000
---------- --------
Total deferred tax asset............................... 1,911,000 636,000
Deferred tax liability:
Prepaid expenses..................................... (38,000) (31,000)
Cash surrender value of life insurance policy........ (39,000) (39,000)
---------- --------
Total deferred tax liability........................... (77,000) (70,000)
---------- --------
Net deferred tax asset................................. $1,834,000 $566,000
========== ========
</TABLE>
The income tax expense is different from that which would be obtained by
applying the statutory federal income tax rate to income before income taxes.
The items causing this difference are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Tax at U.S. statutory rate............. $(1,486,000) $2,706,000 $2,322,000
State income taxes, net of federal
benefit............................... 552,000 466,000
Other.................................. 19,000 (52,000)
----------- ---------- ----------
$(1,486,000) $3,277,000 $2,736,000
=========== ========== ==========
</TABLE>
Income taxes paid in 1998, 1997 and 1996 amounted to $2,160,527, $3,319,000
and $3,163,000, respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1996, the Company received shares of common stock with an aggregate
fair market value of $251,771 in lieu of cash for settlement of amounts due
from an officer. These shares and the related amount were accounted for as
treasury stock and were subsequently retired.
In September 1995, the Company received shares of common stock with an
aggregate fair market value of $25,039 in lieu of cash for settlement of
amount due from a non-employee of $24,000 plus accrued interest of $1,039.
These shares and the related amount were accounted for as treasury stock and
were subsequently retired.
During fiscal 1998 and 1996, and in connection with the exercise of employee
stock options, the Company received shares of common stock with an aggregate
fair market value of $271,072 and $52,315 in lieu of cash upon the exercise of
these options. These shares and the related amount were accounted for as
treasury stock and were subsequently retired.
These noncash transactions have been excluded from the statements of cash
flows for the years ended March 31, 1998 and 1996.
12. SUBSEQUENT EVENTS
In April 1998, the Company privately placed $12 million of Series A
Convertible Preferred Stock (Series A Preferred Stock) and warrants to purchase
Common Stock with Spectrum Equity Investors II, L.P. and other private
investors. The Series A Preferred Stock may be redeemed at the option of the
holders of a majority of the Series A Preferred Stock at any time on or after
the earlier of (i) April 9, 2010 and (ii) the date 180 days after the maturity
F-15
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
date of any debt financing consummated on or before October 9, 1998 yielding
proceeds of at least $75 million. The Series A Preferred Stock is convertible
into shares of Common Stock. On the date of issuance, the shares of Series A
Preferred Stock were convertible into 1,333,333 shares of the Company's Common
Stock, which conversion ratio is subject to certain adjustments. The warrants
entitle the holder thereof to purchase one share of Common Stock at an exercise
price of $9.00 per share. The warrants expire on April 10, 2003. See also
Note 1.
13. QUARTERLY INFORMATION (UNAUDITED)
A summary of operating results and pro forma net income (loss) per share for
the quarterly periods in the two years ended March 31, 1998 is set forth below
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 TOTAL
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended March 31,
1998
Total revenues........ $11,658,954 $11,845,097 $11,155,646 $ 6,287,439 $40,947,136
Gross profit.......... 9,216,118 9,132,848 8,215,645 343,960 26,908,571
Earnings (loss)....... 1,374,000 1,244,000 506,000 (6,008,450) (2,884,450)
Earnings (loss) per
common share--basic.. $0.14 $0.13 $0.05 $(0.60) $(0.29)
Earnings (loss) per
common share--
diluted.............. $0.13 $0.12 $0.05 $(0.60) $(0.29)
Year ended March 31,
1997
Total revenues........ $ 9,007,461 $ 9,617,068 $10,193,787 $11,471,783 $40,290,099
Gross profit.......... 7,325,606 7,463,843 7,932,162 8,859,366 31,580,977
Earnings.............. 1,194,186 1,048,828 1,159,000 1,280,917 4,682,931
Earnings per common
share--basic......... $0.12 $0.11 $0.12 $0.13 $0.49
Earnings per common
share--diluted....... $0.11 $0.10 $0.11 $0.12 $0.43
</TABLE>
Fiscal year 1997 and the first two quarters of fiscal year 1998 earnings per
common share amounts have been restated to comply with Statement of Financial
Accounting Standard No. 128, Earnings per Share.
F-16
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CTC COMMUNICATIONS CORP.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Additions
----------
(1) (2)
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts - Deductions End of
Description of Period Expenses Describe - Describe Period
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998:
Allowance for doubtful accounts $377,000 $1,421,109 $1,306,109 (a) $492,000
Year ended March 31, 1997:
Allowance for doubtful accounts $190,215 $316,669 $129,884 (a) $377,000
Year ended March 31, 1996: $128,452 $ 61,763 $ 0 $190,215
Allowance for doubtful accounts
</TABLE>
(a) = Bad debts written off net of collections.
F-17
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION OF EXHIBIT
9.1 Voting Agreement dated April 10, 1998 among Robert Fabbricatore
and certain of his affiliates and Spectrum
10.15 Employment Agreement between the Company and Steve Jones dated
February 27, 1998
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
99.1 Risk Factors
<PAGE>
EXHIBIT 9.1
VOTING AGREEMENT
This Voting Agreement ("Agreement") is made and entered into as of the 10th
day of April, 1998 by and among Robert J. Fabbricatore, Robert J. Fabbricatore
Family Limited Partnership and Robert J. Fabbricatore as trustee for Rita
Fabbricatore, Danielle Fabbricatore and Douglas Fabbricatore (collectively, the
"Stockholders") and Spectrum Equity Investors II, L.P. ("Spectrum"). All
capitalized terms used but not otherwise defined herein shall have the meaning
given to them in the Purchase Agreement referred to below.
RECITALS:
WHEREAS, pursuant to the Securities Purchase Agreement (the "Purchase
Agreement") between the CTC Communications Corp. (the "Company") and Spectrum
dated as of the date hereof, Spectrum and certain other purchasers named therein
will purchase from the Company 666,666 shares of authorized but unissued Series
A Convertible Preferred Stock, $1.00 par value, of the Company (the "Series A
Preferred Stock");
WHEREAS, the Stockholders own in the aggregate 2,715,974 shares of Common
Stock of the Company;
WHEREAS, the parties believe it is in each of their respective best
interest to provide for certain rights and obligations with respect to voting
for certain directors;
WHEREAS, Spectrum's willingness to purchase the Series A Preferred Stock is
conditioned upon the Stockholders entering into this Agreement and the execution
and delivery of this Agreement is a condition precedent to the closing of the
transactions contemplated by the Purchase Agreement;
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
herein contained and other consideration, the adequacy of which is hereby
acknowledged, the parties hereby agree as follows:
1. Voting Agreement.
----------------
(a) At each annual or special meeting of the stockholders of the
Company occurring on or after the date of this Agreement at which directors
of the Company are to be elected, or by a consent in writing of such
stockholders in lieu thereof, the Stockholders entitled to vote at such
meeting agree to vote (or consent in writing in lieu thereof) all of the
voting securities of the Company owned or controlled by them whether now
owned or controlled or if ownership or control is hereafter acquired to
<PAGE>
elect as directors of the Company (i) two persons designated in writing by
the holders of a majority of the outstanding shares of Series A Preferred
Stock (the "Requisite Series A Holders") if at the time the outstanding
shares of Series A Preferred Stock and Preferred Stock Derivatives
represent at least seven and 27/100 percent (7.27%) of the Company's Common
Stock Deemed Outstanding or (ii) one person designated in writing by the
Requisite Series A Holders if at the time the outstanding shares of Series
A Preferred Stock and Preferred Stock Derivatives represent at least four
and 55/100 percent (4.55%) and less than seven and 27/100 percent (7.27%)
of the Company's Common Stock Deemed Outstanding; provided, however, that
at such time as the outstanding shares of Series A Preferred Stock and
Preferred Stock Derivatives represent less than seven and 27/100 percent
(7.27%) but more than four and 55/100 percent (4.55%) of the Company's
Common Stock Deemed Outstanding, upon request by the Stockholders, Spectrum
agrees to use reasonable efforts to cause one of the directors designated
by the Requisite Series A Holders to resign effective immediately; and
provided, further, that at such time as the outstanding shares of Series A
Preferred Stock and Preferred Stock Derivatives represent less than four
and 55/100 percent (4.55%), upon request by the Stockholders, Spectrum
agrees to use reasonable efforts to cause one or both of the directors
designated by the Requisite Series A Holders to resign effective
immediately.
(b) The initial nominees for directors designated by the Requisite
Series A Holders pursuant to Section 1(a) hereof shall be Kevin J. Maroni
and William P. Collatos.
(c) The Stockholders agree not to vote to remove a director
designated by the Requisite Series A Holders unless so instructed by the
Requisite Series A Holders, and if so instructed, the Stockholders shall so
vote; provided, however, that at such time as the outstanding shares of
Series A Preferred Stock and Preferred Stock Derivatives represent less
than seven and 27/100 percent (7.27%) but more than four and 55/100 percent
(4.55%) of the Company's Common Stock Deemed Outstanding, the Stockholders
shall be entitled to vote for the removal of one of the directors
designated by the Requisite Series A Holders; and provided, further, that
at such time as the outstanding shares of Series A Preferred Stock and
Preferred Stock Derivatives represent less than four and 55/100 percent
(4.55%), the Stockholders shall be entitled to vote for the removal of one
or both of the directors designated by the Requisite Series A Holders to
resign effective immediately.
2. Transfers. The Stockholders agree that they will not transfer any of
---------
the voting securities of the Company owned or controlled by them, whether now
owned or controlled or if ownership or control is hereafter acquired, to an
Affiliate of such Stockholder, except pursuant to Rule 144 or a transaction
registered under the Securities Act, unless the transferee of any such voting
securities agrees to hold the shares so acquired with all the rights conferred
by, and subject to the restrictions imposed by, this Agreement and agrees, as a
condition of
-2-
<PAGE>
such transfer, to execute and deliver to Spectrum an agreement pursuant to which
such transferee agrees to become party to this Agreement and to be bound by all
the terms and conditions hereof.
3. Termination. This Agreement shall terminate upon the earliest to
-----------
occur of the following:
(a) the date as of which the outstanding shares of Series A
Preferred Stock and Preferred Stock Derivatives represent less than four
and 55/100 percent (4.55%) of the Company's Common Stock Deemed
Outstanding;
(b) the date as of which no share of Series A Preferred Stock are
outstanding; and
(c) a written agreement to do so signed by each of Spectrum and the
Stockholders.
4. Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
5. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
6. Choice of Law. The construction, validity and interpretation of this
-------------
Agreement shall be governed by the internal law, and not the law of conflicts,
of the State of Massachusetts.
7. Remedies. Each of the parties to this Agreement will be entitled to
--------
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole discretion apply
to any court of law or equity of competent jurisdiction for specific performance
and/or injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement. In the event a party hereto brings an action
under this Agreement, the prevailing party in such dispute shall be entitled to
recover from the losing party under or with respect to this Agreement, including
without limitation such reasonable fees and expenses of attorneys
-3-
<PAGE>
and accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.
8. Amendments. This Agreement may be amended only by a written agreement
----------
executed by each of the Stockholders and the Requisite Series A Holders.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
THE STOCKHOLDERS:
/s/ Robert J. Fabbricatore
______________________________________
ROBERT J. FABBRICATORE
ROBERT J. FABBRICATORE, AS TRUSTEE FOR
RITA FABBRICATORE,DANIELLE FABBRICATORE
AND DOUGLAS FABBRICATORE
/s/ Robert J. Fabbricatore, as Trustee
______________________________________
ROBERT J. FABBRICATORE FAMILY LIMITED
PARTNERSHIP
By: Robert J. Fabbricatore, as General Partner
/s/ Robert J. Fabbricatore
______________________________________
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P., its
General Partner
By: /s/ Kevin J. Maroni
______________________________________
Kevin J. Maroni, a General Partner
-5-
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 27/th/
day of FEBRUARY, 1998, between CTC Communications Corp, a Massachusetts
Corporation, (the"Company"), which term shall include any successor corporation,
and STEVEN C. JONES (the "Executive'').
W I T N E S S E T H:
-------------------
WHEREAS, the Executive has certain skills and experiences which will prove
beneficial to the Company in managing the finances of the Company and assisting
in the strategic planning and implementation of the Company's current and future
strategies; and
WHEREAS, the Company desires to employ the Executive, and the Executive desires
to be employed by the Company on the terms and subject to the considerations set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained, the
parties agree as follows:
1. EMPLOYMENT:
----------
(a) Position. The Company hereby employs the Executive and the Executive
--------
hereby accepts such employment, on the terms and subject to the conditions
hereinafter set forth. Beginning on the Officer Election Date (as defined
in Section 2(c) hereof), the Executive shall be elected as an officer of
the Company and shall have the title and responsibilities of Executive Vice
President, Chief Financial Officer and Director of Corporate Development.
(b) Reporting and Duties. The Executive shall report directly to the Company's
--------------------
Chief Executive Officer ("CEO") or to the Company's Board of Directors (the
"Board"). The Executive shall be required to devote his full business time,
attention and effort to the Company's business and affairs and perform
diligently such duties as are customarily performed by executives in
similar positions with companies similar in character or size to the
Company, all subject to the direction of the CEO or the Board, together
with such other duties as may be reasonably requested from time to time by
the CEO or the Board, which duties shall be consistent with his positions
as set forth above. The Executive agrees to use all of his skills and
business judgment and render services to the best of his ability to serve
the interests of the Company. Subject to the terms of Section 9, nothing in
this Agreement shall preclude Executive from serving on community and civic
boards, participating in industry associations, or otherwise engaging in
other non-commercial activities which do not unreasonably interfere with
his duties to the Company. Notwithstanding the preceding sentence, the
Company acknowledges and agrees that the Executive shall be entitled to
continue participating in any current or future business ventures with his
spouse so long as such business ventures do not unreasonably interfere or
conflict with his duties to the Company.
(c) Support Services. The Executive shall be entitled to all of the
-----------------
administrative, operational and facility support customary for a similarly
situated executive. This support shall include, without limitation, a
suitably appointed private office, access to a secretary or administrative
assistant, direct access to a Bloomberg Financial Markets terminal, and
payment of or reimbursement for reasonable cellular telephone expenses,
expenses of the Executive maintaining his professional license and standing
and any and all other business expenses reasonably incurred on behalf of or
in the course of performing duties for the Company, all documented in
accordance with the expense reimbursement policies established from time to
time by the Company and in effect for other similarly situated executives.
The Executive agrees to provide such documentation of these expenses as may
be reasonably required.
<PAGE>
2. TERM AND EFFECTIVE DATE:
-----------------------
(a) Term. Unless earlier terminated as herein provided, the Executive's
-----
employment with the Company hereunder shall commence at the Effective
Date and shall end on the last day of the "Term". For purposes of this
Agreement, the "Term" of this Agreement shall mean an initial three
year period, plus any extensions made as provided in this Section 2.
On each anniversary of the Effective Date, the Term shall
automatically be extended for an additional year unless, not later
than ninety (90) days prior to any such anniversary, the Company or
the Executive shall have given notice not to extend the Term. For
purposes of this Agreement, the "Employment Period" (which in no event
shall extend beyond the Term) shall mean the period during which
Executive has an obligation to render services hereunder, as described
in Section 1(b) hereof, taking into account any Notice of Termination
(as defined in Section 7(a) hereof) which may be given by either the
Company or the Executive. Nothing in this Section shall limit the
right of the Company or the Executive to terminate the Executive's
employment hereunder on the terms and conditions set forth in Sections
5, 6, 7, and 8 hereof.
(b) Effective Date of Employment. The Effective Date of Employment under
----------------------------
this Agreement shall be February 27th, 1998 or as soon thereafter as
Executive is able to start using his best efforts (the "Effective Date
of Employment" or the "Effective Date").
(c) Officer Election Date. Beginning on April 1/st/, 1998 or as soon
---------------------
thereafter as is reasonably possible using the Company's best efforts,
the Company shall elect the Executive as an officer of the Company
with the title Executive Vice President, Chief Financial Officer, and
Director of Corporate Development. From the Effective Date of
Employment until April 1, 1998, the Executive shall be an employee,
but not an officer, of the Company.
(d) Leave of Absence. The Company acknowledges and agrees that the
----------------
Executive shall have a leave of absence without pay in the
Spring/Summer of 1998 for approximately 10 weeks. The Executive agrees
to be reasonably available by phone during such leave of absence.
3. COMPENSATION AND BENEFITS:
-------------------------
Throughout the Term the Company shall pay or provide, as the case may be,
to the Executive the compensation and other benefits and rights set forth
in this Section 3, and the additional compensation and benefits set forth
in Sections 8 and 10, as applicable.
(a) Base Salary. During the term hereof, the Company shall pay to the
-----------
Executive a "Base Salary," payable in accordance with the Company's
usual pay practices for executive officers (and in any event no less
frequently than monthly), at a minimum rate of $150,000 per annum,
which shall be reviewed annually by the Company's Board and which may
be increased, but not decreased.
(b) Annual Bonus. Subject to the provisions of paragraph 8, the Executive
------------
shall receive a cash bonus for each fiscal year, or part thereof, that
he is employed by the Company. Such cash bonus in any given year
shall be conditioned upon the Executive having met certain annual
performance objectives stipulated by the Company's CEO or the Board
and communicated to the Executive in writing at least nine months
prior to the end of any given fiscal year and shall be payable within
30 days after the end of such fiscal year. The final amount of any
cash bonus in any given year shall be determined solely at the
discretion of the Board, provided, however, that the Executive's bonus
for any given fiscal year during the Term of this Agreement shall be a
minimum of $75,000.
(c) Stock Options. The Executive shall be entitled to participate, at a
-------------
level appropriate to his positions with the Company, in any stock
option plan or stock-based compensation plan which the Company
maintains from time to time. The Company agrees that it will take
such actions as are
-2-
<PAGE>
necessary (including, without limitation, amendment of the Employees
Incentive Stock Option Plan, the 1985 Stock Option Plan, the 1993
Incentive Stock Option Plan, and/or the 1996 Stock
Option Plan (such existing plans as hereinafter referred to as the "Existing
Stock Option Plans") or create a new stock option plan as may be necessary) to
assure the following:
(i) The Executive is awarded effective as of the date of this
Agreement qualified incentive stock options to purchase 300,000 common
shares of the Company (the "Options"). Such Options shall have a ten
year term and the strike price shall be equal to 100% of the closing
per share price of the Company's common stock at the close of the
trading day on the date of this Agreement. The Company acknowledges
and agrees that it will waive any provisions in any existing or newly
created incentive stock option plans that the Executive be an employee
of the Company for a minimum of six months prior to granting such
Options. The Options shall vest in equal 25% increments according to
the following schedule:
<TABLE>
<CAPTION>
Option Shares Represented Vesting Date
------------------------- -------------
<S> <C>
75,000 April 1, 1998
75,000 March 31, 1999
75,000 March 31, 2000
75,000 March 31, 2001
</TABLE>
The Company acknowledges that the award of the Options to purchase the
above 300,000 common shares is based upon the premise that: (a) the
Company has issued and outstanding approximately ten (10) million
common shares as of the date hereof; (b) total common shares
purchasable with respect to options available under the Company's
Existing Stock Option Plans do not exceed three (3) million common
shares as of the date hereof; and (c) there are no other equity or
equity-linked securities (including, without limitation, convertible
notes, convertible preferred stock, warrants, options, or any other
type of security that consists of any type of right to purchase common
shares; such equity or equity-link securities hereinafter referred to
as "Equity Securities") outstanding as of the date hereof.
(ii) To the extent a change of control provision is not already
provided for in any existing or newly created incentive stock option
plans in a manner which is satisfactory to the Executive and
consistent with the terms of this Agreement, the Company shall modify
such existing or newly created stock option plans such that all
Options or Future Stock Benefits (as defined in Section 8(b) hereof)
held by the Executive shall become fully vested and exercisable and
all restrictions upon any restricted shares held by the Executive will
lapse immediately prior to a Change of Control as defined in Section 4
of this Agreement.
(iii) That the Company's Existing Stock Option Plans or future stock
option plans contain certain antidilution provisions that stipulate
that any event which effects the common shares of the Company in such
a way that an adjustment of the Options or Future Stock Benefits is
appropriate in order to prevent dilution of the rights of the
Executive under the Options or Future Stock Benefits (including,
without limitation, any dividend or other distribution (whether in
cash or in kind), recapitalization, stock split, reverse split,
reorganization, merger, consolidation, spin-off, combination,
repurchase, or share exchange, or other similar corporate transaction
or event), the Company shall make appropriate equitable adjustments,
which may include, without limitation, adjustments to any or all of
the number and kind of common shares of stock of the Company (or other
securities) which may thereafter be issued upon exercise of the then
outstanding Options or Future Stock Benefits and adjustments to the
exercise price of all such Options and Future Stock Benefits. To the
extent the Company's Existing Stock Option Plans do not contain such
antidilution provisions or a reasonable proxy thereto, the Company
shall work with the Executive to find a mutually agreeable solution.
-3-
<PAGE>
(iv) Each grant of Options or Future Stock Benefits shall be evidenced
by a separate Option Grant Agreement which shall be satisfactory to
the Executive and executed within thirty (30) days of (a) the
Effective Date of this Agreement in the case of the Options or (b) the
grant date in the case of Future Stock Benefits.
(c) Relocation Expense. If the Executive decides to permanently relocate
------------------
himself and his family to the Boston, MA area or such other area as
mutually agreed upon with the Company (the "Permanent Relocation"),
the Company shall reimburse the Executive for all reasonable
relocation expenses, up to $30,000, incurred with respect to the
relocation of the Executive and his family. Notwithstanding the above,
the Company shall reimburse the Executive for all reasonable commuting
expenses until a Permanent Relocation occurs. The Company shall also
reimburse the Executive for all reasonable expenses which he may incur
with respect to establishing and maintaining temporary living quarters
in the Boston area, or such other area as mutually agreed upon, until
a Permanent Relocation occurs. If any such relocation, commuting, or
living quarters expenses are treated as taxable income to the
Executive, the Company shall make an additional payment to the
Executive which shall make him whole with respect to the imposition of
any federal, state, or local income tax on such taxable income.
(d) Insurance. Beginning on the Effective Date, the Company shall provide
---------
the Executive such life, medical, hospitalization, disability and
dental insurance for the Executive, and as appropriate for, his spouse
and eligible family members, as is in accordance with the Company's
policy for seniors officers of the Company. The Company acknowledges
and agrees that it will waive any waiting period for new employees.
(e) Retirement and Other Benefit Plans. The Executive shall be eligible
----------------------------------
to participate in all retirement and other benefit plans of the
Company generally available from time to time to employees and for
senior executives of the Company and for which the Executive qualifies
under the terms thereof, without regard to his tenure at the Company.
The Executive shall also be entitled to participate in any equity or
other employee benefit plans and other fringe benefits that are
generally available to executive officers or directors from time to
time, as distinguished from general management, of the Company. The
Executive's participation in and benefits under any such plan shall be
on the terms and subject to the conditions specified in the governing
document of the particular plan.
4. CHANGE OF CONTROL:
-----------------
(a) Definition. For the purposes of this Agreement, a "Change of
----------
Control" shall be deemed to have occurred if any of the events set
forth in any of the following paragraphs (i) - (iv) shall have
occurred:
(i) if any Person (as defined in Section 4b hereof) or Group is or
becomes the Beneficial Owner (as defined in Section 4c hereof),
directly or indirectly, of securities of the Company representing
thirty percent (30%) or more of the combined voting power of the
Company's then outstanding voting securities, except with respect to
current officers or directors.
(ii) if during any period of two consecutive years, the following
individuals cease for any reason to constitute a majority of the
number of directors then serving: individuals who at the beginning of
such period constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the
Company) whose appointment or election by the Board or nomination for
election by the Company's shareholders was approved or recommended by
a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of such period or
whose appointment, election or nomination for election was previously
so approved or recommended; or
-4-
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(iii) if the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation or the
issuance of voting securities of the Company in connection with a
merger or consolidation of the Company (or any direct or indirect
subsidiary of the Company) pursuant to the applicable stock exchange
requirements, other than (x) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior to such merger or consolidation continuing to represent (either
by remaining outstanding or by being converted into voting securities
of the surviving entity or any parent thereof) at least fifty percent
(50%) of the combined voting power of the securities of the Company or
such surviving entity or any parent thereof outstanding immediately
after such merger or consolidation, or (y) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company representing
thirty percent (30%) or more of the combined voting power of the
Company's then outstanding securities
(iv) if the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of
the Company's assets.
(b) For purposes of this Agreement, "Person" and "Group" shall have the
meaning given in Section 3(a)(9) of the Securities Exchange Act of
1934, as amended from time to time (the "Exchange Act"), as modified
and used in Sections 13(d) and 14(d) thereof, except that such terms
shall not include (i) the Company or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any of its affiliates, or (iii) an
underwriter temporarily holding securities pursuant to an offering of
such securities.
(c) For purposes of this Agreement, "Beneficial Owner" shall have the
meaning set forth in Rule 13d-3 under the Exchange Act.
(d) In the event of a Change of Control, all unvested Options (as defined
in Section 3(c)(i) hereof) Future Stock Benefits (as defined in
Section 8(b) hereof) shall immediately vest.
5. TERMINATION BY THE COMPANY:
--------------------------
The Executive's employment hereunder may be terminated as follows:
(a) Death. The Executive's employment shall terminate upon his death.
-----
Upon such termination, the Executive's estate or designated
beneficiary, as the case may be, shall become entitled to the payments
provided in Section 8(b) hereof.
(b) Permanent Disability. If, as a result of the Executive's incapacity
--------------------
due to physical or mental illness (as determined by a medical doctor
mutually agreed to by the Executive or his legal representative and
the Company), the Executive shall have been absent from his duties
hereunder on a full-time basis for either one hundred eighty (180)
consecutive days or for an aggregate two hundred ten (210) days within
a consecutive 12 month period and, within (30) days after Notice of
Termination is given, shall not have returned to the performance of
his duties hereunder on a full-time basis ("Permanent Disability"),
the Company may terminate the Executive's employment for Permanent
Disability. Upon such a termination, the Executive shall become
entitled to the payments provided in Section 8(c) hereof.
(c) Cause. The Company may terminate the Executive's employment hereunder
-----
for "Cause" (as defined in this Section 5(c)). Upon such a
termination, the Executive shall become entitled to the payments
provided in Section 8(d) hereof. For purposes of this Agreement, the
Company shall have "Cause" to terminate the Executive's employment
hereunder upon:
-5-
<PAGE>
(i) the willful (or grossly negligent) and continued failure by the
Executive to substantially perform his duties hereunder (other than
any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure
after the Executive has delivered a "Notice of Termination for Good
Reason" as defined in Section 6(a) hereof, or during a "Window Period"
as defined in Section 6(b) hereof) after demand for substantial
performance is delivered by the Company that specifically identifies
the manner in which the Company believes the Executive has not
substantially performed his duties; or
(ii) the active participation by the Executive in an act or series of
acts of willful malfeasance or gross misconduct, recklessness or gross
negligence which a reasonable person would expect to have a material
adverse effect on the Company; or
(iii) any breach by the Executive of any of the provisions of Section
9 hereof; or
(iv) the Executive's being convicted of, or pleading guilty to, a
felony.
For purposes of this paragraph, no act, or failure to act, on the
Executive's part shall be considered "willful" unless done or omitted
to be done, by him not in good faith and without reasonable belief
that his action or omission was in the best interest of the Company.
Further, unless the Executive has been convicted of, or pleaded guilty
to, a felony, the Executive shall not be deemed to have been
terminated without (1) reasonable notice to the Executive setting
forth the reasons for the Company's intention to terminate for Cause,
(2) an opportunity for the Executive, together with his counsel, to be
heard before the Board, and (3) delivery to the Executive of a Notice
of Termination from the Board finding that, in the good faith opinion
of a majority of the Board, the Executive was guilty of conduct set
forth above in clauses (i), (ii), or (iii) of this Section 6(c), and
specifying the particulars thereof in reasonable detail.
(d) Without Cause. The Company may terminate the Executive's employment
-------------
hereunder without Cause at any time. Upon such a termination, the
Executive shall become entitled to the payments and benefits provided
in section 8(e) hereof.
6. TERMINATION BY THE EXECUTIVE:
----------------------------
(a) Termination for Good Reason. The Executive may terminate his
----------------------------
employment hereunder at anytime for "Good Reason". Upon such
Termination For Good Reason, the Executive shall become entitled to
the payments and benefits provided in Section 8(e) hereof. For the
purposes of this Agreement, the definition of "Good Reason" shall
include: (i) any significant diminution in Executive's title, duties
and responsibilities or such title, duties and responsibilities are
otherwise diminished such that they no longer reflect the title,
duties and responsibilities customary for a Chief Financial Officer
and/or Director of Corporate Development, which diminution is not
cured within thirty (30) days after notice from the Executive, (ii)
the Company (or any successor thereto) hires or appoints a person,
other than Executive, to the position (or functional equivalent,
regardless of actual title) of Chief Financial Officer and/or Director
of Corporate Development, (iii) any failure of the Company to pay any
compensation to the Executive within thirty (30) days of the
Executive's notice to the Company that payment is overdue; and/or (iv)
the Company's breach of a material term or condition of this
Agreement, and the Company's failure to correct such breach within
thirty (30) days after the Executive's notice thereof (specifying in
reasonable detail the particulars of such noncompliance).
(b) Termination During a Window Period. The Executive may terminate his
----------------------------------
employment hereunder without Good Reason by giving a Notice of
Termination during a "Window Period", which for purposes of this
Agreement, shall mean the sixty (60) day period beginning with the
first day following the ninety (90) day period which immediately
follows a Change of Control. Upon a Window Period termination, the
Executive shall become entitled to the payments and benefits provided
in Section 8(e) hereof.
-6-
<PAGE>
(c) Termination Without Good Reason Outside a Window Period. The
-------------------------------------------------------
Executive may terminate his employment hereunder without Good Reason
and outside of a Window Period, upon giving thirty (30) days written
notice to the Company. In the event of such a termination, the
Executive shall comply with any reasonable request of the Company to
assist in providing for an orderly transition of authority, but such
assistance shall not delay the Executive's termination of employment
longer than sixty (60) days beyond the giving of the Executive's
Notice of Termination. Upon such a termination, the Executive shall
become entitled to the payments provided in Section 8(f) hereof.
7. TERMINATION NOTICES, TIMING, AND DISPUTES:
------------------------------------------
(a) Notice of Termination. Any purported termination of the Executive's
---------------------
employment (other than termination pursuant to Section 5(a) hereof)
shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 11(h) hereof. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice that
shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(b) Date of Termination. For purposes of this Agreement, "Date of
-------------------
Termination" shall mean the following: (i) if the Executive's
employment is terminated by his death, the date of his death; (ii) if
the Executive's employment is terminated pursuant to Section 5(b) or
5(d) hereof, thirty (30) days after the Notice of Termination is
given; (iii) if the Executive's employment is terminated pursuant to
Section 5(c) hereof, the date specified in the Notice of Termination;
(iv) if the Executive's employment is terminated pursuant to Section
6(a) or 6(b) hereof, thirty (30) days after the Notice of Termination
is given; and (v) if the Executive's employment is terminated
pursuant to Section 6(c) hereof, the date determined in accordance
with said Section.
(c) Dispute Concerning Termination. If within fifteen (15) days after any
------------------------------
Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7(c)), the
party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be extended until the earlier to occur of (i) the
date on which the Term ends or (ii) the date on which the dispute is
finally resolved, either by mutual written agreement of the parties or
by the final determination of an arbitration panel in accordance with
Section 11(g), which is not subject to appeal; provided, however, that
the Date of Termination shall be extended by a notice of dispute given
by the Executive only if such notice is given in good faith and the
Executive pursues the resolution of such dispute with reasonable
diligence.
(d) Compensation During Dispute. Except in the event of Termination for
---------------------------
Cause by the Company, I if the Date of Termination is extended in
accordance with Section 7(c) hereof, the Company shall continue to pay
the Executive the full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base
Salary and Annual Bonus) and continue the Executive as a participant
in all compensation, benefit and insurance plans in which the
Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance
with Section 7(c) hereof. Amounts paid under this Section 7(d) are in
addition to all other amounts due under this Agreement and shall not
be offset against or reduce any other amounts due under this
Agreement.
8. COMPENSATION DURING DISABILITY OR UPON TERMINATION:
---------------------------------------------------
(a) Disability Period. During any period during the Term hereof that the
-----------------
Executive fails to perform his duties hereunder as a result of
incapacity due to physical or mental illness ("Disability Period"),
the Executive shall continue to (i) receive his full Base Salary, (ii)
remain eligible to receive an Annual Bonus under Section 3(b) hereof,
and (iii) participate in the plans and
-7-
<PAGE>
arrangements described in Section 3(e) and 3(f) hereof (except to the
extent such participation is not permitted under the terms of such
plans and arrangements).
(b) Termination By Death: If the Executive's employment is terminated by
--------------------
death, the Executive's estate shall be entitled to receive as soon as
is practicable after the date of death: (i) any accrued but unpaid
salary and other benefits up to and including the date of Executive's
death, and (ii) life insurance benefits pursuant to any life insurance
purchased by the Company for the benefit of the Executive. In
addition, any unvested Options and any other unvested options,
restricted stock or stock appreciation rights which may be granted
after the date of this Agreement (such future options, restricted
stock or stock appreciation rights hereinafter being referred to as
"Future Stock Benefits") shall vest immediately.
(c) Termination For Permanent Disability: If the Executive's employment
------------------------------------
is terminated by the Company for Permanent Disability, the Executive
shall be entitled to receive any accrued but unpaid salary and other
benefits up to and including the date of the Executive's termination.
In addition, any unvested Options pursuant to Section 3(c) and any
other unvested Future Stock Benefits shall vest immediately.
(d) Termination for Cause. If the Executive's employment is terminated by
---------------------
the Company for Cause, the Company shall not have any other or further
obligations to the Executive under this Agreement except (i) as to
that portion of any unpaid Base Salary and other benefits accrued and
earned under this Agreement to the date of termination, and (ii) as
may be provided in accordance with the terms of retirement and other
benefit plans pursuant to Section 3(e) and 3(f).
(e) Termination Without Cause, Termination For Good Reason, and
-----------------------------------------------------------
Termination During a Window Period. If the Executive's employment
-----------------------------------
hereunder is terminated (1) by the Company without Cause, (2) by the
Executive for Good Reason, or (3) by the Executive during a Window
Period, then:
(i) As soon as practicable after the Date of Termination, but no
later than ten (10) days after such date, the Company shall pay to the
Executive any amounts earned, accrued or owing the Executive under the
terms hereunder for services to the Date of Termination.
(ii) As soon as practicable after the Date of Termination, but no
later than ten (10) days after such date, the Company shall pay to the
Executive a lump sum amount, in cash, equal to the sum of (A) any
Annual Bonus which has been allocated or awarded to the Executive, but
not yet paid, for a completed fiscal year preceding the Date of
Termination under any Annual Bonus plan, and (B) a pro rata portion to
the Date of Termination of the Annual Bonus for the year in which the
Date of Termination occurs, assuming the Executive would have received
an Annual Bonus equivalent to the highest previous Annual Bonus which
the Executive received in any given year during the Employment Period.
In the event such termination occurs in the first year of employment,
the Executive's pro rata Annual Bonus will be based on a full year
bonus of $75,000.
(iii) In lieu of any further salary or bonus payments to the
Executive for periods subsequent to the Date of Termination, the
Company shall pay as a severance payment to the Executive, within ten
(10) days immediately following the Date of Termination, a lump sum
amount, in cash, equal to the sum of: (A) two year's Base Salary at
the Executive's highest annual Base Salary rate in effect during the
Employment Period and (B) an amount equivalent to twice the highest
Annual Bonus that the Executive received in any given year during the
Employment Period or $150,000, whichever is higher.
(iv) The Company shall maintain in full force and effect, for the
continued benefit of the Executive until the later of (x) the second
anniversary of the Date of Termination or (y) the end of the Term,
each "employee welfare benefit plan" (as defined in Section 3(1) of
the Employee
-8-
<PAGE>
Retirement Income Security Act of 1974, as amended ("ERISA")), other
than any disability plan, in which the Executive was entitled to
participate immediately prior to the Date of Termination, provided
that the Executive's continued participation is possible under the
general terms and provisions of such plans. In the event that the
Executive's participation in any such plan is barred, the Company
shall arrange to provide the Executive with benefits substantially
similar to those which the Executive would otherwise have been
entitled to receive under the plan from which his continued
participation is barred;
(v) Any unvested Options or Future Stock Benefits shall, to the
extent not already vested, vest immediately upon the Date of
Termination;
(vi) The Company shall have no additional obligations to the Executive
under this Agreement except to the extent provided in Sections 3(e)
and 3(f).
(f) Termination Without Cause Outside a Window Period by the Executive. If
------------------------------------------------------------------
the Executive's employment is terminated by the Executive without
Cause outside of a Window Period, the Company shall not have any other
or further obligations to the Executive under this Agreement except
(i) as to that portion of any unpaid Base Salary and other benefits
accrued and earned under this Agreement to the date of termination,
and (ii) as may be provided in accordance with the terms of retirement
and other benefit plans pursuant to Section 3(e) and 3(f). In
addition, the pro rata portion of any unvested Options or Future Stock
Benefits that were scheduled to vest in the year of the Executive's
termination shall vest immediately. Such pro rata amount will be
determined in each such case for the Options and Future Stock Benefits
by taking the number of Options or Future Stock Benefits (whichever
the case may be) which were scheduled to vest on the next succeeding
vesting date after the Date of Termination and multiplying each by a
fraction, the numerator of which is the number of days that have
elapsed from the vesting date immediately preceding the Date of
Termination (or the grant date) to the Date of Termination, and the
denominator of which shall be the number of days scheduled between the
most recent vesting date preceding the Date of Termination (or the
grant date) and the vesting date first succeeding the Date of
Termination (such formula hereinafter referred to as the "Pro Rata
Option Formula").
(g) Mitigation. The Executive shall not be required to mitigate amounts
----------
payable pursuant to Section 8 hereof by seeking employment or
otherwise, but any payments made or benefits provided pursuant to
Section 8(e)(iv) hereof shall be offset by any similar payments or
benefits made available without cost to the Executive from any
subsequent employment during the Term (determined immediately prior to
such termination of employment.)
9. CONFIDENTIAL INFORMATION:
------------------------
(a) Unauthorized Disclosure. The Executive shall not, either during the
-----------------------
Executive's employment hereunder or thereafter, disclose, divulge,
discuss, copy or otherwise use or suffer to be used in any manner,
other than in accordance with the Executive's duties hereunder, any
confidential or proprietary information relating to the Company's
business, prospects, finances, operations, customers, products,
services, rates, properties or otherwise to its particular business or
other trade secrets of the Company, it being acknowledged by the
Executive that all such information regarding the business of the
Company compiled or obtained by, or furnished to, the Executive while
the Executive shall have been employed by or associated with the
Company is confidential and/or proprietary information and the
Company's exclusive property; provided, however, that the foregoing
restrictions shall not apply to the extent that such information:
(i) is clearly obtainable in the public domain; or
(ii) becomes obtainable in the public domain, except by reason of the
breach by the Executive of the terms hereof; or
-9-
<PAGE>
(iii) is required to be disclosed by rule of law or by order of a
court or governmental body or agency.
(b) The Executive agrees and understands that the remedy at law for any
breach by him of this Section 9 will be inadequate and that the
damages flowing from such breach are not readily susceptible to being
measured in monetary terms. Accordingly, it is acknowledged that the
Company shall be entitled to seek immediate injunctive relief.
Nothing in this Section 9 shall be deemed to limit the Company's
remedies at law or in equity for any breach by the Executive of any of
the provisions of this Section 9 which may be pursued or availed of by
the Company.
(c) The Executive acknowledges that the Executive's obligations under this
Section 9 shall survive regardless of whether the Executive's
employment by the Company is terminated, voluntarily or involuntarily,
by the Company or the Executive, with Cause or without Cause.
10. EXCISE TAX GROSS-UP PAYMENT:
---------------------------
(a) Notwithstanding anything herein to the contrary, if it is determined
that any payment and/or other compensation under the terms of this
Agreement or otherwise would be subject to the excise tax imposed by
Section 4999 and/or Section 280 of the Internal Revenue Code (the
"Code") or any interest or penalties should be assessed with respect
to such excise tax (such excise tax, together with any interest or
penalties thereon, is herein referred to as an "Excise Tax"), then
Executive shall be entitled to an additional cash payment (a "Gross-Up
Payment") in an amount that will place Executive in the same after-tax
economic position that Executive would have enjoyed if the Excise Tax
had not applied to such payment and/or other compensation. The amount
of the Gross-Up Payment shall be determined by an accounting firm
selected by the Executive in his sole discretion (the "Accounting
Firm") in accordance with such formula as the Accounting Firm deems
appropriate. No Gross-Up Payments shall be payable hereunder if the
Accounting Firm determines that the payments and/or other compensation
are not subject to an Excise Tax. The Accounting Firm shall be paid
by the Company (or any successor thereto) for services performed
hereunder.
(b) All determinations required under this Section 10, including whether a
Gross-Up Payment is required, the amount of the payment and/or other
compensation constituting excess parachute payments, and the amount of
the Gross-Up Payment, shall be made by the Accounting Firm, which
shall provide detailed supporting calculations to both Executive and
the Company within fifteen (15) days of any date reasonably requested
by the Executive on which a determination under this Section 10 is
necessary or advisable. The Company shall pay to the Executive, in
cash, subject to any applicable tax withholding requirements, the
Gross-Up Payment within fifteen (15) days of the receipt of the
Accounting Firm's determination. If the Accounting Firm determines
that no Excise Tax is payable by Executive, the Company agrees that
the Accounting Firm shall provide the Executive with an opinion that
the Accounting Firm, having substantial authority under the Code and
other tax regulations and based on its judgement and an assessment of
the facts, does not believe the Executive will have to report an
Excise Tax on the Executive's federal income tax return. Any
determination by the Accounting Firm shall be binding upon the
Executive and the Company (or any successor thereto).
(c) In the event that it is finally determined by the Internal Revenue
Service on audit or in a judicial proceeding that the Executive is
liable for any Excise Tax in an amount other than that determined by
the Accounting Firm, the Gross-Up Payment shall be recomputed by the
Accounting Firm based on the Excise Tax that is finally determined to
be due. The Executive shall refund any resulting overpayment
(together with interest at the prevailing short-term applicable
federal rate under section 1274 of the Code) and the payer of the
original Gross-Up Payment shall pay to the Executive any resulting
shortfall (together with interest at the short-term applicable federal
rate under section 1274 of the Code), promptly following such
recomputation. The Company shall indemnify the Executive against any
costs and expenses (including the reasonable fees of
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<PAGE>
attorneys and accountants) incurred in connection with any audit or
examination of, or legal proceedings in connection with, his tax
return for any taxable year for which an Excise Tax is, or is alleged
to be, due, to the extent attributable to the issue of such Excise
Tax.
MISCELLANEOUS:
- -------------
(a) The Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether employment or otherwise,
which would restrict or prohibit him from undertaking or performing
employment in accordance with the terms and conditions of this
Agreement.
(b) The provisions of this Agreement are severable and if any one or more
provisions may be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable in any jurisdiction
nevertheless shall be binding and enforceable.
(c) At all times during and after Executive's employment and the date of
this Agreement, the Company shall indemnify the Executive to the
fullest extent permitted by law for all expenses, costs, liabilities
and legal fees which the Executive may incur in the discharge of his
duties hereunder and shall at all times maintain appropriate
provisions in its articles of incorporation and bylaws which mandate
that the Company provide such indemnification. The Company shall also
provide, for the benefit of the Executive, Directors and Officers'
liability insurance in amounts which are customary for directors and
officers of other public companies similar in character or size to the
Company. Any termination of the Executive's employment or of this
Agreement shall have no effect on the continuing operation of this
Section 11(c).
(d) The Company shall reimburse Executive for reasonable fees and expenses
incurred in connection with the negotiation and execution of this
Agreement, including, without limitation, the reasonable fees and
expenses of his attorneys.
(e) The Company will require any purchaser of all or substantially all of
the business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the
Company as herein before defined and any successor to its business
and/or assets as aforesaid which executes and delivers the agreement
provided for in this Section 11(e) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(f) This Agreement and all rights of the Executive hereunder shall inure
to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees. If the Executive should die
while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts unless otherwise provided herein,
shall be paid in accordance with terms of this Agreement to the
Executive's devisee, legatee, or other designee or, if there be no
such designee, to the Executive's estate.
(g) Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association then pertaining in the metropolitan Boston, MA area, and
judgment upon the award rendered by the arbitrator or arbitrators may
be entered in any court having jurisdiction thereof. The arbitrator
or arbitrators shall be deemed to possess the powers to issue
mandatory orders and restraining orders in connection with such
arbitration. The Company (or any successor thereto) and the Executive
each agree to use their best efforts to begin the arbitration process
-11-
<PAGE>
within three months of any notification from the other party
requesting arbitration to settle a dispute. The Company (or any
successor thereto) shall pay all costs of any such proceeding.
(h) All notices and other communications required or permitted under this
Agreement shall be in writing, and shall be deemed properly given if
delivered personally, mailed by registered or certified mail in the
United States mail, postage prepaid, return receipt requested, sent by
facsimile, or sent by Express Mail, Federal Express or nationally
recognized express delivery service, as follows:
If to the Company or the Board:
CTC Communications Corp.
360 Second Avenue
Waltham, MA 02154
Attention: Chief Executive Officer
Fax Number: (781) 890-1613
If to the Executive:
Steven C. Jones
795-A Meadowland Drive
Naples, FL 34108
Notice given by hand, certified or registered mail, or by Express
Mail, Federal Express or other such express delivery service, shall be
effective upon actual receipt. Notice given by facsimile transmission
shall be effective upon telephonic confirmation of receipt by the
party to whom it is addressed. All notices by facsimile transmission
shall be followed up promptly after transmission by delivering an
original copy by hand, certified or registered mail, or by Express
Mail, Federal Express or other such delivery service. Any party may
change any address to which notice is to be given to it by giving
notice as provided above of such change of address.
(i) The failure of either party to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor
prevent that party thereafter from enforcing each and every other
provision of this Agreement. The rights granted the parties herein
are cumulative and the waiver of any single remedy shall constitute a
waiver of such party's right to assert all other legal remedies
available to it under the circumstances.
(j) This Agreement supersedes all prior agreements and understandings
between the parties and may not be modified or terminated orally. No
modification or attempted waiver shall be valid unless in writing and
signed by the party against whom the same is sought to be enforced.
-12-
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(k) This Agreement shall be governed by, and construed in accordance with
the provisions of, the law of the Commonwealth of Massachusetts,
without reference to provisions that refer a matter to the law of any
other jurisdiction. Each party hereto hereby irrevocably submits
itself to the non-exclusive personal jurisdiction of the federal and
state courts sitting in Massachusetts; accordingly, subject to the
provisions for arbitration provided in Section 11(g), any justiciable
matters involving the Company and the Executive with respect to this
Agreement may be adjudicated only in a federal or state court sitting
in Massachusetts.
(l) All payments required to be made by the Company hereunder to the
Executive shall be subject to the withholding of such amounts relating
to taxes and other government assessments as the Company may
reasonably determine it should withhold pursuant to any applicable
law, rule or regulation.
(m) Captions and section headings used herein are for convenience and are
not a part of this Agreement and shall not be used in construing it.
(n) Where necessary or appropriate to the meaning hereof, the singular and
plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
(o) This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when
so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an
executed counterpart of this Agreement by telecopier shall be
effective as delivery of a manually executed counterpart of this
Agreement.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.
CTC COMMUNICATIONS CORP.:
By: /s/ Robert J. Fabbricatore
_____________________________________
Robert J. Fabbricatore
Chairman and Chief Executive Officer
EXECUTIVE:
By: /s/ Steven C. Jones
___________________________________
Steven C. Jones
Address:
795-A Meadowland Drive
Naples, FL 34108
-14-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-44337) pertaining to the Employee Stock Purchase Plan of CTC
Communications Corp. and the Registration Statement (Form S-8 No. 333-17613)
pertaining to the 1996 Stock Option Plan of CTC Communications Corp. of our
report dated May 28, 1998, except for Note 1, as to which the date is July 15,
1998, with respect to the financial statements and schedule of CTC
Communications Corp. included in the Annual Report (Form 10-K) for the year
ended March 31, 1998.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
July 15, 1998
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,168
<SECURITIES> 0
<RECEIVABLES> 17,288
<ALLOWANCES> 492
<INVENTORY> 0
<CURRENT-ASSETS> 22,386
<PP&E> 13,377
<DEPRECIATION> 6,838
<TOTAL-ASSETS> 30,967
<CURRENT-LIABILITIES> 11,143
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 11,480
<TOTAL-LIABILITY-AND-EQUITY> 30,967
<SALES> 40,947
<TOTAL-REVENUES> 41,267
<CGS> 14,039
<TOTAL-COSTS> 45,531
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> (4,370)
<INCOME-TAX> (1,486)
<INCOME-CONTINUING> (2,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,884)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
<PAGE>
EXHIBIT 99.1
RISK FACTORS
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 71% of the Company's revenues for the nine month period ended
December 31, 1997 are no longer generated by the Company. For the fourth quarter
ended March 31, 1998, agency revenues decreased from $8.4 million to $194,000
and total revenues decreased from $11.5 million to $6.2 million. 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 AND UNCERTAINTY OF FINANCING
The Company has obtained a commitment for an interim credit facility
(the "Interim Facility") from its current lender. The Interim Facility, which
would mature on June 30, 1999, would provide secured revolving loans of up to
$20 million to refinance the Credit Facility, to fund capital expenditures and
operating losses and for general corporate purposes. The commitment, which is
subject to certain conditions, extends to September 30, 1998. To satisfy one of
those conditions, the Company has received a commitment from Spectrum to
purchase $5 million of Preferred Stock which extends until June 30, 1999. The
Company believes that the Interim Facility and the Interim Spectrum Financing,
if required, together with cash on hand would be sufficient to refinance the
Company's existing credit facility and fund the Company's existing operations
for at least the next 12 months. However, CTC would be required to delay its
proposed geographic expansion and deployment of facilities or to obtain
additional financing within the next 6 months.
The implementation of the Company's business plan to further penetrate
its existing markets as an ICP, deploy the ICN in its existing markets, expand
its sales presence into six additional states in the Boston-Washington D.C.
corridor and enhance the CTC Information System and the repayment of the Credit
Facility will require the Company to raise significant capital. The Company has
been seeking and is actively engaged in the negotiation of commitments with
alternative sources of long term financing to fund its business plans. Although
the Company is highly optimistic that it will be successful in obtaining such
financing based upon its negotiations, there can be no assurance that the
Company will be able to consummate financing in the amount, on the terms and on
the schedule required to implement the Company's business plan, if at all.
The timing and amount of the Company's actual capital requirements may
be materially affected by many factors, including the timing and availability of
financing, 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. Sources of funding
<PAGE>
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 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 intern have a
material adverse effect on the Company.
HIGH LEVERAGE; POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
If the any of the proposed financings are consummated, the Company
will be 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 the Notes 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 DATE 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
<PAGE>
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
reseller 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
<PAGE>
effect on the Company's business, operating results and financial condition.
POTENTIAL IMPACT OF THE BELL ATLANTIC LITIGATION AND THE TRO
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 $11.3 million
as of July 10, 1998) owed to the Company. The Company intends to pursue this
suit vigorously. Although the Company believes the collection of the agency
commissions sought in the suit is probable, there can be no assurance that the
Company will be successful in collecting 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 adversely affect the Company.
In the Company's litigation against Bell Atlantic, Bell Atlantic
obtained a temporary restraining order (the "TRO") prohibiting the Company until
December 30, 1998 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.
Although the Company is seeking to have the TRO modified or dissolved, there is
no assurance that it will be successful and the Company's sale of local service
to such customer sites could be prohibited until December 30, 1998. The
inability of the Company to sell local telephony services to such customers
until such date may continue to adversely affect the Company's business. 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
<PAGE>
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 July 10, 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.
<PAGE>
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 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.
