<PAGE>
As filed with the Securities and Exchange Commission on July 12, 1999
Registration No. 333-77709
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
AMENDMENT NO. 2
TO
Form S-1
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
CTC COMMUNICATIONS CORP.
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 4812 04-2731202
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification No.)
of Incorporation or
Organization)
CTC Communications Corp.
220 Bear Hill Road
Waltham, Massachusetts 02451
Telephone: (781) 466-8080
(Address, including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
-----------
Robert J. Fabbricatore
Chief Executive Officer
CTC Communications Corp.
220 Bear Hill Road
Waltham, Massachusetts 02451
Telephone: (781) 466-8080
(Name, Address including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
-----------
Copies to:
Mary E. Weber, Esq. John D. Watson, Jr., Esq.
Ropes & Gray Latham & Watkins
One International Place 1001 Pennsylvania Avenue, N.W., Suite
Boston, Massachusetts 02110-2624 1300
(617) 951-7000 Washington, D.C. 20004
----------- (202) 637-2200
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
-----------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_] 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated July 12, 1999
3,500,000 Shares
[CTC Logo Appears Here]
CTC Communications Corp.
Common Stock
---------------------------------------------------------
CTC is offering 3,200,000 shares, and selling
stockholders are offering 300,000 shares. CTC
will not receive any of the proceeds from
shares sold by the selling stockholders.
The shares are listed on The Nasdaq National
Market under the symbol "CPTL." The last
reported sale price of our shares on July 9,
1999 was $19.75 per share.
Investing in the shares involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discounts and Commissions.............................. $ $
Proceeds to CTC..................................................... $ $
Proceeds to Selling Stockholders.................................... $ $
</TABLE>
CTC has granted the underwriters a 30-day option to purchase up to 525,000
additional shares on the same terms and conditions as set forth above solely to
cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
---------------------------------------------------------
<TABLE>
<S> <C>
Lehman Brothers Credit Suisse First Boston
</TABLE>
, 1999.
<PAGE>
Inside Front Cover
[A map of the Northeastern United States showing the first phase of CTC's
network. The title of the map is "CTC's Phase I Integrated Communications
Network and Branch Locations." The Map depicts CTC's core hub sites, hub sites,
Network Operations Centers/Data centers, leased capacity connections and sales
branch offices. There is a legend and CTC's logo at the bottom right of the
page.]
<PAGE>
------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 13
Price Range of Common Stock and Dividend Policy.......................... 13
Capitalization........................................................... 14
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 22
Management............................................................... 34
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Principal and Selling Stockholders......................................... 39
Certain Relationships and Related Transactions............................. 41
Description of Senior Secured Facilities................................... 41
Holding Company Reorganization............................................. 43
Description of Capital Stock............................................... 44
Underwriting............................................................... 48
Legal Matters.............................................................. 50
Experts.................................................................... 50
Where You Can Find More Information........................................ 50
Financial Statements....................................................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
<PAGE>
Prospectus Summary
This summary only highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully. Unless we indicate
otherwise, information in this prospectus assumes the underwriters will not
exercise their over-allotment option.
Overview of Our Business
We are a rapidly growing single-source provider of voice and data
telecommunications services, or integrated communications provider, with 15
years of marketing, sales and service experience. We target predominantly
medium and larger-sized business customers who seek greater capacity for voice
and data traffic, a single provider for their telecommunications requirements
and improved levels of service. We have a large, experienced sales force
consisting of 164 sales people supported by 101 network consultants. Our sales
force is located close to our customers in 25 sales branches primarily in New
England and New York State.
We are currently deploying our own state-of-the-art network facilities to
carry telecommunications traffic. Our network uses packet-switching, a
technology which transmits data in discrete packages. It also uses internet
protocol, which is a method that allows computers with different architectures
and operating systems to communicate over the internet, and asynchronous
transfer mode, or ATM, architecture, which allows the network to transmit
multiple types of media, such as voice data and video. The first phase of our
network includes 22 Cisco Systems advanced data switches and two network
operations centers. We are interconnecting our facilities with leased
transmission capacity over fiber optic cable strands from Level 3
Communications and NorthEast Optic Network. Cisco has reviewed and approved our
network design and has designated our network as a Cisco Powered Network.(TM)
In May 1999, we began testing of our network with some of our customers. By
late summer, we expect to begin providing, and billing for, commercial service
to a limited number of customers on our network.
We became an integrated communications provider in January 1998. Prior to
that, we were the largest independent sales agent for NYNEX Corp. (now Bell
Atlantic), based on agency revenues. At the end of 1997, before leaving the
Bell Atlantic agency program, we were managing relationships for approximately
7,000 customers, representing over 280,000 local access lines and over $200
million in annual local telecommunications spending. As of March 31, 1999,
after only 15 months as an integrated communications provider, we were serving
over 9,000 customers and had over 142,000 access lines and equivalent circuits,
or ALEs. ALEs are the total number of voice circuits and equivalent data
circuits we have in service. Voice circuits are the actual number of voice
circuits purchased by our customers, while equivalent data circuits represents
the data transmission capacity purchased by our customers divided by 64
kilobits per second, which is the capacity necessary to carry one voice
circuit.
We intend to access customer locations from our network through our
PowerPathSM services. These will include a variety of high capacity
technologies including digital subscriber line, or DSL, service which premits
high speed connections over existing lines, leased high capacity wireline
circuits, or T-1s, wireless technologies and fiber optic facilities, as
available. We will offer continuously connected long distance and data services
over our network. We believe that these services represent over 50% of our
target customers' fixed line telecommunications spending. The balance
represents local dial tone services which we currently obtain from other
carriers. We plan to incorporate local dial tone service into our packet-
switching architecture as that technology matures.
We have substantial expertise selling sophisticated data services, including
frame relay, which is a high speed data service that transmits data in discrete
packages, continuously connected high capacity data links, integrated services
digital network, or ISDN which is a standardized digital service that combines
voice and data communications, ATM and internet services. Over the last five
years, we sold digital data services to more than 7,000 customer sites and
designed and implemented more than 600 wide area networks, or WANs. As of March
31, 1999, data circuits represented approximately 20% of our total ALEs in
service.
1
<PAGE>
Our Market Opportunity
The market potential for integrated communications providers is large and
growing. According to FCC data, in 1997, the total market for U.S. retail
telecommunications services was approximately $187 billion. Data services,
including internet, frame relay and ATM services, represent one of the fastest
growing segments of the telecommunications market. Industry reports by
International Data Corporation estimate that from 1997 to 2002, annual internet
services revenues will increase from $7.5 billion to $29.7 billion. These same
reports also indicate that combined annual revenues from frame relay and ATM
services will increase from $2.9 billion to $7.6 billion over this period. We
are deploying our data-centric network to capitalize on this market
opportunity.
Our target market, the Northeastern and Mid-Atlantic region, represents an
attractive opportunity for us because it has a high concentration of
telecommunications traffic. According to FCC data, New York State and New
England had an estimated 7.3 million local business access lines as of December
31, 1997, which generated retail telecommunications revenues of approximately
$24.4 billion in 1997. When we expand our business in the remaining portions of
the New York-Washington, D.C. corridor, we will increase our addressable market
by an estimated 8.4 million local business access lines as of December 31,
1997, which generated approximately $26.3 billion in retail telecommunications
revenues in 1997. We estimate our target customers represent nearly 50% of the
total business access lines in our target markets.
Our Competitive Strengths
Our goal is to be the leading integrated communications provider for medium
and larger-sized business customers in our target markets. We believe that the
following competitive strengths position us well to achieve this goal:
. Over 15 years of telecommunications marketing, sales and service
experience.
. Over 250 experienced sales people and network consultants providing
personalized sales and customer care.
. A capital-efficient and scalable, all packet-switched network, capable
of providing advanced data services.
. Significant experience designing and selling sophisticated data
services.
. A broad range of voice and data services incorporated on a single bill.
. Comprehensive, fully integrated billing and operational support systems,
or OSS.
. The ability to expand using our proven operating model for branch
offices, sales process, customer service and personnel training.
Holding Company Reorganization
Shortly after the closing of this offering, we expect to complete a
reorganization into a holding company structure. We are a Massachusetts
corporation. In the reorganization, we will become a wholly owned subsidiary of
CTC Communications Group, Inc., a Delaware corporation. CTC Communications
Group was formed by us for this purpose and has no other business. All of our
issued and outstanding common and preferred stock, including the common stock
offered by this prospectus, will be converted into the same number of shares of
common and preferred stock of CTC Communications Group.
--------
Our principal executive offices are located at 220 Bear Hill Road, Waltham,
Massachusetts 02451, our telephone number is (800) 883-6000 and our internet
website address on the world wide web is www.ctcnet.com. The contents of our
website are not part of this prospectus. In this prospectus we refer to CTC
Communications Corp. and its subsidiary collectively as "CTC," "we" and "us."
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered ............... 3,200,000 shares by CTC
300,000 shares by the selling stockholders
----------
3,500,000 shares
----------
----------
Common stock to be outstanding
after the offering.................. 13,897,504 shares
Over-allotment option............... 525,000 shares
Use of proceeds..................... To repay indebtedness, $6.0 million
as of July 9, 1999, under our
credit facility with Toronto
Dominion and for general corporate
purposes, including capital
expenditures, working capital and
operating losses associated with
the continued deployment of our
network, further penetration of our
existing region and expansion into
new markets throughout the New
York--Washington, D.C. corridor.
Nasdaq National Market symbol....... CPTL
</TABLE>
The shares of common stock to be outstanding after the offering are stated
as of July 9, 1999. The shares of common stock to be outstanding exclude:
. 3,639,018 shares of common stock issuable upon exercise of stock options
at exercise prices between $1.10 and $20.00 per share;
. 1,288,071 shares of common stock issuable upon exercise of warrants at
exercise prices between $6.75 and $11.81 per share, warrants to purchase
455,769 of these shares, calculated using an assumed value of $19.75 per
share, being exercised by selling stockholders to obtain the 300,000
shares they are offering; and
. 1,480,063 shares of common stock issuable at that date upon conversion
of Series A redeemable convertible preferred stock, or Series A
preferred stock. See "Capitalization," "Management," and "Description of
Capital Stock."
3
<PAGE>
Summary Financial Data
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
----------------------------
1997 1998 1999
------------------ ---------
(dollars in thousands)
<S> <C> <C> <C>
Statement of Operations Data
Agency revenues................................. $ 29,195 $ 24,775 $ --
Telecommunications revenues..................... 11,095 16,172 70,964
-------- -------- ---------
Total revenues................................. 40,290 40,947 70,964
Cost of telecommunications revenues (excluding
depreciation and amortization)................. 8,709 14,039 61,866
Selling, general and administrative expenses.... 23,077 29,488 52,521
Depreciation and amortization................... 743 1,418 3,778
Income (loss) from operations................... 7,761 (3,998) (47,201)
Net income (loss)............................... 4,683 (2,498) (51,238)
Other Financial Data
EBITDA (loss)................................... $ 8,519 $ (2,405) $ (43,346)
Capital expenditures............................ 1,222 6,109 36,041
Net cash (used in) provided by operating
activities..................................... 3,572 (7,951) (33,254)
Net cash used in investing activities........... 1,222 4,765 6,282
Net cash provided by financing activities....... 114 8,479 39,622
</TABLE>
EBITDA consists of income (loss) before interest, income taxes, depreciation
and amortization. We have provided EBITDA because it is a measure of financial
performance commonly used in the telecommunications industry. Other companies
may calculate it differently from us. EBITDA is not a measurement of financial
performance under generally accepted accounting principles, or GAAP. We do not
believe you should consider EBITDA as an alternative to net income (loss) as a
measure of results of operations or to GAAP-based cash flow data as a measure
of liquidity. Capital expenditures consists of additions to property and
equipment acquired for cash or under notes payable and capital leases.
<TABLE>
<CAPTION>
As of March 31, 1999
----------------------
Historical As Adjusted
---------- -----------
(dollars in thousands)
<S> <C> <C>
Balance Sheet Data
Cash and cash equivalents................................ $ 2,254 $ 61,378
Total assets............................................. 69,482 128,606
Total long-term debt, including current portion.......... 64,858 64,858
Series A redeemable convertible preferred stock.......... 12,672 12,672
Stockholders' equity (deficit)........................... (37,144) 21,980
</TABLE>
The as adjusted balance sheet data reflects our receipt of net proceeds of
this offering of $59,124,000 based upon an assumed public offering price of
$19.75 per share, after deducting underwriting discounts and commissions and
estimated offering expenses.
4
<PAGE>
Summary Quarterly Financial and Operating Data
The following table sets forth certain financial and operating data for the
five quarters since becoming an integrated communications provider. The
financial information is from our unaudited financial statements. You should
read this information in conjunction with the financial statements and related
notes included elsewhere in this prospectus. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal Quarter ended
--------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1998 1999
--------- -------- ------------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Telecommunications revenues............ $ 6,288 $12,836 $ 14,516 $ 19,025 $ 24,587
Cost of telecommunications revenues
(excluding depreciation and
amortization)......................... 5,944 11,614 12,383 16,429 21,440
Selling, general and administrative
expenses.............................. 8,868 9,095 12,043 12,429 18,954
Depreciation and amortization.......... 668 505 610 1,058 1,605
Loss from operations................... (9,192) (8,378) (10,520) (10,891) (17,412)
Net loss............................... (5,622) (8,029) (10,733) (11,480) (20,996)
Other Financial Data
EBITDA (loss)(/1/)..................... (8,524) (7,843) (9,907) (9,830) (15,766)
Capital expenditures................... 1,552 1,015 4,850 16,397 13,779
Net cash used in operating activities.. (5,251) (7,446) (11,330) (2,779) (11,699)
Net cash provided by financing
activities............................ 6,527 11,669 12,972 14,780 201
Operating Data
Net ALEs provisioned in the quarter.... 17,637 22,548 24,209 38,878 38,935
Cumulative ALEs in service at quarter
end .................................. 17,637 40,185 64,394 103,272 142,207
</TABLE>
(1) Excluding expenses and charges of $7.4 million relating to the litigation
and settlement with Bell Atlantic, EBITDA (loss) would have been $(8.3)
million for the fiscal quarter ended March 31, 1999. See "Business--Legal
Proceedings."
5
<PAGE>
Risk Factors
Investing in our common stock involves risk. You should carefully consider
the risks and uncertainties described below before deciding to purchase common
stock. These risks and uncertainties are not the only ones we face or which may
adversely affect our business. If any of the following risks or uncertainties
actually occur, our business, financial condition or results of operations
could be materially adversely affected. In this event, the trading price of our
common stock could decline, and you could lose all or part of your investment.
Because our revenues prior to January 1998 resulted from a business strategy we
are no longer pursuing, you may have difficulty evaluating us.
We terminated our agency relationship with Bell Atlantic in December 1998
and we no longer receive agency revenues. We only began offering local services
under our own brand name in January 1998 and have only begun testing our
network with some customers in May of 1999. As a result, we can only provide
limited historical operating and financial information about our current
business strategy for you to evaluate.
Our incurrence of negative cash flows and operating losses during the next
several years may adversely affect the price of our common stock.
During recent periods we have experienced substantial net losses, operating
losses and negative cash flow. Our expenses have increased significantly, and
we expect our expenses to continue to increase as we deploy our network and
implement our business plan. Accordingly, we expect to incur significant
operating losses, net losses and negative cash flow during the next several
years, which may adversely affect the price of our common stock.
If we do not successfully execute our new business strategy, we may be unable
to compete effectively.
Our business strategy is complex and requires that we successfully complete
many tasks, a number of which we must complete simultaneously. If we are unable
to effectively implement or coordinate the implementation of these multiple
tasks, we may be unable to compete effectively in our markets and our financial
results may suffer.
If our network does not function properly, we will be unable to provide the
telecommunications services on which our future performance will in large part
depend.
Because the design of our network has not been widely deployed, we cannot
assure you that our network will provide the functionality that we expect. We
also cannot be sure that we will be able to incorporate local dial tone
capabilities into our network because this technology has not been widely
implemented. Without this capability we will not be able to provide on our
network all of our target customers' fixed line telecommunications services.
If we do not obtain interconnection agreements with other carriers, we will be
unable to provide enhanced services on our network.
Negotiation of interconnection agreements with incumbent local exchange
carriers can take considerable time, effort and expense, and these agreements
are subject to federal, state and local regulation. We may not be able to
effectively negotiate the necessary interconnection agreements. Without these
interconnection agreements, we will be unable to provide enhanced connectivity
to our network and local dial tone services and to achieve the financial
results we expect.
6
<PAGE>
Because of our limited experience, we may not be able to properly or timely
deploy, operate and maintain our network, which could materially adversely
affect our financial results.
We have engaged a network services integrator to design, engineer and manage
the build out of our network in our existing markets. If the network integrator
is not able to perform these functions, we may experience delays or additional
costs in providing services and building the network. The failure of our
network equipment to operate as anticipated or the inability of equipment
suppliers to timely supply such equipment could materially and adversely affect
our financial results.
We are still deploying the initial phase of our network and not currently
providing any commercial services over our network. Because we have limited
experience operating and maintaining telecommunications networks, we may not be
able to deploy our network properly or do so within the time frame we expect.
In addition, once the network is deployed, we may encounter unanticipated
difficulties in operating and maintaining it. If we do not implement our
network on time and in an effective manner, our financial results could be
adversely affected.
Our high leverage creates financial and operating risk that could limit the
growth of our business.
We have a significant amount of indebtedness. As of March 31, 1999, we had
approximately $64.9 million of total indebtedness outstanding. We expect to
seek substantial additional debt financing to fund our business plan. Our high
leverage could have important consequences to us, including,
. limiting our ability to obtain necessary financing for future working
capital, capital expenditures, debt service requirements or other
purposes;
. limiting our flexibility in planning for, or reacting to, changes in our
business;
. placing us at a competitive disadvantage to competitors with less
leverage;
. increasing our vulnerability in the event of a downturn in our business
or the economy generally;
. requiring that we use a substantial portion of our cash flow from
operations for the payment of principal and interest on our indebtedness
and not for other purposes.
We will need to refinance our existing indebtedness when due, and we may be
unable to do so.
We do not expect to generate sufficient cash flow from operations to repay
our existing credit and vendor facilities. We will need to refinance this
indebtedness when it comes due. We cannot assure you that we will be able to
refinance any of our indebtedness on reasonable terms, or at all. If we are
unable to refinance all or some of our indebtedness, we may need to sell
assets, delay capital expenditures or sell additional capital stock. We cannot
assure you that we will be able to do so.
We may be unable to obtain the additional capital we will require to fund our
operations and finance our growth on acceptable terms or at all, which could
cause us to delay or abandon our development and expansion plans.
We will need significant additional capital to fund our business plan. We
expect to seek additional financing to further fund our business plan as soon
as practicable. We cannot assure you that capital will be available to us when
we need it or at all. If we are unable to obtain capital when we need it, we
may delay or abandon our development and expansion plans. That could have a
material adverse effect on our business and financial condition.
7
<PAGE>
Our market is highly competitive, and we may not be able to compete
effectively, especially against established competitors with greater financial
resources and more experience.
We operate in a highly competitive environment. We have no significant
market share in any market in which we operate. We will face substantial and
growing competition from a variety of data transport, data networking,
telephony service and integrated telecommunications service providers. We also
expect that the incumbent local exchange carriers ultimately will be able to
provide the range of services we currently offer. Many of our competitors are
larger and better capitalized than we are, are incumbent providers with long-
standing customer relationships, and have greater name recognition. We may not
be able to compete effectively against our competitors. See "Business--
Competition."
Our information systems may not produce accurate and prompt bills which could
cause a loss or delay in the collection of revenue and could adversely affect
our relations with our customers.
We depend on our information systems to bill our customers accurately and
promptly. Because of the deployment of our network and our expansion plans, we
are continuing to upgrade our information systems. Our failure to identify all
of our information and processing needs or to adequately upgrade our
information systems could delay our collection efforts, cause us to lose
revenue and adversely affect our relations with our customers. See "Business--
Our Information Systems."
We may not receive timely and accurate call data records from our suppliers
which could cause a loss or delay in the collection of revenue and could
adversely affect our relations with our suppliers.
Our billing and collection activities are dependent upon our suppliers
providing us with accurate call data records. If we do not receive accurate
call data records in a timely manner, our collection efforts could suffer and
we could lose revenue. In addition, we pay our suppliers according to our
calculation of the charges based upon invoices and computer tape records
provided by these suppliers. Disputes may arise between us and our suppliers
because these records may not always reflect current rates and volumes. If we
do not pay disputed amounts, a supplier may consider us to be in arrears in our
payments until the amount in dispute is resolved, which could adversely affect
our relations with our suppliers.
We depend on the networks and services of third party providers to serve our
customers and our relationships with our customers could be adversely affected
by failures in those networks and services.
We depend almost entirely on other carriers for the switching and
transmission of our customer traffic. After we complete deploying our network,
we will still rely to some extent on others for switching and transmission of
customer traffic. We cannot be sure that any third party switching or
transmission facilities will be available when needed or on acceptable terms.
Although we can exercise direct control of the customer care and support we
provide, most of the services we currently offer are provided by others. These
services are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security and other factors which may cause
interruptions in service or reduced capacity for our customers. These problems,
although not within our control, could adversely affect customer confidence and
damage our relationships with our customers.
Increases in customer attrition rates could adversely affect our operating
results.
Our customers may not continue to purchase local, long distance, data or
other services from us. Because we have been selling voice and data
telecommunications under our own brand name for a short time, our customer
attrition rate is difficult to evaluate. We could lose customers as a result of
national advertising campaigns, telemarketing programs and customer incentives
provided by major competitors as well as for other reasons not in our control
as well as a result of our own performance. Increases in customer attrition
rates could have a material adverse effect on our results of operations.
8
<PAGE>
We may be unable to effectively manage our growth, which could materially
adversely affect all aspects of our business.
We are pursuing a business plan that will result in rapid growth and
expansion of our operations if we are successful. This rapid growth would place
significant additional demands upon our current management and other resources.
Our success will depend on our ability to manage our growth. To accomplish this
we will have to train, motivate and manage an increasing number of employees.
Our failure to manage growth effectively could have a material adverse effect
on our business, results of operations and financial condition.
We may be unable to retain or replace our senior management or hire and retain
other highly skilled personnel upon which our success will depend.
We believe that our continued success will depend upon the abilities and
continued efforts of our management, particularly members of our senior
management team. The loss of the services of any of these individuals could
have a material adverse effect on our business, results of operations and
financial condition. Our success will also depend upon our ability to identify,
hire and retain additional highly skilled sales, service and technical
personnel. Demand for qualified personnel with telecommunications experience is
high and competition for their services is intense. If we cannot attract and
retain the additional employees we need, we will be unable to successfully
implement our business strategy.
Changes to the regulations applicable to our business could increase our costs
and limit our operations.
We are subject to federal, state, and local regulation of our local, long
distance, and data services as described under "Business-Government
Regulation." The outcome of the various administrative proceedings at the
federal and state level and litigation in federal and state courts relating to
this regulation as well as federal and state legislation may increase our
costs, increase competition and limit our operations.
Rapid technological changes in the telecommunications industry could render our
services or network obsolete faster than we expect or require us to spend more
than we currently anticipate.
The telecommunications industry is subject to rapid and significant changes
in technology. Any changes could render our services or network obsolete,
require us to spend than we anticipate or have a material adverse effect on our
operating results and financial condition. Advances in technology could also
lead to more entities becoming our direct competitors. Because of this rapid
change, our long-term success will increasingly depend on our ability to offer
advanced services and to anticipate or adapt to these changes, such as evolving
industry standards. We cannot be sure that:
. we will be able to offer the services our customers require;
. our services will not be economically or technically outmoded by current
or future competitive technologies;
. our network or our information systems will not become obsolete;
. we will have sufficient resources to develop or acquire new technologies
or introduce new services that we need to effectively compete; or
. our cost of providing service will decline as rapidly as the costs of
our competitors.
Our systems and network, and the systems of our suppliers, may not properly
process date information after December 31, 1999, which could increase our
costs, disrupt our business and adversely affect our relations with our
customers.
As discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000 Compliance," failure of our systems and
network to adequately process year 2000 information could cause miscalculations
or system failures that could affect our operations. We cannot assure
9
<PAGE>
you that we have successfully identified all Year 2000 problems with our
information systems and network. We also cannot assure you that we will be
able to implement any necessary corrective actions in a timely manner. If we
or the companies that provide us services or with whom our systems
interconnect fail to successfully identify and remediate Year 2000 problems,
our service and operations may be disrupted. These problems could increase our
costs and adversely affect our relations with our customers and business.
We may pursue acquisitions which would could disrupt our business and may not
yield the benefits we expect.
We may pursue strategic acquisitions as we expand. Acquisitions may disrupt
our business because we may:
. experience difficulties integrating acquired operations and personnel
into our operations;
. divert resources and management time;
. be unable to maintain uniform standards, controls, procedures and
policies;
. enter markets or businesses in which we have little or no experience;
and
. find that the acquired business does not perform as we expected.
Our existing principal stockholders, executive officers and directors control
a substantial amount of our voting shares and will be able to significantly
influence any matter requiring shareholder approval.
After this offering, our officers and directors and parties related to them
will control approximately 35.3% of the voting power of our outstanding
capital stock. Robert J. Fabbricatore, our Chairman and Chief Executive
Officer, will control approximately 17.7% of our voting power. Therefore, the
officers and directors are able to significantly influence any matter
requiring shareholder approval. In addition, Mr. Fabbricatore and some of his
affiliates have agreed to vote shares they control to elect to our board up to
two persons designated by the holders of a majority of our Series A preferred
stock.
If our stockholders exercise appraisal rights or if we do not consummate the
holding company reorganization, we could default under our credit facilities
and be unable to pay those debts.
In connection with the holding company reorganization, all of our
stockholders, including holders of the shares offered by this prospectus, will
have appraisal rights under Massachusetts law. If any of our stockholders
exercise their appraisal rights, CTC Communications Group would be required by
law to pay them the appraised value of their shares. Our credit facilities
require us to consummate the reorganization but prohibit us from making
payments to stockholders who exercise their appraisal rights. If our lenders
do not waive one of these requirements, we could default under our credit
facilities and our lenders could require us to repay our debt. If this
happens, we could need to refinance that indebtedness, sell assets, delay
capital expenditures or sell additional capital stock or we would be unable to
pay those debts.
Fluctuations in our operating results could adversely affect the price of our
common stock.
Our annual and quarterly revenue and results could fluctuate as a result of
a number of factors, including:
. variations in the rate of timing of customer orders,
. variations in our provisioning of new customer services,
. the speed at which we expand our network and market presence,
. the rate at which customers cancel services, or churn,
10
<PAGE>
. costs of third party services purchased by us, and
. competitive factors, including pricing and demand for competing
services.
Also, our revenue and results may not meet the expectations of securities
analysts and our stockholders. As a result of fluctuations or a failure to meet
expectations, the price of our common stock could be materially adversely
affected.
Our stock price is likely to be volatile.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and telecommunications
companies in particular, has experienced extreme volatility. This volatility
has often been unrelated to the operating performance of particular companies.
Other factors that could cause the market price of our common stock to
fluctuate substantially include:
. announcements of developments related to our business, or that of our
competitors, our industry group or our customers;
. fluctuations in our results of operations;
. hiring or departure of key personnel;
. a shortfall in our results compared to analysts' expectations and
changes in analysts' recommendations or projections;
. sales of substantial amounts of our equity securities into the
marketplace;
. regulatory developments affecting the telecommunications industry or
data services; and
. general conditions in the telecommunications industry or the economy as
a whole.
The market price of our common stock could be depressed by the substantial
number of our shares that are eligible for future sale.
After our reorganization is completed, all of our outstanding common shares
will be freely tradeable in the public market, subject to compliance with Rules
144 and 145 under the Securities Act. The market price of our common stock
could drop due to sales of a large number of shares or the perception that such
sales might occur. These factors could also make it more difficult to raise
funds through future offerings of common stock.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.
The telecommunications industry has experienced significant consolidation in
recent years. However, provisions of our articles of organization and bylaws
and Massachusetts law, and after our reorganization into a holding company
structure, CTC Communications Group's certificate of incorporation and bylaws
and the provisions of Delaware law, could make it more difficult for a third
party to acquire control of us even if a change in control would be beneficial
to our stockholders. These provisions may negatively affect the price of our
common stock and may discourage third parties from bidding for us. In addition,
our board of directors may issue, without stockholder approval, shares of
preferred stock with terms set by the board. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could depress the price of the common stock. See "Description of Capital
Stock--Preferred Stock."
The forward looking statements we make in this document are inherently
uncertain.
Certain statements about us and our industry under the captions "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere in this document are
"forward-looking statements." These forward-looking statements include,
11
<PAGE>
but are not limited to, statements about our plans, objectives, expectations,
intentions and assumptions and other statements in this document that are not
historical facts. When we use the words "estimate," "project," "believe,"
"anticipate," "intend," "plan," "expect" and similar expressions in this
document, we generally intend to identify forward-looking statements. Because
these forward-looking statements involve risks and uncertainties, including
those described in this "Risk Factors" section, actual results could differ
materially from those expressed or implied by these forward-looking statements.
We caution you not to place undue reliance on these forward-looking statements.
These forward-looking statements speak only as of the date of this document. We
do not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect new information, future events or
otherwise.
12
<PAGE>
Use of Proceeds
We will receive net proceeds of approximately $59.1 million from our sale of
3,200,000 shares of common stock at an assumed public offering price of $19.75
per share, after deducting the underwriting discounts and commissions and our
estimated offering expenses. This amount would be approximately $68.9 million
if the underwriters fully exercise their over-allotment option. We intend to
use these proceeds to repay all of our outstanding indebtedness under our
credit facility with Toronto Dominion and for general corporate purposes
including capital expenditures, working capital and operating losses associated
with the continued deployment of our network, further penetration of our
existing region and expansion into new markets throughout the New York--
Washington, D.C. corridor. We will not receive any proceeds from the sale of
shares by the selling stockholders. As of July 9, 1999, we had borrowed $6.0
million under our credit facility with Toronto Dominion. Advances under this
facility bear interest at 11.99%. This facility matures on June 15, 2000. We
used advances under this facility for general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
We intend to use the net proceeds remaining after the repayment of
indebtedness to Toronto Dominion to either temporarily repay the revolving
portion of our senior secured credit facility or temporarily invest the
remaining net proceeds in short-term, interest bearing, investment grade
securities. Advances under our senior secured credit facility bear interest at
1.75% over the prime rate. The credit facility matures on September 1, 2001. We
used advances under this credit facility for general corporate purposes. See
"Description of Senior Credit Facilities."
Price Range of Common Stock
Our common stock is listed on The Nasdaq National Market under the symbol
"CPTL." Following is the range of high and low trading prices on The Nasdaq
National Market for the common stock for the periods indicated.
<TABLE>
<CAPTION>
Price Range
-------------
High Low
------ ------
<S> <C> <C>
Calendar Year 1997
Second Quarter.............................................. $10.00 $ 6.88
Third Quarter............................................... $ 9.75 $ 7.06
Fourth Quarter.............................................. $15.94 $ 8.00
Calendar Year 1998
First Quarter............................................... $14.94 $ 5.13
Second Quarter.............................................. $ 9.88 $ 6.50
Third Quarter............................................... $ 8.50 $ 4.75
Fourth Quarter.............................................. $ 9.00 $ 4.00
Calendar Year 1999
First Quarter............................................... $17.50 $ 8.38
Second Quarter.............................................. $24.00 $12.19
Third Quarter (through July 9, 1999)........................ $20.38 $17.00
</TABLE>
The last sale price of the common stock on The Nasdaq National Market on
July 9, 1999 was $19.75.
Dividend Policy
We have never paid cash dividends on our common stock and we have no plans
to do so in the foreseeable future. We intend to retain earnings, if any, to
develop and expand our business. In addition, the terms of the credit and
vendor facilities and the Series A preferred stock restrict our ability to pay
cash dividends on our common stock. We also expect the terms of agreements
governing any future indebtedness to restrict our ability to pay cash
dividends.
13
<PAGE>
Capitalization
The following table sets forth our capitalization as of March 31, 1999 on an
actual basis and as adjusted to reflect our sale of 3,200,000 shares of common
stock offered hereby at an assumed public offering price of $19.75 per share,
and after deducting underwriting discounts and commissions and estimated
offering expenses. This information should be read in conjunction with our
financial statements and notes appearing elsewhere in this prospectus. The "As
Adjusted" column does not take into account the exercise of warrants by the
selling stockholders in connection with this offering. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------
As
Actual Adjusted
----------- ------------
(dollars in thousands)
<S> <C> <C>
Cash and cash equivalents............................. $ 2,254 $ 61,378
=========== ==========
Long-term debt, including current portion:
Notes payable....................................... $ 53,624 $ 53,624
Obligations under capital leases.................... 11,234 11,234
----------- ----------
Total long-term debt.............................. 64,858 64,858
Series A redeemable convertible preferred stock....... 12,672 12,672
Stockholders' equity (deficit):
Common stock(/1/)................................... 104 136
Additional paid-in capital.......................... 8,387 67,479
Deferred compensation............................... (213) (213)
Retained earnings (deficit)......................... (45,391) (45,391)
----------- ----------
Subtotal.......................................... (37,113) 22,011
Amounts due from stockholders....................... (31) (31)
----------- ----------
Total stockholders' equity (deficit).............. (37,144) 21,980
----------- ----------
Total capitalization............................ $ 40,386 $ 99,510
=========== ==========
</TABLE>
- --------
(1) Consists of common stock, $.01 par value per share: 25,000,000 shares
authorized, 10,352,513 outstanding at March 31, 1999 and 13,552,513
outstanding, as adjusted. Does not include 3,615,809 shares of common stock
issuable upon exercise of outstanding stock options at exercise prices
between $1.10 and $20.00 per share; 1,453,262 shares of common stock
issuable upon conversion of the Series A preferred stock or 1,288,071
shares of common stock issuable upon the exercise of outstanding warrants
at exercise prices between $6.75 and $11.81 per share.
14
<PAGE>
Selected Financial Data
The following selected financial data for the five years ended March 31,
1999 are derived from our financial statements which have been audited by Ernst
& Young LLP, independent auditors. You should read the following financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements and the related notes.
All earnings per share and weighted average share information included in
the accompanying financial statements have been restated to reflect the five-
for-four stock split effected in fiscal year ended March 31, 1995, and the
three-for-two stock split and the two-for-one stock split effected in fiscal
year ended March 31, 1996.
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Agency revenues......... $ 18,898 $ 25,492 $ 29,195 $ 24,775 $ --
Telecommunications
revenues............... 3,038 5,383 11,095 16,172 70,964
---------- ---------- ---------- ---------- ----------
Total revenues......... 21,936 30,875 40,290 40,947 70,964
Cost of
telecommunications
revenue (excluding
depreciation and
amortization).......... 2,451 4,242 8,709 14,039 61,866
Selling, general and
administrative
expenses............... 16,663 19,349 23,077 29,488 52,521
Depreciation and
amortization........... 656 660 743 1,418 3,778
Income (loss) from
operations............. 2,166 6,624 7,761 (3,998) (47,201)
Net income (loss)....... 1,472 4,094 4,683 (2,498) (51,238)
Income (loss) per share
Basic.................. 0.18 0.43 0.49 (.25) (5.18)
Diluted................ 0.17 0.38 0.43 (.25) (5.18)
Other Financial Data
EBITDA (loss)........... $ 2,932 $ 7,295 $ 8,519 $ (2,405) (43,346)
Capital expenditures.... 599 759 1,222 6,109 36,041
Net cash (used in)
provided by operating
activities............. 1,580 2,192 3,572 (7,951) (33,254)
Net cash used in
investing activities... 599 759 1,222 4,765 6,282
Net cash provided by
financing activities... 171 119 114 8,479 39,622
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents............. $2,391 $ 3,942 $ 6,406 $ 2,168 $ 2,254
Total assets.......................... 7,726 12,509 20,186 30,768 69,482
Total long-term debt, including
current portion ..................... -- -- -- 9,673 64,858
Series A redeemable convertible
preferred stock...................... -- -- -- -- 12,672
Stockholders' equity (deficit)........ 5,526 9,495 14,292 11,966 (37,144)
</TABLE>
EBITDA consists of income (loss) before interest, income taxes, depreciation
and amortization. We have provided EBITDA because it is a measure of financial
performance commonly used in the telecommunications industry. Other companies
may calculate it differently from us. EBITDA is not a measurement of financial
performance under generally accepted accounting principles. We believe you
should not consider EBITDA as an alternative to net income (loss) as a measure
of results of operations or to GAAP-based cash flow data as a measure of
liquidity. Capital expenditures consists of additions to property and equipment
acquired for cash or under notes payable and capital leases.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the financial statements and notes included
elsewhere in this prospectus.
Overview
Historically, we have generated agency revenues and telecommunications
revenues. Agency revenues consist of commissions we earned as an agent of Bell
Atlantic and other Regional Bell Operating Companies, and long distance
providers. Telecommunications revenues are generated by our sale of local, long
distance, data communications, internet access and other communications
services. For the fiscal year ended March 31, 1998, agency commissions
accounted for approximately 60% of our revenues, with telecommunications
revenues accounting for the other 40%. As a result of our transition to an
integrated communications provider strategy in January 1998, agency commissions
earned after December 31, 1997 are not material.
Our financial information for the fiscal year ended March 31, 1999 reflects
a full year of operations under our new strategy. Our financial information for
fiscal years ended on or before March 31, 1998 primarily reflects our
operations as an agent for Bell Atlantic. Because of our transition to our new
strategy and our network buildout, most of the financial information for these
periods does not reflect our current business and is not comparable to results
for subsequent periods.
Results of Operations
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Total revenues for the fiscal year ended March 31, 1999 were $70,964,000, an
increase of 73% from $40,947,000 for the preceding fiscal year. As an
integrated communications provider, revenues for fiscal 1999 reflect our direct
sales of local telecommunication services in addition to our direct sales of
other telecommunications services. Revenue for fiscal 1998 reflect agency
commissions on local telecommunications services for the period April 1, 1997
through December 31, 1997 as well as our direct sales of other
telecommunications services for the entire year.
A common basis for measurement of an integrated communications provider's
progress is the growth in access line equivalents, or ALEs. During the quarter
ended March 31, 1999, voice and data ALEs in service increased by 38,935, or
approximately 38%, from the quarter ended December 31, 1998. This brought our
total ALEs in service to 142,207 at the end of our first 15 months as an
integrated communications provider. Data ALEs increased by approximately 45%
from the quarter ended December 31, 1998 to 28,502, or 20% of total ALEs in
service, as of March 31, 1999. Data ALEs at March 31, 1999 include 6,720 ALEs
purchased by other carriers including internet service providers.
Costs of telecommunications revenues, excluding depreciation and
amortization, increased to $61,866,000 for fiscal 1999 from $14,039,000 for
fiscal 1998 as a result of our decision to provide local services directly
instead of providing local services on an agency basis. However, as a
percentage of telecommunications revenue, costs of telecommunications revenues
remained at 87% for fiscal 1999 and 1998. We expect that, as a result of a
recent agreement we entered into with Bell Atlantic, our costs of reselling
Bell Atlantic local lines will decrease. Under the terms of this agreement we
will receive up to an additional 15% discount on the wholesale rates Bell
Atlantic is required to offer. Under this agreement, we have committed to
maintain in service over the next five years a number of resold Bell Atlantic
local telephone lines at least equal to 100,000 at the end of the first year
and 225,000 at the end of each of the remaining four years.
Selling, general and administrative expenses increased 78% to $52,521,000 in
fiscal 1999 from $29,488,000 for fiscal 1998. This increase was primarily due
to the increased number of service and technical employees hired and other
expenses incurred in connection with operating under our new strategy. Also
16
<PAGE>
contributing to the increase were approximately $9,886,000 of expenses and
charges relating to the litigation and settlement with Bell Atlantic. See
"Business--Legal Proceedings." Selling, general and administrative expenses
also increased for fiscal 1999 due to increased expenses associated with the
network buildout.
Depreciation and amortization expense increased 166% to $3,778,000 in fiscal
1999 from $1,418,000 in fiscal 1998. This increase was a result of the
investment we made in equipment and software for our network.
Interest and other expense increased to $5,563,000 for the fiscal year ended
March 31, 1999, as compared to interest and other income of $213,000 for the
fiscal year ended March 31, 1998. The increase is due to increased borrowings
to fund our operating losses and the deployment of our network, the fees
associated with our credit and vendor financing facilities and the amortization
of the interest expense associated with warrants issued in connection with the
financings.
The benefit for income taxes, which is limited to refunds available on a
loss carryback basis, has been recognized ratably as a percentage of our
estimated pre-tax loss over each of the four quarters of the fiscal year. The
effective rate of the benefit varied with changes in management's estimates.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
The results for the fiscal year ended March 31, 1998 reflect our decision to
leave the Bell Atlantic agency program in December 1997 and our commencement of
operations as an integrated communications provider. This decision adversely
affected revenues and expenses to a certain extent in the third quarter as we
prepared for this transition and significantly affected revenues in the fourth
quarter after the transition had been effected. Total revenues of $40,947,000
for fiscal 1998 were essentially flat as compared to $40,290,000 for the fiscal
year ended March 31, 1997. Agency revenues decreased 15% to $24,775,000 for
fiscal 1998 from $29,195,000 in fiscal 1997, primarily as a result of fourth
quarter revenues of only $194,000, as compared to $8,354,000 for the same
period of fiscal 1997. This decrease reflects the fact that we left the Bell
Atlantic agency program in December 1997, and thus no Bell Atlantic agency
revenues were reported in the fourth quarter of fiscal 1998. Telecommunications
revenues increased 46% to $16,172,000 for fiscal 1998 from $11,095,000 for
fiscal 1997. This increase reflects the increased sales of long distance,
internet access, and frame relay data services as well as the commencement of
our sale of local telecommunications services as an integrated communications
provider in the fourth quarter of fiscal 1998. Although local
telecommunications sales increased during the fourth quarter, they were
significantly less than we expected as a result of the imposition of the
temporary restraining order in connection with the Bell Atlantic litigation
initiated in February 1998, which required us to sell these local services only
to new customers, resulting in a longer sales cycle. This temporary restraining
order was dissolved in August 1998.
Costs of telecommunications revenues, excluding depreciation and
amortization, 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 one of
our long distance suppliers, increased costs associated with adding new
customers and services and costs associated with phasing out our debit calling
card program.
Selling, general and administrative expenses increased 28% to $29,488,000 in
fiscal 1998 from $23,077,000 in fiscal 1997. This increase was a result of the
increased number of sales and service employees hired in connection with the
transition to an integrated communications provider, increased corporate and
administrative expenses, expenses related to new branch openings and $614,000
of costs incurred attributable to our litigation with Bell Atlantic.
17
<PAGE>
Depreciation and amortization expense increased 91% to $1,418,000 in fiscal
1998 from $743,000 in fiscal 1997. This increase was attributable to increased
depreciation associated with greater capital expenditures.
Quarterly Financial and Operating Information
The following table sets forth certain financial and operating data for the
five quarters since we became an integrated communications provider. This
financial information is from our unaudited financial statements. You should
read this information in conjunction with the financial statements and related
notes included elsewhere in this prospectus. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal Quarter ended
--------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1998 1998 1998 1998 1999
--------- -------- ------------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Telecommunications revenues............ $ 6,288 $12,836 $ 14,516 $ 19,025 $ 24,587
Cost of telecommunications revenues
(excluding depreciation and
amortization)......................... 5,944 11,614 12,383 16,429 21,440
Selling, general and administrative
expenses.............................. 8,868 9,095 12,043 12,429 18,954
Depreciation and amortization.......... 668 505 610 1,058 1,605
Loss from operations................... (9,192) (8,378) (10,520) (10,891) (17,412)
Net loss............................... (5,622) (8,029) (10,733) (11,480) (20,996)
Other Financial Data
EBITDA (loss)(/1/)..................... (8,524) (7,843) (9,907) (9,830) (15,766)
Capital expenditures................... 1,552 1,015 4,850 16,397 13,779
Net cash used in operating activities.. (5,251) (7,446) (11,330) (2,779) (11,699)
Net cash provided by financing
activities............................ 6,527 11,669 12,972 14,780 201
Operating Data
Net ALEs provisioned in the quarter.... 17,637 22,548 24,209 38,878 38,935
Cumulative ALEs in service at quarter
end .................................. 17,637 40,185 64,394 103,272 142,207
</TABLE>
(1) Excluding expenses and charges of $7.4 million relating to the litigation
and settlement with Bell Atlantic, EBITDA (loss) would have been $(8.3)
million for the fiscal quarter ended March 31, 1999. See "Business--Legal
Proceedings."
Liquidity and Capital Resources
Prior to March 1998, we had funded our working capital and operating
expenditures primarily from cash flows from operations. Commencing in April
1998, we have funded our transition to an integrated communications provider,
expansion of our sales branches, operating losses and the deployment of our
network by raising additional equity capital and through bank, vendor and lease
financing.
In April 1998, we received $12.0 million from our private placement of our
Series A redeemable convertible preferred stock and warrants to Spectrum Equity
Investors II, L.P. We also received a commitment on June 30, 1998 from Spectrum
to purchase, at our option, an additional $5.0 million of preferred stock on
the same terms and conditions as the Series A preferred stock. This option
expired on June 30, 1999 without our issuing any shares of preferred stock. See
"Certain Relationships and Related Transactions."
On September 1, 1998, we entered into a senior secured credit facility with
Goldman Sachs Credit Partners and Fleet National Bank. Under the terms of this
senior secured credit facility, the lenders have provided a three-year credit
facility to us consisting of revolving loans in the aggregate amount of up to
18
<PAGE>
$75.0 million. Under our senior secured credit facility we may borrow $15.0
million unconditionally and an additional $60.0 million based on trailing 120
days accounts receivable collections, reducing to trailing 90 days accounts
receivable collections by March 31, 2000. As of March 31, 1999, we had
availability of $45.2 million under this senior secured credit facility, of
which we had borrowed approximately $36.1 million.
On October 14, 1998, we entered into an agreement with Cisco Capital for up
to $25.0 million of vendor financing. Under the terms of the agreement, we have
agreed to a three-year, $25.0 million volume purchase commitment of Cisco
equipment and services and Cisco Capital has agreed to advance funds as these
purchases occur. Up to $10.0 million of the vendor facility can be utilized for
costs associated with the integration of Cisco equipment and related
peripherals. Under the terms of the vendor facility, we are required to pay
interest on funds advanced under the facility at an annual rate of 12.5%. As of
March 31, 1999, we had borrowed $15.4 million under the vendor facility.
Since September 30, 1998, we have entered into various lease and vendor
financing agreements which provide for the acquisition of up to $16.2 million
of equipment and software. As of March 31, 1999, the aggregate amount borrowed
under these agreements was approximately $14.0 million.
In order to provide liquidity, we entered into a loan agreement dated as of
March 15, 1999 with Toronto Dominion (Texas), Inc. to provide an unsecured
standby credit facility for up to $30.0 million for capital expenditures and
other general corporate purposes. Originally, $10.0 million of this facility
was immediately available, with the remaining $20.0 million becoming available
only if we raised an additional $5.0 million of proceeds from the issuance of
equity. Toronto Dominion has waived the requirement that we raise any equity,
and therefore, the entire $30 million is now available to us. As of June 17,
1999, we had borrowed $3.0 million under this facility. Availability under this
facility will be reduced by any proceeds of this offering. If we raise at least
$30.0 million in the offering, this facility will terminate.
As we continue to deploy our network, further penetrate our existing region
and expand into new markets throughout the Boston--Washington, D.C. corridor,
we will need significant additional capital. We believe that the proceeds of
this offering, together with cash on hand and the amounts we expect to be
available under our bank, lease and vendor financing arrangements, will be
sufficient to fund our capital requirements for at least the next 12 months.
During this period we will seek to raise additional capital through the
issuance of debt and possibly equity securities, the timing of which will
depend on market conditions, and which could occur in the near future. We may
also seek to raise additional capital through further equity offerings, vendor
financing, equipment lease financing and bank loans.
We cannot assure you that additional financing will be available on terms
acceptable to us when we need it. The agreements governing our existing
indebtedness limit our ability to obtain debt financing. If we are unable to
obtain financing when we need it, we may delay or abandon our development and
expansion plans. That could have a material adverse effect on our business,
results of operations and financial condition. The actual timing and amount of
our capital requirements may be materially affected by various factors,
including the timing and actual cost of the network, the timing and cost of our
expansion into new markets, the extent of competition and pricing of
telecommunications services by others in our markets, the demand by customers
for our services, technological change and potential acquisitions.
On February 24, 1999, we settled a lawsuit against Bell Atlantic Corp. Under
the terms of the settlement agreement we received cash and will receive other
consideration to satisfy claims of commissions we earned while we were an agent
for Bell Atlantic. Both parties have agreed to keep the specific terms of the
settlement confidential. We do not expect to incur any additional material
costs related to this matter subsequent to March 31, 1999.
Working capital deficit at March 31, 1999 was $6.7 million compared to a
working capital surplus of $12.0 million at March 31, 1998, a decrease of $18.7
million. This decrease is due primarily to the increase in
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accounts payable and accrued expenses associated with our transition to an
integrated communications provider. We will fund this deficit through
borrowings under our credit facilities, which are long term liabilities. Cash
balances at March 31, 1999 and March 31, 1998 totaled approximately $2.3
million and $2.2 million, respectively.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to financial market risk, including changes in interest rates,
relates primarily to outstanding debt obligations. We utilize our senior
secured credit facility to fund a substantial portion of our capital
requirements. This facility bears interest at a variable interest rate, which
is subject to market changes. We have not entered into any interest rate swap
agreements, or other instruments to minimize our exposure to interest rate
increases but will investigate such options should changes in market conditions
occur. We have not had any derivative instruments in the past and do not plan
to in the future, other than possibly to reduce our interest rate exposure as
described above.
For purposes of specific risk analysis we use sensitivity analysis to
determine the impacts that market risk exposure may have on the fair value of
our outstanding debt obligations. To perform sensitivity analysis, we assess
the risk of loss in fair values from the impact of hypothetical changes in
interest rates on market sensitive instruments. We compare the market values
for interest risk based on the present value of future cash flows as impacted
by the changes in the rates. We selected discount rates for the present value
computations based on market interest rates in effect at March 31, 1999. We
compared the market values resulting from these computations with the market
values of these financial instruments at March 31, 1999. The differences in the
comparison are the hypothetical gains or losses associated with each type of
risk. As a result of our analysis we determined at March 31, 1999 a 10 percent
decrease in the levels of interest rates with all other variables held constant
would result in an increase in the fair value of our fixed rate debt
obligations by approximately $1.9 million. A 10 percent increase in the levels
of interest rates with all other variables held constant would result in a
decrease in the fair value of our outstanding fixed rate debt obligations by
approximately $2.0 million. With respect to our variable rate debt obligations
a 10% increase in interest rates would result in increased interest expense and
cash expenditures for interest of approximately $170,000 in fiscal 1999. A 10%
decrease in interest rates would result in reduced interest expense and cash
expenditures of approximately $170,000 in fiscal 1999.
Year 2000 Compliance
Our State of Readiness
We have evaluated the effect of the year 2000 problem on our information
systems. We are implementing plans to permit our systems and applications to
effectively process information in order to support ongoing operations in the
year 2000 and beyond. We believe our information technology systems and non-
information systems will be year 2000 compliant by the end of 1999.
In connection with the deployment of our new network, we have designed a new
database architecture for our computer systems which we expect will be year
2000 compliant. We expect installation of the network and related network
control software to be completed in the summer of 1999. We expect installation
of our new information systems related to our new network to be completed in
the third or fourth quarter of 1999. We began testing our network and these new
systems when we first began installation, and we expect testing to continue. We
are also upgrading our current information systems to be year 2000 compliant in
case we have not completed installing our new systems by the end of 1999.
Approximately 40% of our existing information systems are now year 2000
compliant. We expect to complete this upgrade in the third or fourth quarter of
1999. While we expect that all significant information systems will be year
2000 compliant in the third or fourth quarter of 1999, we cannot assure you
that all year 2000 problems in the new system will be identified or that the
necessary corrective actions will be completed in a timely manner. We also
expect our non-information systems to be year 2000 compliant in the third or
fourth quarter of 1999.
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We have requested certification from our significant vendors and suppliers
demonstrating their year 2000 compliance. Approximately 80% of vendors and
suppliers have delivered these certifications. We will continue to seek
additional certifications. However, we cannot assure you that we will receive
any additional certifications. Generally, these certifications state that our
vendors and suppliers are year 2000 compliant but do not require any
affirmation action if these certifications are inaccurate. We intend to
continue to identify critical vendors and suppliers and communicate with them
about their plans and progress in addressing year 2000 problems. We cannot
assure you that the systems of these vendors and suppliers will be timely
converted. We also cannot assure you that any failure of their systems to be
year 2000 compliant will not adversely affect our operations.
Our Costs of Year 2000 Remediation
We have incurred approximately $120,000 in costs to date related
specifically to year 2000 issues and expect to incur an additional
approximately $380,000 in costs through the end of 1999. However, we cannot
assure you that the costs associated with year 2000 problems will not be
greater than we anticipate.
Our Year 2000 Risk
Based on the efforts described above, we currently believe that our systems
will be year 2000 compliant in a timely manner. We have completed the process
of identifying year 2000 issues in our information systems and non-information
systems and expect to complete any remediation efforts in the third and fourth
quarters of 1999.
We cannot assure you that our operations and financial results will not be
affected by year 2000 problems. We may experience interruptions in service and
not receive billing information in a timely manner if either our systems or
those of our vendors or suppliers are not year 2000 compliant in a timely
manner. It is possible that we could experience other serious year 2000
difficulties that we cannot presently predict.
Our Contingency Plans
We have begun upgrading our current information systems as part of our
contingency plans in case our new systems are not installed before the end of
1999. In addition, we intend to seek to identify alternative service providers
in case our current providers are unable to adequately deliver services in the
year 2000. If it becomes necessary for us to implement a contingency plan, the
plan may not avoid a material year 2000 issue.
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Business
Overview
We are a rapidly growing integrated communications provider, with 15 years
of marketing, sales and service experience. We target predominantly medium and
larger-sized business customers who seek capacity for voice and data traffic, a
single provider for their telecommunications requirements and improved levels
of service. We have a large, experienced sales force consisting of 164 sales
people supported by 101 network consultants. Our sales force is located close
to our customers in 25 sales branches primarily in New England and New York
State. We are currently deploying our own state-of-the-art, all packet-switched
network based on internet protocol and ATM architecture. In May 1999, we began
testing of our network with some of our customers. By late summer, we expect to
begin providing, and billing for, commercial service to a limited number of
customers on our network.
We became an integrated communications provider in January 1998. Prior to
that, we were the largest sales agent for NYNEX Corp. (now Bell Atlantic),
based on agency revenues. At the end of 1997, before leaving the Bell Atlantic
agency program, we were managing relationships for approximately 7,000
customers, representing over 280,000 local access lines and over $200 million
in annual local telecommunications spending. As of March 31, 1999, after only
15 months as an integrated communications provider, we were serving over 9,000
customers and had over 142,000 ALEs in service.
Our Market Opportunity
The market potential for integrated communications providers is large and
growing. According to FCC data, in 1997, the total market for U.S. retail
telecommunications services was approximately $187 billion. Data services,
including internet, frame relay and ATM services, represent one of the fastest
growing segments of the telecommunications market. Industry reports by
International Data Corporation estimate that from 1997 to 2002, annual internet
services revenues will increase from $7.5 billion to $29.7 billion. These same
reports also indicate that combined annual revenues from frame relay and ATM
services will increase from $2.9 billion to $7.6 billion over this period. We
are deploying our data-centric network to capitalize on this market
opportunity.
Our target market, the Northeastern and Mid-Atlantic region, represents an
attractive opportunity for us because it has a high concentration of
telecommunications traffic. According to FCC data, New York and New England had
an estimated 7.3 million local business access lines as of December 31, 1997,
which generated retail telecommunications revenues of approximately $24.4
billion in 1997. When we expand our business in the remaining portions of the
New York-Washington, D.C. corridor, we will increase our addressable market by
an estimated 8.4 million local business access lines as of December 31, 1997,
which generated approximately $26.3 billion in retail telecommunications
revenues in 1997. We estimate our target customers represent nearly 50% of the
total business access lines in our target markets.
Our Competitive Strengths
Our goal is to be the leading integrated communications provider for medium
and larger-sized business customers in our target markets. We believe that the
following competitive strengths position us well to achieve this goal:
. Over 15 years of telecommunications marketing, sales and service
experience. We have sold local telecommunications services as an agent
since 1984 and have sold long distance and data services under our own
brand name since 1994. During this period, we successfully introduced
integrated services digital network, or ISDN, frame relay, ATM and other
new services in response to technological change. Collectively, our
nine-person senior management team has nearly 200 years of
telecommunications experience. Six members of this team have worked
together at CTC for more than 10 years.
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. Over 250 experienced sales people and network consultants providing
personalized sales and customer care. Our sales and service teams
consist of a sales executive and a network consultant assigned to each
customer. This provides a single, responsive point of contact for all of
our customers' service and billing inquiries. Our sales and service
teams seek to develop a long-term relationship with customers. We
believe that our focus on customer care and our integration of sales and
service create higher levels of customer satisfaction. We expect this
will lead to better referral and retention rates.
. A capital-efficient and scalable, all packet-switched network, capable
of providing advanced data services. Our packet-switched network only
occupies a circuit for the length of time that is required to transmit
the package of information, while a circuit-switched network requires a
continuous connection between the parties. We believe that our packet-
switched network approach is superior to circuit-switched approaches
because:
. our network requires approximately 50-60% less capital and
significantly less time to deploy than a circuit-switched network;
. our network is based on open architecture standards and will allow
us to adapt to future technological developments and network
innovations;
. we believe our network will enable us to provide a more advanced and
differentiated service offering than other local exchange carriers
can provide over their circuit switches; and
. we believe our network will be significantly more cost efficient for
ongoing operations and maintenance.
. Significant experience designing and selling sophisticated data
services. We have substantial expertise designing, selling and
implementing sophisticated data services including frame relay,
continuously connected point-to-point high capacity data links, ISDN,
ATM and internet services. Over the last five years, we have sold
digital data services to more than 7,000 customer sites, designed and
implemented more than 600 data networks and assisted customers in
transitioning to more advanced frame relay and ATM networks.
. A broad range of voice and data services incorporated on a single
bill. We currently provide local, long distance, data and internet
services and intend to provide additional enhanced data services in the
future following deployment of our network. We also provide our
customers with the convenience of a single bill for all of their
telecommunications services. We believe that our ability to deliver a
single-source solution to our target market is a key element in building
our customer base. We also believe this will allow us to increase our
share of customers' telecommunications billings and will promote
customer retention.
. Comprehensive, fully integrated billing and operational support systems,
or OSS. Over the past decade we developed comprehensive information
systems by capitalizing on our experience with the provisioning systems
used by incumbent local exchange carriers to supply and implement their
services. Our systems fully integrate and automate all aspects of our
business, including marketing, provisioning, finance, facilities
management, billing and customer service. This integration facilitates
accurate and timely customer care and billing. The system also allows us
to provide our customers with a single, integrated bill for multiple
services. Our customers can download information about their accounts
directly to their own systems through online, near real-time access via
the internet. Our information systems electronically interface with most
of our major suppliers. In late 1998, we became one of the first
competitive local exchange carriers to complete a full electronic data
interchange interface with Bell Atlantic, which allows our systems to
connect directly with those of Bell Atlantic. We believe that our
information systems are a primary reason for our success in provisioning
a high volume of access lines during our first five quarters as an
integrated communications provider.
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. The ability to expand using our proven operating model for branch
offices, sales process, customer service and personnel training. Over
the last five years, we have developed a successful and replicable
approach to branch expansion. We believe that our standardized approach
to opening new branches, our uniform approach to sales and service and
our extensive training of new hires will enable us to expand without
compromising our solutions-oriented, customer-focused culture. New
branch offices are fully integrated with our information systems from
the outset. This allows our corporate headquarters to maintain control
of quality and productivity across our branch offices while enabling
each branch office to operate as an autonomous local sales and service
organization.
Our Services
We offer the following services:
. Local Telephone Services. We offer connections between customers'
telecommunications equipment and the local telephone network, which we
currently lease from the incumbent local exchange carriers. For large
customers or customers with specific requirements, we integrate their
private systems with analog or digital connections. We also provide all
associated call processing features as well as continuously connected
private lines for both voice and data applications.
. Long Distance Telephone Services. We offer a full range of domestic and
international long distance services, including "1+" outbound calling,
inbound toll free service, standard and customized calling plans. We
also offer related services such as calling cards, operator assistance
and conference calling.
. High Speed Data Services. We offer a wide array of both continuously
connected and switched high speed digital data services. Switched or
high speed digital services include ISDN, frame relay and ATM products.
. Internet Services. We offer high speed continuously connected internet
access and services through various digital connections. In addition, we
offer switched digital access to the internet via ISDN. We provide the
necessary communications hardware, configuration support and other
support services on a 24-hour, 7-day a week basis.
. Wholesale Services to Internet Service Providers. We provide a full
array of local services to internet service providers including
telephone numbers and switched and continuously connected access to the
internet.
. Future Service Offerings. Following deployment of the network, we may
offer the following additional services: hosting of web-sites,
electronic commerce over the internet, data security and storage
services, systems integration, consulting and network monitoring
services, customized private networks and other data, voice and
sophisticated network products.
Our Integrated Communications Network
We began deploying the first phase of our state-of-the-art, packet-switched
network in January 1999. We will be able to offer a broad array of
sophisticated services over our network. We believe our network will enable us
to improve margins, enhance network and service quality and broaden our range
of product offerings. We also believe that our network will ultimately enable
us to deliver voice and data services across a single multi-service connection.
We expect our network to lower customers' overall telecommunications costs and
stimulate demand for new services.
The first phase of our network includes 22 Cisco advanced data switches and
two network operation centers. Our primary network operations center is located
in our Waltham, Massachusetts technology center. Our fully redundant back-up
network operations center is located in Springfield, Massachusetts. We are
interconnecting our facilities with leased transmission capacity over fiber
optic cable strands from Level 3
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Communications and NorthEast Optic Network. Initially, we have obtained high
capacity connections between our switches providing multiple, back-up
connections. The initial transmission infrastructure will consist of fiber
optic rings with automatic re-routing in either direction covering the
southern, western and eastern New England regions. This SONET technology
provides for the use of redundant circuits and allows data to travel to its
destination along many different paths.
The network will also allow us to take advantage of available technology to
meet increasing customer demands for reliable, high capacity voice, data and
video connections. We have also arranged to co-locate our switching hubs in
Level 3 Communications and NorthEast Optic Network facilities along selected
fiber routes. We expect to work with Cisco to test various new Cisco
technologies in our Waltham technology center. We expect this to better
position us to adopt developing Cisco technology at an early stage.
We intend to access customer locations from our network through our
PowerPathSM services. These will include a variety of high capacity
technologies, including leased T-1s, DSL service, wireless technologies and
fiber optic facilities, as available. Initially, we will offer continuously
connected long distance and data services over our network. We believe that
these services represent over 50% of our target customers' fixed line
telecommunications spending. The balance represents local dial tone services
which we currently obtain from other carriers. We plan to incorporate local
dial tone service into our packet-switching architecture as that technology
matures.
Our network strategy to incorporate local dial tone functionality at a later
stage will allow us to simplify the transitioning of existing customers onto
our network because our customers will not have to disconnect from the
incumbent local exchange carrier and then reconnect to our network. To
transition our customers onto our network, we will simply be required to
reprogram our customer's systems to direct long distance and data traffic to
our network. This strategy will also allow our customers to retain their
existing phone numbers as well as have the built-in redundancy of the separate
physical connection to the incumbent local exchange carrier. At a later stage,
once customers can use the same telephone number irrespective of who provides
their telecommunications service, we will be able to more easily transition our
customers' local dial tone service onto our network.
Sales and Customer Care
We market telecommunications services by developing long-term business
relationships with our customers and offering them comprehensive management of
their telecommunications requirements. Each of our customers is assigned a
local dedicated team consisting of a sales executive and a network consultant.
This team provides a single point of contact for our customer's needs. This
team works together with the customer to design, implement and maintain an
integrated telecommunications solution. This team also reviews and updates the
customer's services on a regular basis. We believe that providing localized,
high quality customer care promotes continued sales of new services and reduces
customer churn.
Sales and Service Infrastructure. Our branches are currently staffed with
over 300 individuals, representing approximately 80% of our employees. As of
June 30, 1999, there were 164 sales executives, 101 network consultants, 26
branch/regional managers and 16 service managers located in 25 sales branches
serving markets in Connecticut, Maine, Maryland, Massachusetts, New Hampshire,
New York, Rhode Island and Vermont.
Customer Sales and Service Model. At their first meeting with a prospective
customer, our sales executives analyze the customer's current
telecommunications usage and costs. Sales executives then outline the range of
services and potential savings we offer and make recommendations to optimize
the customer's current network. Sales executives also discuss the benefits of
our comprehensive customer care program and develop account management plans
designed to balance network expense and utility. Sales executives and network
consultants continue to review the customer's telecommunications usage and
requirements and update the customer's suite of services and network design. We
believe the relationship-intensive approach of assigning sales executives and
network consultants to each customer account results in high customer
satisfaction and retention rates.
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Our sales executives regularly participate in training programs on subjects
such as solution-oriented sales, comprehensive customer care, network design
and other technical features of our services. We seek to motivate and retain
our sales executives through extensive training and a commission structure that
supports our relationship oriented sales and service policies.
Customer Care. Our network consultants are trained in our service offerings
and are responsible for customer care. Network consultants are located in each
of our sales branches and are assigned directly to individual customer accounts
in direct support of the sales executives. Our localized, multi-step customer
care process provides an ongoing and comprehensive service program to our
customers. This process ranges from long-term consultative planning to day-to-
day handling of service issues.
Our customer care program is designed to provide prompt action in response
to customer inquiries and complaints. The local sales branches are staffed 11
hours a day, 5 days a week. At other times, incoming calls automatically roll
over to a central customer care center which is staffed 24 hours a day, 7 days
a week. We believe that our network consultants are motivated to provide the
highest level of customer care because a significant portion of their
compensation is based on customer retention and satisfaction.
Our Information Systems
Our information systems include five central applications which fully
integrate our sales and account management, customer care, provisioning,
billing and financial processes. Automation of each of these processes is
designed for high transaction volumes, accuracy, timely installation, accurate
billing feeds and quality customer service. Data entered in one application is
generally exported into all other applications. Each branch office is served by
a LAN connected via frame relay to the central processor. Our employees have
online access to our information systems from their branch desktops or docking
stations.
We also have an electronic interface to most of our major suppliers. When a
sales executive places an order for one of these suppliers, our information
systems electronically direct it to the appropriate supplier and monitors any
delays in provisioning the order. Once the order is provisioned, our
information systems automatically remove it from the in-process order file,
update the customer's service inventory and network configuration, initiate
billing, post the sales executive's commission and update our financial
reports.
Our information systems include the following applications:
. Account and Sales Management. Our account management application is the
hub of our information systems. It stores all of our customer-related
information, such as location detail, contact information, transaction
history and account profile. Our account management application also
automatically exports data to our customized sales application. Our
sales application is a fully-integrated database that provides sales
personnel with access to information for pricing services, customized
sales proposals, customer correspondence, sales performance, referencing
methods and procedures, service descriptions, competitive information
and historical profiles of our current and prospective customers. These
historical profiles include details of installed services, recent
transactions and billing history. Our sales system can be used both on-
and off-line. All entries made while off-line are automatically updated
to the central processor and all relevant data is simultaneously
exported to the other central applications each time a salesperson
connects to the network.
. Customer Care. Our network consultants use our account care application
to review installed services, make additions, changes and deletions to
accounts, initiate and track repair and service work and review past
billing for any customer. This closed loop application provides
automatic follow up and records all transactions in a customer history
file. Service orders and repair requests input in our account care
application are automatically exported into our provisioning
application.
. Provisioning. We generally direct customer orders through our
provisioning application electronically to our major suppliers. We track
these orders through our account care application from
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initiation through completion. If any delay in provisioning occurs, the
proactive nature of this application alerts the sales executive or
network consultants who can take corrective action and notify the
customer of the delay. Once the order has been filled the information is
automatically fed to our billing application.
. Billing and Customer Interface. Our billing application allows us to
provide our customers a single bill for all the services we provide. Our
billing application also allows the customer to review historic bill
detail, perform customized usage analyses and download information
directly to their own accounting applications. Using a secure Web-based
application called IntelliVIEW(TM), our customers have near real-time
online access to our billing application. Using IntelliVIEW, our
customers are able to review and analyze their bills and related
information. Customer billing statements are also available on CD ROM,
diskette or paper. Paper statements generated by our billing application
offer our customers different management formats.
. Financial. Data from our billing application is automatically exported
to our financial application. Our financial application tracks and
prepares reports on sales activity, commissions, branch operations,
branch profitability and cash flows. The financial application also
compiles this data for our periodic financial reports. In addition, this
application provides internal controls for revenue tracking and costing.
The integrated nature of our information systems allows us to operate
each branch as a separate profit and loss center.
We are actively upgrading our information systems in order to support our
network. We have selected Oracle's relational database for our data repository
and warehouse. We will vertically integrate our business applications described
above with the data repository. Customers, vendors, partners and internal
users, will access our business applications using either UNIX, Windows 95 or
standard internet browsers. We expect that our upgraded information system will
allow us to grow and expand our business, replace and upgrade business
applications without impacting other applications and provide us with reliable
data.
Competition
We operate in a highly competitive environment. We have no significant
market share in any market in which we operate. We will face substantial and
growing competition from a variety of data transport, data networking and
telephony service providers. We will face competition from single-source
providers and from providers of each individual telecommunications service.
Many of these competitors are larger and better capitalized than we are. Also,
many of our competitors are incumbent providers, with long standing
relationships with their customers and greater name recognition.
Bell Atlantic is a competitor for local and data services, and, we expect
based on regulatory developments, eventually will be a competitor for long
distance services as well. Major competitors in our markets in the provision of
single-source solutions include WinStar Communications, Inc. and Teligent, Inc.
Network Plus is a competitor in our market for the provision of long distance
and, to some extent, local services. Competitors for our data services also
include AT&T Local (Teleport) and MCI Worldcom (Brooks Fiber and MFS). Our
competitors for long distance services include all the major long distance
carriers such as AT&T, MCI Worldcom and Sprint.
In addition, the continuing trend toward business combinations and alliances
in the telecommunications industry may create significant new competitors.
Examples of some of these alliances include: Bell Atlantic's proposed
acquisition of GTE, SBC's proposed merger with Ameritech, AT&T's acquisition of
TCI and proposed acquisition of Media One, US West's proposed merger with
Global Crossing, Global Crossing's proposed acquisition of Frontier Corp.,
Qwest's proposed acquisition of US West and Frontier Corp. and SBC's
acquisition of SNET. Many of these combined entities have or will have
resources far greater than ours. These combined entities may provide a single
package of telecommunications products that is in direct competition with our
products. These combined entities may be capable of offering these products
sooner and at more competitive rates than we can.
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Competition from Single-Source Providers. The number of single-source
providers has increased because of the current regulatory trend toward
fostering competition and the continued consolidation of telecommunications
service providers. Many single-source providers and long distance carriers have
committed substantial resources to building their own networks or to purchasing
carriers with complementary facilities. Through these strategies, a competitor
can offer single-source local, long distance and data services similar to those
that we will offer. The alternative strategies available to these competitors
may provide them with greater flexibility and a lower cost structure.
Once the Regional Bell Operating Companies, or RBOCs, are allowed to offer
in-region long distance services under the terms of Section 271 of the
Telecommunications Act, they will be in a position to offer local and long
distance services similar to the services we offer. No RBOC is currently
permitted to provide long distance services for calls originating in their
region. We cannot assure you that this will continue to be the case. The FCC
must approve RBOC provision of in-region interLATA long distance services and
can only do so upon finding that the RBOC has complied with the 14-point
checklist outlined in Section 271 of the Telecommunications Act. This 14-point
checklist is designed to ensure that RBOC competitors have the ability to
provide local telephone services in competition with the RBOC. The FCC has not
yet found that any RBOC has complied with the 14-point checklist.
Although the Telecommunications Act and other federal and state regulatory
initiatives will provide us with new business opportunities, as competition
increases regulators are likely to provide the incumbent local exchange
carriers with more pricing flexibility. Our revenues may be adversely affected
if the incumbent local exchange carriers elect to lower their rates and sustain
these lower rates over time. We believe that we may be able to offset the
effect of lower rates by offering new services to our target customers, but we
cannot assure you that this will occur. In addition, if future regulatory
decisions give incumbent local exchange carriers increased pricing flexibility
or other regulatory relief, such decisions could have a material adverse effect
on our business.
Competition for Provision of Local Exchange Services. In the local exchange
market, incumbent local exchange carriers, including RBOCs, continue to hold
near-monopoly positions. We also face competition or prospective competition
from one or more integrated service providers, and from other competitive
providers, including providers who do not own their own network. Many of these
competitors are larger and better capitalized than we are. Some carriers have
entered into interconnection agreements with incumbent local exchange carriers
and either have begun, or in the near future likely will begin, offering local
exchange service in each of our markets. Further, as of February 8, 1999, the
largest long distance carriers were permitted to bundle local and long distance
services. This removes one of our competitive advantages. Other entities that
currently offer or are potentially capable of offering switched services
include cable television companies, electric utilities, other long distance
carriers, microwave carriers, and large customers who build private networks.
Wireless telephone system operators are also competitors in the provision of
local services. Cellular, personal communications service, and other commercial
mobile radio services providers may offer wireless services to fixed locations,
rather than just to mobile customers. This ability to provide fixed as well as
mobile services will enable wireless providers to offer wireless local loop
service and other services to fixed locations (e.g., office and apartment
buildings) in direct competition with us and other providers of traditional
fixed telephone service. In addition, the FCC recently auctioned substantial
blocks of spectrum for fixed use including local exchange services. We expect
exploitation of this spectrum to increase competition in the local market.
The World Trade Organization recently concluded an agreement that could
result in additional competitors entering the U.S. local and long-distance
markets. Under the WTO agreement, the United States committed to open
telecommunications markets to foreign-owned carriers. The FCC has adopted
streamlined procedures for processing market entry applications from foreign
carriers, making it easier for such carriers to compete in the U.S. We cannot
predict whether foreign-owned carriers will enter our markets as a result of
the WTO agreement.
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Competition for Provision of Long Distance Services. The long distance
market is significantly more competitive than the local exchange market. In the
long distance market numerous entities compete for the same customers. In
addition, customers frequently change long distance providers in response to
lower rates or promotional incentives by competitors. This results in a high
average rate of customer loss, or churn, in the long distance market. Prices in
the long distance market have declined significantly in recent years and are
expected to continue to decline. Competition in this market will further
increase once RBOCs are permitted to offer long distance services.
Data and Internet Services. The market for high speed data services and
access to the internet is highly competitive. We expect competition in this
market to continue to intensify. Our competitors in this market will include
internet service providers and other telecommunications companies, including
large interexchange carriers and RBOCs. Many of these competitors have greater
financial, technological and marketing resources than those available to us.
Recently, various RBOCs have filed petitions with the FCC requesting regulatory
relief in connection with the provision of their own data services, including
DSL services. In response to these petitions, the FCC issued a decision that
data services generally are telecommunications services that, when provided by
incumbent local exchange carriers, are subject to the unbundling, resale, and
other independent local exchange carrier obligations prescribed in Section 251
of the Telecommunications Act. Petitions have been filed with the FCC asking
them to reconsider this decision. The FCC also has initiated a proceeding to
determine whether independent local exchange carriers will be able to escape
their Section 251 obligations by providing data services through "truly"
separate affiliates, whether the FCC will require incumbent local exchange
carriers to unbundle their data services equipment and resell data services,
and whether the FCC will grant RBOCs relief for the provision of data services.
We cannot predict the effect that this proceeding will have on our ability to
obtain facilities and services from incumbent local exchange carriers and on
the competition that we will face from incumbent local exchange carriers in the
data services market.
Government Regulation
The local and long distance telephony services and, to a lesser extent, the
data services we provide are regulated by federal, state, and, to some extent,
local government authorities. The FCC has jurisdiction over all
telecommunications common carriers to the extent they provide interstate or
international communications services. Each state regulatory commission has
jurisdiction over the same carriers with respect to the provision of intrastate
communications services. Local governments sometimes impose franchise or
licensing requirements on telecommunications carriers and regulate construction
activities involving public rights-of-way. Changes to the regulations imposed
by any of these regulators could have a material adverse effect on our
business, operating results and financial condition.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and state utility commissions have adopted many new rules to
implement this legislation and encourage competition. These changes, which are
still incomplete, have created new opportunities and challenges for us and our
competitors. The following summary of regulatory developments and legislation
is not intended to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Some of
these and other existing federal and state regulations are the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degree, the manner in which this industry operates. We
cannot predict the outcome of these proceedings, or their impact on the
telecommunications industry at this time.
Federal Regulation
We are currently not subject to price cap or rate of return regulation at
the federal level and are not currently required to obtain FCC authorization
for the installation, acquisition or operation of our domestic interexchange
network facilities. However, we must comply with the requirements of common
carriage under the Communications Act. We are subject to the general
requirement that our charges and terms for our
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<PAGE>
telecommunications services be "just and reasonable" and that we not make any
"unjust or unreasonable discrimination" in our charges or terms. The FCC has
jurisdiction to act upon complaints against any common carrier for failure to
comply with its statutory obligations.
Comprehensive amendments to the Communications Act were made by the
Telecommunications Act, which was signed into law on February 8, 1996. The
Telecommunications Act effected changes in regulation at both the federal and
state levels that affect virtually every segment of the telecommunications
industry. The stated purpose of the Telecommunications Act is to promote
competition in all areas of telecommunications. While it may take years for the
industry to feel the full impact of the Telecommunications Act, it is already
clear that the legislation provides us with new opportunities and challenges.
The Telecommunications Act greatly expands the interconnection requirements
on the incumbent local exchange carriers. The Telecommunications Act requires
the incumbent local exchange carriers to:
. provide physical collocation, which allows companies such as us and
other competitive local exchange carriers to install and maintain their
own network termination equipment in incumbent local exchange carriers;
central offices, and virtual collocation only if requested or if
physical collocation is demonstrated to be technically infeasible;
. unbundle components of their local service networks so that other
providers of local service can compete for a wide range of local
services customers; and
. establish "wholesale" rates for their services to promote resale by
competitive local exchange carriers.
In addition, all local exchange carriers must:
. establish number portability, which will allow a customer to retain its
existing phone number if it switches from the local exchange carrier to
a competitive local service provider;
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way;
. compensate other local exchange carriers on a reciprocal basis for
traffic originated on one local exchange carrier and terminated on the
other local exchange carrier.
The FCC is charged with establishing national guidelines to implement
certain portions of the Telecommunications Act. The FCC issued its
interconnection order on August 8, 1996. On July 18, 1997, however, the United
States Court of Appeals for the Eighth Circuit issued a decision vacating the
FCC's pricing rules, as well as certain other portions of the FCC's
interconnection rules, on the grounds that the FCC had improperly intruded into
matters reserved for state jurisdiction. On January 25, 1999, the Supreme Court
largely reversed the Eighth Circuit's order, holding that the FCC has general
jurisdiction to implement the local competition provisions of the
Telecommunications Act. In so doing, the Supreme Court stated that the FCC has
authority to set pricing guidelines for unbundled network elements, to prevent
incumbent local exchange carriers from disaggregating existing combinations of
network elements, and to establish "pick and choose" rules regarding
interconnection agreements. "Pick and choose" rules would permit a carrier
seeking interconnection to "pick and choose" among the terms of service from
other interconnection agreements between the incumbent local exchange carriers
and other competitive local exchange carriers. This action reestablishes the
validity of many of the FCC rules vacated by the Eighth Circuit. Although the
Supreme Court affirmed the FCC's authority to develop pricing guidelines, the
Supreme Court did not evaluate the specific pricing methodology adopted by the
FCC and has remanded the case to the Eighth Circuit for further consideration.
Thus, while the Supreme Court resolved many issues, including the FCC's
jurisdictional authority, other issues remain subject to further consideration
by the courts and the FCC. We cannot predict the ultimate disposition of those
matters. We also cannot predict the possible impact of this decision on
existing interconnection agreements between incumbent local exchange carriers
and competitive local exchange carriers or on agreements that may be negotiated
in the future.
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Although most of the FCC rules that the Supreme Court was considering were
upheld, the Court vacated the FCC's rule that identifies the unbundled network
elements that incumbent local exchange carriers must provide to competitive
local exchange carriers. The FCC recently initiated a new proceeding to
reexamine whether it will identify which unbundled network elements incumbent
local exchange carriers must provide, and, if so, how to identify those
elements. It is unclear how the FCC will decide this issue or the effect that
the FCC's decision will have on our business or operations.
The FCC recently adopted new rules designed to make it easier and less
expensive for competitive local exchange carriers to obtain collocation at
incumbent local exchange carrier central offices by, among other things,
restricting the incumbent local exchange carriers' ability to prevent certain
types of equipment from being collocated and requiring incumbent local exchange
carriers to offer alternative collocation arrangements to competitive local
exchange carriers. The FCC also initiated a new proceeding to address line
sharing, which, if implemented, would allow competitive local exchange carriers
to offer data services over the same line that a consumer uses for voice
services without the competitive local exchange carrier having to provide the
voice service. While we expect that the FCC's new collocation rules will be
beneficial to us, we cannot be certain that these new rules will be implemented
in a favorable manner. Moreover, incumbent local exchange carriers or other
parties may ask the FCC to reconsider some or all of its new collocation rules,
or may appeal these rules in federal court. We cannot predict the outcome of
these actions or the effect they may have on our business.
Under the Communications Act, incumbent local exchange carriers have an
obligation to negotiate with us in good faith to enter into interconnection
agreements. We will need interconnection agreements to provide enhanced
connectivity to our network and to provide local dial tone services. If we
cannot reach agreement, either side may petition the applicable state
commission to arbitrate remaining disagreements. These arbitration proceedings
can last up to 9 months. Moreover, state commission approval of any
interconnection agreement resulting from negotiation or arbitration is
required, and any party may appeal an adverse decision by the state commission
to federal district court. The potential cost in resources and delay from this
process could harm our ability to compete in certain markets, and there is no
guarantee that a state commission would resolve disputes, including pricing
disputes in our favor. Moreover, as explained above, the FCC rules governing
pricing standards for access to the networks of the traditional telephone
companies are currently being challenged in federal court. If the courts
overturn the FCC's pricing rules, the FCC may adopt a new pricing methodology
that would require us to pay a higher price to traditional telephone companies
for interconnection. This could have a detrimental effect on our business.
The Telecommunications Act permits RBOCs to provide long distance services
outside their local service regions immediately, and will permit them to
provide in-region long distance service upon demonstrating to the FCC and state
regulatory agencies that they have adhered to the Telecommunication Act's 14-
point competitive checklist. Some RBOCs have filed applications with various
state public utility commissions and the FCC seeking approval to offer in-
region long distance service. Some states have denied these applications while
others have approved them. However, to date, the FCC has denied each of the
RBOC's applications brought before it because it found that the RBOC had not
sufficiently made its local network available to competitors. We anticipate
that a number of RBOCs will file additional applications in 1999.
In May 1997, the FCC released an order establishing a significantly expanded
universal service regime to subsidize the cost of telecommunications service to
high cost areas, as well as to low-income customers and qualifying schools,
libraries, and rural health care providers. Providers of interstate
telecommunications services, like us, as well as certain other entities, must
pay for these programs. We are also eligible to receive funding from these
programs if we meet certain requirements, but we are not currently planning to
do so. Our share of the payments into these subsidy funds will be based on our
share of certain defined telecommunications end-user revenues. Currently, the
FCC is assessing such payments on the basis of a provider's revenue for the
previous year. Various states are also in the process of implementing their own
universal service programs. We are currently unable to quantify the amount of
subsidy payments that we will be required to make and the effect that these
required payments will have on our financial condition. Moreover, the FCC's
universal service rules remain subject to judicial appeal and further FCC
review. Additional changes to the universal service program could increase our
costs.
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On November 1, 1996, the FCC issued an order that required nondominant
interexchange carriers, like us, to cease filing tariffs for our domestic
interexchange services. The order required mandatory detariffing and gave
carriers nine months to withdraw federal tariffs and move to contractual
relationships with their customers. This order subsequently was stayed by a
federal appeals court, and it is unclear at this time whether the detariffing
order will be implemented. In June 1997, the FCC issued another order stating
that non-dominant local exchange carriers, like us, could withdraw their
tariffs for interstate access services provided to long distance carriers. The
FCC continues to require that carriers obtain authority to provide service
between the United States and foreign points and file tariffs for international
service. If the FCC's orders become effective, nondominant interstate services
providers will no longer be able to rely on the filing of tariffs with the FCC
as a means of providing notice to customers of prices, terms and conditions
under which they offer their interstate services. If we cancel our FCC tariffs
as a result of the FCC's orders, we will need to implement replacement
contracts which could result in substantial administrative expenses.
In March 1999, the FCC adopted further rules that, while still maintaining
mandatory detariffing, nonetheless require long distance carriers to make
specific public disclosures on the carriers' Internet websites of their rates,
terms and conditions for domestic interstate services. The effective date for
these rules is also delayed until a court decision on the appeal of the FCC's
detariffing order.
Recently, the FCC has determined that both continuous access and dial-up
calls from a customer to an Internet service provider are interstate, not
local, calls, and, therefore, are subject to the FCC's jurisdiction. The FCC
has initiated a proceeding to determine the effect that this regulatory
classification will have on the obligation of a local exchange carrier to pay
reciprocal compensation for dial-up calls to internet service providers that
originate on one local exchange carrier network and terminate on another local
exchange carrier network. Moreover, several states are considering this issue,
and one state has held that local exchange carriers do not need to pay
reciprocal compensation for calls terminating at internet service providers. In
addition, one RBOC has petitioned the FCC for a ruling that telephone-to-
telephone calls made over the Internet are subject to regulation as a
telecommunications service under the Communications Act. Although the FCC has
suggested that such Internet-based telephone-to-telephone calls may be
considered a telecommunications service, it has not reached a final decision on
that issue. We cannot predict the effect that the FCC's resolution of these
issues will have on our business.
In August 1997, the FCC issued rules transferring responsibility for
administering and assigning local telephone numbers from the RBOCs and a few
other local exchange carriers to a neutral entity in each geographic region in
the United States. In August 1996, the FCC issued new numbering regulations
that prohibit states from creating new area codes that could unfairly hinder
competitive local exchange carriers by requiring their customers to use 10
digit dialing while existing independent local exchange carrier customers use 7
digit dialing. These regulations also prohibit incumbent local exchange
carriers which are still administering central office numbers pending selection
of the neutral administrator from charging "code opening" fees to competitors
unless they charge the same fee to all carriers including themselves. In
addition, each carrier is required to contribute to the cost of numbering
administration through a formula based on net telecommunications revenues. In
July 1996, the FCC released rules requiring all local exchange carriers 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 May 1999, the FCC initiated a
proceeding to address the problem of the declining availability of area codes
and phone numbers.
A customer's choice of local or long distance telecommunications company is
encoded in a customer record, which is used to route the customer's calls so
that the customer is served and billed by the desired company. A user may
change service providers at any time, but the FCC and some states regulate this
process and require that specific procedures be followed. When these procedures
are not followed, particularly if the change is unauthorized or fraudulent, the
process is known as "slamming." Slamming is such a significant problem that it
was addressed in detail by Congress in the Telecommunications Act, by some
state legislatures, and by the FCC in recent orders. The FCC has levied
substantial fines for slamming. The risk of financial damage and business
reputation from slamming is significant. Even one slamming complaint could
cause extensive litigation expenses for us. The FCC recently decided to apply
its slamming rules (which originally covered only long distance) to local
service as well.
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State Regulation
To the extent that we provide telecommunications services which originate
and terminate in the same state, we are subject to the jurisdiction of that
state's public service commission. As our local service business and product
lines expand, we will offer more intrastate service and become increasingly
subject to state regulation. The Telecommunications Act maintains the authority
of individual state utility commissions to preside over rate and other
proceedings, as discussed above, and impose their own regulation of local
exchange and interexchange services so long as such regulation is not
inconsistent with the requirements of the Telecommunications Act. For instance,
states may impose tariff and filing requirements, consumer protection measures
and obligations to contribute to universal service, and other funds.
We are subject to requirements in some states to obtain prior approval for,
or notify the state commission of, any transfers of control, sales of assets,
corporate reorganizations, issuances of stock or debt instruments and related
transactions. Although we believe such authorizations could be obtained in due
course, there can be no assurance that the FCC or state commissions would grant
us authority to complete any of these transactions.
We have state regulatory authority to provide competitive local exchange
services and interexchange services in nine states. We also have state
regulatory authority to provide interexchange services in approximately 31
additional states. In some states, in which we have or have had de minimis
intrastate interexchange revenues, we have not obtained authorization to
provide such interexchange services or have allowed such authorization to
lapse. We have either subsequently obtained, or are in the process of applying
to obtain, the appropriate authorization in these states.
The Telecommunications Act generally preempts state statutes and regulations
that restrict the provision of competitive local services. States, however, may
still restrict competition in some rural areas. As a result of this preemption,
we will be free to provide the full range of local, long distance, and data
services in any state. While this action greatly increases our potential for
growth, it also increases the amount of competition to which we may be subject.
Local Government Regulation
We may be required to obtain from municipal authorities street opening and
construction permits to install our facilities in some cities. In some of the
areas where we provide service, we are subject to municipal franchise
requirements requiring us to pay license or franchise fees either on a
percentage of gross revenue, flat fee or other basis. The Telecommunications
Act requires municipalities to charge nondiscriminatory fees to all
telecommunications providers, but it is uncertain how quickly this requirement
will be implemented by particular municipalities in which we operate or plan to
operate or whether it will be implemented without a legal challenge.
Properties
Our headquarters and technology center are located in leased space in
Waltham, Massachusetts. We have a back-up network operations center in
Springfield, Massachusetts. We also lease offices in eight states. Although we
believe that our leased facilities are adequate at this time, we expect to
lease a significant number of additional sales facilities in connection with
our planned expansion in existing markets and into new markets.
Legal Proceedings
In December 1997, we terminated our agency contract and filed suit against
Bell Atlantic for, among other things, breach of contract, including the
failure of Bell Atlantic's retail division to pay agency commissions owed to
us. This litigation was settled on February 24, 1999. Under the terms of the
settlement, we will receive cash and other consideration. Both parties have
agreed to keep the specific terms of the settlement confidential.
Employees
As of June 30, 1999, we employed 393 persons. None of our employees are
represented by a collective bargaining agreement.
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Management
Executive Officers, Directors and Significant Employees
Our executive officers and directors, and their ages as of July 9, 1999, are
as follows:
<TABLE>
<CAPTION>
Name Age Current Office Held
---- --- -------------------
<C> <C> <S>
Robert J. Fabbricatore.. 56 Chairman and Chief Executive Officer
Steven P. Milton........ 45 President and Chief Operating Officer
John D. Pittenger....... 45 Executive Vice President, Chief Financial Officer
and Treasurer
David E. Mahan.......... 57 Vice President--Marketing and Strategic Planning
Michael H. Donnellan.... 45 Vice President--Operations
Thomas Fabbricatore..... 40 Vice President--Marketing
Anthony D. Vermette..... 38 Vice President--Sales
Frederick Kunzi......... 47 Vice President and Chief Technology Officer
Jeffrey C. Lavin........ 43 Vice President--Corporate Development
Katherine D. Courage.... 41 Director
Henry Hermann........... 57 Director
Kevin J. Maroni......... 36 Director
J. Richard Murphy....... 55 Director
Robert A. Nicholson..... 31 Director
Carl Redfield........... 51 Director
Richard J. Santagati.... 55 Director
Ralph C. Sillari........ 44 Director
Ralph S. Troupe......... 38 Director
</TABLE>
Robert J. Fabbricatore, a founder of CTC and a director since its inception
in 1980, became Chairman of the Board of Directors in March 1983 and served as
President from October 1993 to August 1995. Robert J. Fabbricatore is the
brother of Thomas Fabbricatore, Vice President--Marketing.
Steven P. Milton has been employed by CTC since 1984 and has served as
President and Chief Operating Officer since August 1995. Prior to that, he held
various positions within CTC including Branch Manager, District Manager,
Regional Manager and Vice President--Sales and Marketing.
John D. Pittenger has served as Chief Financial Officer since April 14,
1999, as Executive Vice President--Finance and Administration since April 1998
and as Treasurer and Clerk of CTC since August 1989. Mr. Pittenger served as
Vice President--Finance from 1991 until April 1998, and as Chief Financial
Officer from 1989 to April 1998.
David E. Mahan joined CTC in October 1995 as Vice President--Marketing and
Strategic Planning. Prior to joining CTC, Mr. Mahan held a number of senior
management level positions with NYNEX, including Vice President--Sales Channel
Management from 1993 to 1995.
Michael H. Donnellan has been employed by CTC since 1988 in a number of
positions. He was named Vice President--Operations in 1995.
Thomas Fabbricatore joined CTC in 1982. He was named Vice President--
Regulatory and Electronic Media in 1991, and was named Vice President--
Marketing in November 1998. Thomas Fabbricatore is the brother of Robert J.
Fabbricatore.
Anthony D. Vermette has been employed by CTC in a variety of positions since
1987. Mr. Vermette was named Vice President--Sales in 1996.
Frederick Kunzi joined CTC as a Vice President and Chief Technology Officer
in September 1998. Mr. Kunzi has over 25 years experience in information
technology. From 1985 to September 1998, he was employed by Digital Equipment
Corporation, most recently as Senior Manager, Global Network Services where he
was responsible for Digital's worldwide enterprise network infrastructure.
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Jeffrey C. Lavin joined CTC in June 1998 as Vice President--Corporate
Development. Mr. Lavin has 19 years of sales and operational management
experience in the telecommunications industry. From December 1996 to May 1998,
Mr. Lavin was Vice President of Sales, Americas/Asia Pacific for NovaSoft
Systems, Inc., a software development corporation. From 1979 to 1996, Mr. Lavin
was employed by Comlink Incorporated, a communication network integrator, most
recently as Senior Vice President. Following the acquisition of Comlink in 1996
by Williams Communications, Mr. Lavin served as Vice President and General
Manager of Network Systems Integration.
Katherine D. Courage became a director of CTC in April 1999. Ms. Courage is
a Managing Director in the Global Telecommunications and Media Group in the
Investment Banking Department of Credit Suisse First Boston, one of the
underwriters of this offering. Prior to joining Credit Suisse First Boston in
September 1996, Ms. Courage worked at Salomon Brothers Inc for ten years where
she was a managing director in the Global Telecommunications Group. Ms. Courage
currently serves as a director of NorthEast Optic Network, Inc. and Lightpath
Technologies, Inc.
Henry Hermann became a director of CTC in September 1996. Since November
1997, he has operated Hermann Companies, a financial services company. Mr.
Hermann is registered as an Investment Advisor with the State of Texas, a
Chartered Financial Analyst and, as an independent contractor, offers general
securities through SWS Financial. In 1997, he was employed by Kuhns Brothers &
Company, Inc., as a principal and Executive Vice President. For the previous
nine years, he was employed by WR Lazard, Laidlaw and Luther, Inc., a
securities brokerage firm, as Vice President, Securities Analyst and Portfolio
Manager. Mr. Hermann has been an NASD Board of Arbitrators Member since 1991.
Kevin J. Maroni became a director of CTC in April 1998 as one of the two
designees of the Series A preferred stockholders. Mr. Maroni is a general
partner of Spectrum which he joined in 1994. Spectrum is a leading private
equity fund which manages $1 billion of capital for investment in the
communications and media industries. Prior to joining Spectrum, he worked at
Time Warner Telecommunications and Harvard Management Company. Mr. Maroni is a
director of PathNet, Inc., Formus Communications, Inc., WNP Communications,
Inc. and American Cellular Corp.
J. Richard Murphy became a director of CTC in August 1995. Mr. Murphy has
been the director of the Corporate Advisory Group of Moody, Cavanaugh and
Company, LLP, a North Andover, Massachusetts public accounting firm, since
April 1996. Mr. Murphy was an officer, director and principal stockholder from
1990 to 1995 of Arlington Data Corporation, a systems integration company
located in Amesbury, Massachusetts; from 1992 to 1996 of Arlington Data
Consultants, Inc., a company engaged in the installation and maintenance of
computer systems and hardware; and from 1994 to 1996 of Computer Emporium,
Inc., a company engaged in processing parking violations for municipalities. In
June 1996, Arlington Data Corporation filed for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code.
Robert A. Nicholson is one of the two designees of the Series A preferred
stockholders and became a director of CTC in November 1998. Mr. Nicholson
joined Spectrum in 1995 as a Vice President and became a partner in July 1998.
From 1990 to 1993, Mr. Nicholson was an Associate Consultant and then
Consultant at Bain & Company, a leading strategy consulting firm, where he was
responsible for strategy and operations projects in the communications
industry. Mr. Nicholson currently serves as a Director of Navitar
Communications Group, Inc., a Canadian competitive local exchange carrier.
Carl Redfield became a director of CTC in January 1999. He has been Senior
Vice President, Manufacturing and Logistics of Cisco since February 1997. From
September 1993 to February 1997 he was Vice President of Manufacturing. Mr.
Redfield also is a director of VA Research Inc. and Paragon Electronics Inc.
Richard J. Santagati became a director of CTC in September 1991. He has been
the President of Merrimack College in North Andover, Massachusetts since 1994.
From March 1992 to February 1994,
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Mr. Santagati was the Chairman of the Board, Chief Executive Officer and
President of Artel Communications Corp., a publicly held data communications
firm located in Hudson, Massachusetts. Mr. Santagati also serves as a director
of Celerity Solutions, Inc., a software company.
Ralph C. Sillari became a director of CTC in October 1997. Since 1991, Mr.
Sillari has been employed by Fleet National Bank where he is currently an
Executive Vice President in the Business and Entrepreneurial Services Division.
Ralph S. Troupe became a director of CTC in May 1999. Since January 1993,
Mr. Troupe has been employed by International Network Services, where he is
currently Vice President of North American Field Operations, East.
We currently have ten members on our board of directors: three Class I
Directors (Messrs. Hermann, Sillari and Redfield), three Class II Directors
(Messrs. Murphy and Santagati and Ms. Courage) and four Class III Directors
(Messrs. Fabbricatore, Maroni, Nicholson and Troupe). The terms of the Class I,
Class II and Class III directors expire upon the election and qualification of
their successors at the annual meetings of stockholders held following the end
of fiscal years 2001, 1999 and 2000, respectively.
Director Compensation
Non-employee directors receive an annual retainer of $10,000. On February
17, 1999, we granted Messrs. Sillari, Murphy and Hermann options to purchase
10,000 shares of our common stock. We also granted Messrs. Nicholson, Maroni
and Santagati options to purchase 20,000 shares of our common stock. All of the
above options were at a purchase price of $10.125 per share. At the same time
we granted Robert Fabbricatore options to purchase 50,000 shares of our common
stock at a purchase price of $11.1375, 50,000 shares at a purchase price of
$15.00 per share and 50,000 shares at a purchase price of $20.00 per share. On
January 19, 1999, we granted Mr. Redfield an option to purchase 40,000 shares
of our common stock at a purchase price of $11.25 per share. On April 5, 1999,
we granted Ms. Courage an option to purchase 40,000 shares of our common stock
at a purchase price of $12.375 per share. On May 5, 1999, we granted Mr. Troupe
an option to purchase 25,000 shares of common stock at a purchase price of
$18.875 per share.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation
committee and a nominating committee.
The audit committee consists of Messrs. Murphy and Hermann. The audit
committee is responsible for reviewing the internal accounting controls of CTC,
meeting and conferring with our independent auditors and reviewing the results
of the accountants' auditing engagement.
The compensation committee consists of Messrs. Maroni, Santagati and Murphy.
The compensation committee establishes compensation and benefits for our senior
executives. The committee also determines the number and terms of stock options
granted to employees, directors and consultants under our stock option plans.
The nominating committee consists of Messrs. Santagati, Murphy and Sillari.
The nominating committee recommends candidates for nomination to the board of
directors. The committee also reviews and makes recommendations regarding
compensation for non-employee directors.
Voting Agreement
Pursuant to a voting agreement between Robert J. Fabbricatore and some of
his affiliates and Spectrum, Mr. Fabbricatore and these affiliates agreed to
vote at each annual or special meeting at which directors of CTC are to be
elected all of the shares of common stock held by them in favor of two persons
designated by a
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majority of the outstanding shares of Series A preferred stock as nominees for
directors, subject to certain limitations based on the number of shares of
Series A preferred stock outstanding at any time. As of June 17, 1999, Spectrum
owned 657,555 of the 666,666 shares, or 98.6%, of the Series A preferred stock
outstanding. Kevin J. Maroni and Robert A. Nicholson, partners of Spectrum and
designees of the Series A preferred stockholders, are Class III directors of
CTC.
Executive Compensation
The following table provides summary information concerning compensation of
our Chief Executive Officer and each of the four other most highly paid
executive officers (the "Named Executive Officers") during the fiscal year
ended March 31, 1999:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------- ---------------------------
Fiscal Securities
Year Ended Annual Underlying All Other
March 31, Salary Bonus Options (#)(1) Compensation
---------- ---------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Robert J.
Fabbricatore,.......... 1999 $ 240,000 $ 78,000 150,000 $20,900(/2/)
Chairman and Chief 1998 240,000 60,000 150,000 19,550(/2/)
Executive Officer 1997 240,000 60,000 -- 18,075(/2/)
Steven C. Jones,........ 1999 150,000 75,000 -- 3,375(/3/)
Executive Vice President, 1998 12,500 -- 300,000 --
Chief Financial Officer 1997 -- -- -- --
and Director of Corporate
Development(/4/)
Steven P. Milton,....... 1999 150,000 54,500 100,000 5,625(/3/)
President and Chief 1998 100,000 40,000 150,000 4,200(/3/)
Operating Officer 1997 100,000 40,000 -- 4,075(/3/)
David E. Mahan,......... 1999 110,000 52,000 20,000 4,440(/3/)
Vice President-- 1998 100,000 40,000 260,000 4,075(/3/)
Marketing and Strategic 1997 100,000 40,000 -- 4,075(/3/)
Planning
John D. Pittenger,...... 1999 100,000 62,000 36,000 4,860(/3/)
Executive Vice President-- 1998 90,000 36,000 80,000 3,900(/3/)
Finance and Administration,1997 86,100 34,000 -- 3,437(/3/)
Treasurer and Clerk
</TABLE>
- --------
(1) On March 20, 1998 we repriced all previously granted options that had an
exercise price in excess of $7.19 per share. The 1998 information includes
75,000, 75,000, 130,000 and 40,000 shares underlying options previously
granted to Messrs. Fabbricatore, Milton, Mahan and Pittenger that were
canceled as a result of the repricing.
(2) Includes 50% matching contributions in the amounts of $4,800, $4,750 and
$4,500 in 1999, 1998 and 1997 to the CTC Communications Corp. 401(k)
Savings Plan. Also included is the actuarial benefit on the "split-dollar"
life insurance policy for the benefit of Mr. Fabbricatore in the amounts of
$16,100, $14,800 and $13,575 in 1999, 1998 and 1997.
(3) Includes 50% matching contributions to the CTC Communications Corp. 401(k)
Savings Plan.
(4) Mr. Jones began working for CTC on February 27, 1998 and resigned on April
21, 1999. Does not include $135,879 of severance benefits that we paid to
Mr. Jones after March 31, 1999.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth the aggregate number of stock options granted
to each of the Named Executive Officers during the fiscal year ended March 31,
1999. Options are exercisable for our common stock. No options were granted to
Mr. Jones in the last fiscal year.
<TABLE>
<CAPTION>
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rate of
Underlying Granted to Exercise Stock Price
Options Employees in Price Expiration Appreciation for
Granted (#) Fiscal Year ($/Share) Date Option Term
----------- ------------- --------- ---------- ----------------------
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Fabbricatore.. 50,000 4.2% 20.00 2/17/2003 (353,882) (184,679)
50,000 4.2% 15.00 2/17/2003 (103,882) 65,321
50,000 4.2% 11.138 2/17/2003 89,243 258,446
Steven P. Milton........ 33,000 3% 20.00 2/17/2003 (233,562) (122,996)
33,000 3% 15.00 2/17/2003 (68,562) 43,112
34,000 3% 10.125 2/17/2003 95,110 210,168
David E. Mahan.......... 20,000 2% 10.125 2/17/2003 55,947 123,628
John D. Pittenger....... 36,000 3% 10.125 2/17/2003 100,705 222,531
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information concerning the exercise of
options by the Named Executive Officers during the fiscal year ended March 31,
1999 and the March 31, 1999 aggregate value of unexercised options held by each
of the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options
Options at Fiscal at Fiscal Year End ($)
Year-End (#)(1) (1)(2)
Shares ----------------------- -----------------------
acquired on Value Exercisable/ Exercisable/
exercise(#) Realized ($) Unexercisable Unexercisable
----------- ------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Fabbricatore.. -- -- 89,806 168,750 445,384 266,625
Steven C. Jones(/3/).... -- -- 150,000 150,000 796,875 796,875
Steven P. Milton........ -- -- 79,750 131,250 501,482 312,019
David E. Mahan.......... -- -- 100,000 100,000 605,265 474,645
John D. Pittenger....... -- -- 58,000 57,000 420,096 216,360
</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
effected in July 1995 and the two-for-one stock split effected in October
1995.
(2) Assumes a fair market value of the Common Stock at March 31, 1999 of
$12.375 per share.
(3) In connection with Mr. Jones' resignation in April 1999, we vested an
additional 37,500 options and extended the exercise period of his vested
options until April 21, 2004.
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<PAGE>
Principal and Selling Stockholders
Common Stock
The following table sets forth information as of July 9, 1999 with respect
to the beneficial ownership of our common stock by:
. each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
. our directors and our Named Executive Officers;
. all executive officers and directors as a group; and
. each selling stockholder.
Fleet National Bank is selling 100,000 shares of common stock in the
offering and Goldman, Sachs & Co. is selling 200,000 shares of common stock in
the offering.
The following table assumes the issuance of 300,000 shares of common stock
on exercise of 455,769 warrants. The selling stockholders have indicated to us
that they will exercise these warrants, through a cashless transaction,
calculated using an assumed value of $19.75 per share, in order to acquire the
shares they are selling in this offering. Based on the information furnished by
the beneficial owners of the common stock listed below, we believe that each
such stockholder exercises sole voting and investment power with respect to the
shares beneficially owned.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Before the After the
Name Number Offering Offering
---- --------- ---------- ---------
<S> <C> <C> <C>
Robert J. Fabbricatore(/1/)...................... 2,830,870 26.9% 20.2%
Spectrum Equity Investors II, L.P.(/2/).......... 1,655,287 13.7% 10.6%
Kevin J. Maroni(/2/)(/3/)........................ 1,660,287 13.8% 10.7%
Robert A. Nicholson(/2/)(/4/).................... 1,661,302 13.8% 10.7%
Fleet National Bank(5)........................... 311,812 2.9% 1.1%
Goldman, Sachs & Co.(/6/)........................ 662,600 6.0% 2.5%
Henry Hermann(/7/)............................... 225,755 2.2% 1.6%
Richard J. Santagati(/8/)........................ 96,000 * *
Carl Redfield(/9/)............................... 24,000 * *
J. Richard Murphy(/10/).......................... 30,167 * *
Ralph C. Sillari(/11/)........................... 6,334 * *
Katherine D. Courage(/12/)....................... 10,000 * *
Steven P. Milton(/13/)........................... 489,432 4.7% 3.5%
David E. Mahan(/14/)............................. 187,100 1.8% 1.3%
John D. Pittenger(/15/).......................... 263,588 2.5% 1.9%
Steven C. Jones(/16/)............................ 237,500 2.2% 1.7%
Ralph S. Troupe(/17/)............................ 6,250 * *
All directors and executive
officers as a group (13 persons)(/18/).......... 6,391,844 53.4% 41.0%
</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 108,556 shares issuable upon exercise of
options exercisable within 60 days of July 9, 1999. Mr. Fabbricatore's
address is c/o CTC Communications Corp., 360 Second Avenue, Waltham,
Massachusetts 02451.
(2) Includes 187,066 shares issuable upon the exercise of warrants exercisable
within 60 days of July 9, 1999 and 1,468,221 shares issuable upon
conversion of Series A preferred stock as of July 9, 1999. As partners of
Spectrum Equity Investors II, L.P., Mr. Maroni, Mr. Nicholson, William
Collatos and Brion B. Applegate may be deemed to be beneficial owners of
the shares owned by Spectrum. The address of Spectrum and its partners is
One International Place, 29th Floor, Boston, Massachusetts 02110.
39
<PAGE>
(3) Includes 5,000 shares issuable to Mr. Maroni upon the exercise of options
exercisable within 60 days of July 9, 1999.
(4) Includes 83 shares issuable to Mr. Nicholson upon the exercise of warrants
and 5,000 shares issuable upon the exercise of options exercisable within
60 days of July 9, 1999, and 931 shares issuable upon conversion of Series
A preferred stock as of July 9, 1999.
(5) Consists of 311,812 shares issuable upon exercise of a warrant exercisable
within 60 days of July 9, 1999. The address of Fleet National Bank is One
Federal Street, Boston, MA 02110. Fleet is selling 100,000 shares in the
offering. After the offering Fleet will beneficially own warrants to
purchase 159,889 shares or 1.1% of our common stock.
(6) Consists of 662,600 shares issuable upon exercise of a warrant exercisable
within 60 days of July 9, 1999. The address of Goldman, Sachs & Co. is 85
Broad St., New York, NY 10004. Goldman Sachs is selling 200,000 shares in
the offering. After the offering Goldman Sachs will beneficially own
warrants to purchase 358,754 shares or 2.5% of our common stock.
(7) Includes 9,750 shares held by Mr. Hermann's spouse and 20,167 shares
issuable upon the exercise of options exercisable within 60 days of July
9, 1999.
(8) Includes 21,000 shares issuable to Mr. Santagati upon the exercise of
options exercisable within 60 days of July 9, 1999.
(9) Includes 10,000 shares issuable to Mr. Redfield upon the exercise of
options exercisable within 60 days of July 9, 1999.
(10) Includes 29,167 shares issuable to Mr. Murphy upon the exercise of options
exercisable within 60 days of July 9, 1999.
(11) Includes 5,834 shares issuable to Mr. Sillari upon the exercise of options
exercisable within 60 days of July 9, 1999.
(12) Consists of 10,000 shares issuable to Ms. Courage upon the exercise of
options exercisable within 60 days of July 9, 1999.
(13) Includes 4,500 shares owned by Mr. Milton as trustee of a trust for his
children and 98,500 shares issuable upon the exercise of options
exercisable within 60 days of July 9, 1999.
(14) Includes 120,000 shares issuable to Mr. Mahan upon the exercise of options
exercisable within 60 days of July 9, 1999.
(15) Includes 65,000 shares issuable to Mr. Pittenger upon the exercise of
options exercisable within 60 days of July 9, 1999.
(16) Includes 187,500 shares issuable to Mr. Jones upon the exercise of options
exercisable within 60 days of July 9, 1999.
(17) Includes 6,250 shares issuable to Mr. Troupe upon the exercise of options
exercisable within 60 days of July 9, 1999.
(18) Represents directors and executive officers as of July 9, 1999 and
includes the shares described in footnotes (1) through (4), and (7)
through (15), and (17) above.
Preferred Stock
As of July 9, 1999, Spectrum Equity Investors II, L.P., owned 657,555
shares, or 98.6%, of the Series A preferred stock outstanding.
40
<PAGE>
Certain Relationships and Related Transactions
We lease office space from a trust of which Robert J. Fabbricatore, our
Chairman and Chief Executive Officer, is a beneficiary. Until March 1, 1999 we
also leased office space from another trust of which Robert J. Fabbricatore is
a beneficiary. Rental payments under the leases totaled approximately $391,000
for the last three fiscal years. We also sublease space at our cost to Comm-
Tract Corp., a company in which Mr. Fabbricatore is a principal stockholder.
Sublease income totaled $306,125 for the last three fiscal years. We also
contract with Comm-Tract Corp. for the installation of telephone lines and for
the service and maintenance of equipment marketed by CTC. During the last three
fiscal years, Comm-Tract Corp. provided us with services, inventory and
equipment totaling $829,222. We believe that the payments to the trusts and
Comm-Tract Corp. are comparable to the costs for such services, inventory and
equipment, and for rentals of similar facilities, which we would be required to
pay to unaffiliated individuals in arms-length transactions.
In April 1998, we privately placed 666,666 shares of our Series A
convertible preferred stock and warrants to purchase 133,333 shares of our
common stock with Spectrum and other investors in exchange for $12.0 million in
cash. Each share of Series A preferred stock is initially convertible at any
time at the option of the holder into two shares of our common stock. The
warrants expire on April 10, 2003 and have an exercise price of $9.00 per
share. We granted Spectrum customary registration and other rights as part of
this transaction. As a condition to this investment, Robert J. Fabbricatore and
some of his affiliates have agreed to vote shares they control to elect to our
board two persons designated by the holders of a majority of our Series A
preferred stock. These directors are currently Kevin Maroni and Robert
Nicholson. We also received a commitment on June 30, 1998 from Spectrum to
purchase, at our option, an additional $5.0 million of preferred stock on the
same terms and conditions as the Series A preferred stock. In exchange for this
commitment we issued 55,555 warrants to Spectrum on the same terms and
conditions as the original warrants. This option expired on June 30, 1999
without our issuing any shares of preferred stock.
Carl Redfield, one of our directors, is an executive officer of Cisco. We
have purchased, and expect to continue purchasing, most of our network
equipment from Cisco. Also, we have entered into a vendor facility with Cisco
Capital, an affiliate of Cisco. See "Description of Senior Secured Facilities."
Ralph Sillari, one of our directors, is an Executive Vice President of Fleet
National Bank. We have entered into a senior secured credit facility with Fleet
National Bank. See "Description of Senior Secured Facilities."
Katherine D. Courage, one of our directors, is a Managing Director of Credit
Suisse First Boston, one of the underwriters of this offering. Ms. Courage is
also a director of NorthEast Optic Network. We have commitments with NorthEast
Optic Network for the provision of leased transmission facilities.
Ralph S. Troupe, who became a director in May 1999, is Vice President of
North American Field Operations, East at International Network Services, or
INS. We have engaged INS to design, engineer and buildout our network in our
existing markets. We have outstanding commitments to INS of approximately
$1 million.
Goldman Sachs and Fleet National Bank are the selling stockholders in this
offering. Goldman Sachs is a beneficial owner of more than five percent of our
common stock. Goldman Sachs Credit Partners, L.P., an affiliate of Goldman
Sachs, and Fleet National Bank are both lenders under our senior secured credit
facility. See "Description of Senior Secured Facilities."
Description of Senior Secured Facilities
Fleet/Goldman Credit Facility
As of September 1, 1998, we entered into a senior secured credit facility
with Goldman Sachs Credit Partners, L.P., or GSCP, and Fleet National Bank, or
Fleet. GSCP and Fleet provided us with a three-year senior secured credit
facility consisting of revolving loans in the aggregate amount of up to $75
million. Advances under the facility bear interest at 1.75% over the prime
rate. Advances under the facility are secured
41
<PAGE>
by a first priority perfected security interest on all of our assets, except
that we have the ability to exclude assets we acquire through purchase money
financing. In addition, we are required to pay a commitment fee of 0.5% per
annum on any unused amounts under the facility. We are also required to pay a
monthly line fee of $150,000 per month. In connection with this credit facility
we issued to Goldman Sachs & Co. warrants to purchase 662,600 shares of our
common stock and to Fleet National Bank warrants to purchase 311,812 shares of
our common stock. We may borrow $15 million unconditionally and $60 million
based on trailing 120 days accounts receivable collections, reducing to the
trailing 90 days of collections by March 31, 2000. If we wish to prepay the
loan during the first 18 months we must pay a prepayment penalty of 2% of the
aggregate amount of the facility. As of March 31, 1999, we had borrowed
$36,145,000 under this credit facility.
Under this credit facility, we have agreed, among other things, to maintain
minimum quarterly net revenues, to achieve minimum EBITDA targets for rolling
six-month periods measured at the end of each fiscal quarter and to achieve a
minimum quarterly target of provisioned ALEs.
We have also agreed that we will not, without the prior written consent of
the lenders, with various exceptions:
. create, incur or assume any secured indebtedness,
. create, incur or assume any liens,
. enter into any merger, consolidation, reorganization, recapitalization
or reclassification of our stock,
. sell, lease, assign, transfer or otherwise dispose of any of our assets,
. declare or pay any cash dividends or purchase, acquire or redeem any of
our stock,
. make, acquire or incur any liabilities in connection with the
acquisition of any entity or the acquisition of all or substantially all
of the assets of any entity,
. make capital expenditures in excess of $32 million for the period from
September 1, 1998 to March 31, 2000 and $87 million for the period from
April 1, 2000 through September 1, 2001.
Events of default under this credit facility include:
. failure to make payments on the loan,
. failure to observe various covenants,
. insolvency proceedings,
. the filing of any governmental liens in an amount exceeding $2 million,
. the filing of any judgment liens in an amount exceeding $2 million,
. default on a material agreement with obligations exceeding $2 million,
. payment of any subordinated indebtedness, except as specifically
permitted,
. any material misrepresentation or misstatement in any warranty or
representation,
. the limitation or termination of any guaranty, or
. the occurrence of a change of control, except in connection with the
reorganization.
Cisco Capital Vendor Facility
On October 14, 1998, we entered into a three-year vendor facility for up to
$25 million with Cisco Capital. We have agreed to a three year, $25 million
total volume purchase commitment of Cisco equipment and services. Cisco Capital
has agreed to advance funds as these purchases occur. We can also use the
facility for working capital costs associated with the integration and
operation of Cisco solutions and related equipment.
Under the terms of the vendor facility and an intercreditor agreement
between Cisco Capital and GSCP, we have agreed to give Cisco Capital a senior
security interest in all products Cisco provides to us or other products
purchased with the proceeds of the first $15 million advanced under the
facility and a subordinate security interest in all of our other assets. We are
required to repay 5% of the outstanding amount of the first
42
<PAGE>
$15 million of indebtedness advanced under the facility at the end of each of
the ninth, tenth and eleventh quarterly periods during the term of the
facility. We are required to pay interest on funds advanced under the facility
at an annual rate of 12.5%. In addition to other amounts, we are also required
to pay a commitment fee of .50% per annum on any unused amounts under the
facility.
This vendor facility limits or restricts, except as permitted under our
senior secured credit facility and other than other various exceptions, our
ability to: merge with or acquire all of the assets of any entity; sell or
dispose of assets; purchase or otherwise acquire the capital stock or assets of
any person, or extend any credit to any person; declare or pay any cash
dividends; or redeem or purchase any capital stock.
This vendor facility also limits or restricts, among other things, our
ability to: incur additional indebtedness; amend, modify or waive some
provisions of our senior secured facility; voluntarily repay any subordinated
debt; or amend or modify any document or instrument governing subordinated
debt. Events of default under the vendor facility include:
. failure to make payments on the loan,
. any representation or warranty is incorrect when made or deemed made,
. failure to perform or observe our covenants,
. insolvency proceedings,
. failure to pay any amounts due or observe any covenants under our senior
secured facility or other indebtedness in an amount over $2 million
which failure results in the acceleration of such indebtedness,
. failure to pay under, or be in breach of, any other agreement with
Cisco, Cisco Capital, or their subsidiaries,
. failure of any guarantor to perform or observe any covenant contained in
any guaranty,
. any event of default in any other loan documents as defined therein,
. revocation of any consent, authorization or other approval necessary to
enable us to borrow under the vendor facility,
. the occurrence of a change of control, as defined therein,
. any payment of indebtedness subordinated to the vendor facility, except
as expressly permitted,
. the entrance of various judgments against us.
Holding Company Reorganization
Shortly after the closing of this offering, we expect to complete a
reorganization into a holding company structure. We are a Massachusetts
corporation. As a result of the reorganization, we will become a wholly owned
subsidiary of CTC Communications Group, a Delaware corporation. CTC
Communications Group was formed by us for this purpose and has no other
business. We will complete the merger by causing CTC-Newco, a subsidiary of CTC
Communications Group organized for this purpose, to merge into us. All of our
issued and outstanding common and preferred stock, including the common stock
offered by this prospectus, will be converted into the same number of shares of
common and preferred stock of CTC Communications Group. CTC Communications
Group's business will initially consist of owning all of our common stock. We
will continue to carry on our existing business. Our directors and some
executive officers will continue as directors and executive officers of CTC
Communications Group. Following the reorganization, CTC Communications Group
will pledge our shares to the lenders under the credit facility with GSCP and
Fleet.
43
<PAGE>
Description of Capital Stock
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our amended and restated articles of organization, the certificate of
designation for the Series A preferred stock, and our amended and restated by-
laws.
The authorized capital stock of the Company consists of 25,000,000 shares of
common stock and 1,000,000 shares of preferred stock. The common stock has a
par value of $.01 per share and the preferred stock has a par value of $1.00
per share. We have designated 666,666 shares of our preferred stock as Series A
convertible preferred stock.
As of July 9, 1999, there were 10,397,504 shares of our common stock
outstanding, and after the offering there will be 13,897,504 shares
outstanding. On that date our common stock was held by 497 stockholders of
record. As of July 9, 1999, options to purchase 3,639,018 shares of our common
stock were outstanding and warrants to purchase 1,288,071 shares of our common
stock were outstanding. Of these warrants, warrants to purchase 455,769 shares
are expected to be exercised in a cashless transaction, calculated at an
assumed price of $19.75 per share of common stock, by selling stockholders.
Through this exercise, the selling stockholders will obtain the 1,000 shares
they are offering. As of July 9, 1999, 666,666 shares of our Series A preferred
stock were outstanding.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. After the payment of any
required preferential amounts to the holders of any outstanding preferred
stock, holders of common stock are entitled to receive dividends that may be
declared by the board of directors. In the event of the liquidation,
dissolution or winding up of CTC, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the payment of
any required preferential amounts to the holders of any outstanding preferred
stock. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
Preferred Stock
Each share of our Series A preferred stock accrues a dividend in an amount
equal to an annual rate of 9% of the $18.00 per share purchase price per annum
compounding every six months. This dividend is payable upon redemption,
liquidation or conversion of the Series A preferred stock. The holders of a
majority of the Series A preferred stock may elect to cause us to redeem the
Series A preferred stock after April 9, 2003. Upon any liquidation, dissolution
or winding up of CTC, holders of the Series A preferred stock will be entitled
to receive the payment of a preferential amount, before any distribution or
payment is made with respect to any junior class of our capital stock. The
preference amount payable for each share of our Series A preferred stock will
be an amount in cash equal to the greater of:
. the purchase price plus all accrued dividends through the date of
payment, or
. the purchase price plus all accrued dividends plus an acceleration of
the dividend due through April 9, 2003. Prior to any liquidation,
dissolution or winding up of CTC, the Series A preferred stock will
automatically convert into common stock if the liquidation amount is
less than the amount the holder of Series A preferred stock would have
received had the holder converted to common stock.
The Series A preferred stock can be converted by its holders into common
stock at any time. In addition, we have the right to convert the Series A
preferred stock. We can convert the Series A convertible preferred stock prior
to April 10, 2002, if the trading price of our common stock is at least $27.00
for thirty consecutive trading days. After April 10, 2002, we can convert the
Series A convertible preferred stock if the trading price of our common stock
is at least $9.00 for thirty consecutive trading days. On the date of issuance,
the 666,666 shares of Series A preferred stock were convertible into 1,333,332
shares of our common stock. The number of shares of common stock into which the
Series A preferred stock can be converted increases by an amount equal to the
accrued dividend divided by $9.00. The number of shares of common stock also
adjusts on some
44
<PAGE>
issuances of common stock, or securities convertible into or exercisable for
common stock, that would dilute the economic interest of the holders of the
Series A preferred stock. Holders of the Series A preferred stock are entitled
to a number of votes equal to the lesser of
. the whole number of shares of common stock they would receive if they
converted their Series A preferred stock plus the number of warrants
they hold that were issued with the preferred stock and
. the number of shares of Series A preferred stock they hold multiplied by
2.476.
For example, on July 9, 1999, the aggregate accrued dividend on the Series A
convertible preferred stock was $1,397,089. Dividing this accrued dividend by
$9.00 equals 155,232, or the number of additional shares of common stock
issuable upon conversion of the Series A convertible preferred stock. In
connection with the issuance of the Series A convertible preferred stock CTC
issued warrants to purchase an aggregate of 133,333 shares of its common stock.
The sum of the shares issuable on conversion of the Series A convertible
preferred stock, or 1,488,565, plus the 133,333 warrant issued with the Series
A convertible preferred stock is 1,621,898. Because this number is less than
666,666 multiplied by 2.476, the number of votes the holders of the Series A
convertible preferred stock are entitled to on July 9, 1999 is 1,621,898.
Except as required by law or the certificate of designation, the holders of
Series A preferred stock vote with the holders of the common stock as a single
class.
Our board of directors may issue the 333,334 shares of authorized but
unissued preferred stock from time to time in one or more series. The rights,
preferences, privileges and restrictions of the different series may be
determined by our board of directors without any further vote or action by the
stockholders. Accordingly, our board of directors, without stockholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control.
Registration Rights
Under the terms of a registration rights agreement with the purchasers of
the Series A preferred stock, those purchasers can request that we register
their sale of the shares of common stock issuable upon exercise of the warrants
or upon conversion of the Series A preferred stock under the Securities Act.
Toronto Dominion, Relational Funding Corporation, Goldman Sachs and Fleet have
similar registration rights under the terms of warrants we issued to them.
Certain Provisions of our Charter and Bylaws
Our charter and bylaws, and the charter and bylaws of CTC Communications
Group if the reorganization is completed, may prevent, discourage or delay any
change in the control of CTC or CTC Communications Group and may make it more
difficult to remove the board and management. Our and CTC Communications
Group's board has the authority to issue preferred stock with voting or other
rights or preferences that could impede the success of any attempt to effect a
change in control of CTC or CTC Communications Group. Our and CTC
Communications Group's bylaws provide for three classes of directors serving
for staggered three-year terms. Directors can be removed only for cause and
only by either a vote of not less than a majority of the total number of votes
of our outstanding capital stock entitled to elect directors, or by the vote of
a majority of the directors. These provisions could also impede the success of
any attempt to acquire control of CTC or CTC Communications Group.
Our and CTC Communications Group's bylaws establish procedures for
stockholders to nominate directors or bring other matters to a vote by our
stockholders at a meeting, including advance notice procedures. In general,
notice must be received at least 60 and no more than 90 days prior to the
meeting. This notice must contain specified information concerning the
stockholder submitting the proposal. Such procedures also authorize regulation
of the order of business and conduct of stockholder meetings, the authority of
the presiding
45
<PAGE>
officer and attendance at such meetings. These provisions can be amended only
by a majority of the directors or by a majority of votes of our outstanding
capital stock at a meeting held for the purpose of considering the amendment.
The provisions could make it more difficult for a third party to acquire
control of our or CTC Communications Group's board. In addition, these
provisions could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock and may make more difficult or discourage a takeover
of CTC or CTC Communications Group.
Massachusetts Anti-Takeover Laws
We are subject to the Massachusetts Business Combination Statute. This
statute prohibits a publicly-held Massachusetts corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the time of the transaction in which the person became an
interested stockholder, unless:
. prior to such time, the board of directors of the corporation approves
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 90% of the outstanding voting stock (excluding shares held by
persons who are both directors and officers of the corporation and
employee stock plans), or
. on or after the consummation date, the business combination is approved
by the board of directors and by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
A "business combination" generally includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is generally a person who, together with affiliates
and associates, owns, or within three years, owned, 5% or more of the
corporation's voting stock.
Our bylaws provide that Chapter 110D of the Massachusetts General Laws does
not apply to us. However, our board may in the future amend the bylaws to
become subject to the statute. In general, if Chapter 110D were applicable to
us, any person or entity that acquired 20% or more of our outstanding voting
stock could not vote that stock unless authorized by our other stockholders.
Our board is permitted under Massachusetts law to consider noneconomic
factors, such as employee welfare, suppliers, creditors, customers, the economy
of the state, region and nation, community and societal consideration and long-
term and short-term corporate and stockholder interests when considering
business combinations as defined in the Business Combination Statute.
Delaware Anti-Takeover Laws
If the reorganization is completed, CTC Communications Group will be subject
to Section 203 of the Delaware General Corporation Law. This statute will
prohibit us from engaging in a "business combination" with an "interested
stockholder" for a period of three-years after the time of the transaction in
which one person became an interested stockholder, unless:
. the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by our board
of directors before the stockholder became an interested stockholder,
. upon consummation of the transaction that made the stockholder an
interested stockholder, the interested stockholder owns at least 85% of
the voting stock missing language owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender stock held by the plan in a tender
or exchange offer, or
46
<PAGE>
. the business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting
stock, other than voting stock owned by the interested stockholder.
A "business combination" generally includes mergers or consolidations
between us and an interested stockholder, transactions with an interested
stockholder involving our assets or stock or assets or stock of our majority-
owned subsidiaries, and transactions which increase an interested stockholder's
percentage ownership of stock.
An "interested stockholder" generally includes those stockholders who become
beneficial owners of 15% or more of our voting stock, together with affiliates
or associates of that stockholder.
Limitation of Liability of Directors and Indemnification of Directors and
Officers
Our charter provides that our directors will not be personally liable for
monetary damages to us or our stockholders for breach of fiduciary duty as a
director, except for liability for any breach of the director's duty of loyalty
to us or our stockholders, for acts or omissions not in good faith, for acts or
omissions involving intentional misconduct or a knowing violation of law or for
any transaction from which the director derived an improper benefit. Our bylaws
provide that our directors and officers will be indemnified against liabilities
that arise from their service as directors and officers.
Transfer Agent and Registrar
Boston EquiServe L.P. is the transfer agent and registrar for the common
stock.
47
<PAGE>
Underwriting
Under the underwriting agreement, which will be filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc. and Credit Suisse First Boston Corporation
are acting as representatives, have each agreed to purchase from us and from
the selling stockholders the respective number of shares shown opposite its
name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc................................................
Credit Suisse First Boston Corporation.............................
---------
Total............................................................ 3,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of the common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 525,000 additional shares at the public offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price...................................... $ $ $
Underwriting discount...................................... $ $ $
Proceeds, before expenses, to our company.................. $ $ $
</TABLE>
We have agreed, subject to various exceptions, that we will not offer, sell,
contract to sell, announce our intention to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock without the prior written consent of
Lehman Brothers Inc. for a period of 90 days after the date of this prospectus.
In addition, our officers, directors, selling stockholders and certain other
stockholders are entering into similar agreements. These agreements also apply
to common stock or securities convertible into or exchangeable or exercisable
for common stock of CTC Communications Group, assuming the holding company
reorganization is consummated.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
48
<PAGE>
Our shares are traded on The Nasdaq National Market under the symbol "CPTL."
Until the distribution of the shares is completed, rules of the Securities
and Exchange Commission may limit the ability of the underwriters and selling
group members to bid for and purchase shares. As an exception to these rules,
the representatives are permitted to engage in transactions that stabilize the
price of the shares. These transactions may consist of bids or purchases for
the purposes of pegging, fixing or maintaining the price of the shares.
The underwriters may create a short position in the shares in connection
with the offering, which means that they may sell more shares than are set
forth on the cover page of this prospectus. If the underwriters create a short
position, then the representatives may reduce that short position by purchasing
shares in the open market. The representatives also may elect to reduce any
short position by exercising all or part of the over-allotment option.
The representatives may impose a penalty bid on certain underwriters and
selling group members. This means that if the representatives purchase shares
in the open market to reduce the underwriters' short position or to stabilize
the price of the shares, they may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those shares as part
of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the shares. In addition, neither we
nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
This prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of the shares in Canada or any province or
territory thereof. Any offer or sale of shares in Canada will be made only
under an exemption from the requirements to file a prospectus in the province
or territory of Canada in which such offer or sale is made.
The shares offered in this prospectus are only being registered for offering
in the United States. No action will be taken by us or by the underwriters in
any other jurisdiction where action is required to permit a public offering of
the shares offered in this prospectus. People who obtain this prospectus are
required by us and by the underwriters to inform themselves about and to
observe any restrictions on the offering of the shares and the distribution of
this prospectus.
Purchasers of the shares offered in this prospectus may be required to pay
stamp taxes and other charges under the laws and practices of the country of
purchase, in addition to the offering price listed on the cover of this
prospectus.
In connection with the offering, underwriters and selling group members may
engage in passive market making transactions in our common stock on The Nasdaq
National Market in accordance with Regulation M under the Securities Exchange
Act of 1934, as amended, during a period before the commencement of offers or
sales of our common stock in the offering.
Katherine D. Courage, a Managing Director of Credit Suisse First Boston
Corporation, is one of our directors.
49
<PAGE>
Legal Matters
The validity of the shares of common stock offered hereby will be passed
upon for CTC by Ropes & Gray, Boston, Massachusetts. Latham & Watkins,
Washington, D.C., is acting as counsel to the underwriters in connection with
this offering.
Experts
The financial statements of CTC at March 31, 1999 and 1998, and for each of
the three years in the period ended March 31, 1999, appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
Where You Can Find More Information
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act of 1933,
as amended, with respect to the common stock offered under this prospectus.
This prospectus does not contain all of the information contained in the
registration statement and the exhibits and schedules to the registration
statement. Some items are omitted in accordance with the rules and regulations
of the Securities and Exchange Commission. For further information about CTC
and the common stock offered under this prospectus, you should review the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Descriptions of contracts or other documents referred
to in this prospectus are not necessarily complete. If the contract or other
document is filed as an exhibit to the registration statement, you should
review that contract or document. You should be aware that when we discuss
these contracts or documents in the prospectus we are assuming that you will
read the exhibits to the registration statement for a more complete
understanding of the contract or documents.
We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended, and, in
accordance therewith, we file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information filed by us can be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the
following regional offices of the Securities and Exchange Commission: 500 West
Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, New York, New
York 10048. Copies of such material can be obtained by mail from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material may
also be accessed electronically by means of the Securities and Exchange
Commission's home page on the internet at http://www.sec.gov.
50
<PAGE>
CTC Communications Corp.
Index to Financial Statements
<TABLE>
<S> <C>
Audited Financial Statements and Schedule
Report of Independent Auditors............................................ F-2
Balance Sheets as of March 31, 1999 and 1998.............................. F-3
Statements of Operations for the years ended March 31, 1999, 1998 and
1997..................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the years ended March 31,
1999, 1998 and 1997...................................................... F-5
Statements of Cash Flows for the years ended March 31, 1999, 1998 and
1997..................................................................... 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 balance sheets of CTC Communications Corp.,
as of March 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CTC Communications Corp. at
March 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
May 19, 1999, except for Note 7,
as to which the date is June 30, 1999
Boston, Massachusetts
F-2
<PAGE>
CTC Communications Corp.
Balance Sheets
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......................... $ 2,254,258 $ 2,167,930
Accounts receivable, less allowance for doubtful
accounts of $1,717,000 and $492,000 in 1999 and
1998, respectively............................... 19,200,931 17,288,183
Prepaid commissions............................... 2,500,000 287,300
Prepaid expenses and other current assets......... 1,022,198 504,436
Amounts due from officers and employees........... 55,572 84,754
Income taxes receivable........................... 2,313,070 2,190,339
------------ -----------
Total current assets................................ 27,346,029 22,522,942
Property and equipment:
Property and equipment............................ 49,417,689 13,376,970
Accumulated depreciation and amortization......... (10,615,766) (6,837,683)
------------ -----------
38,801,923 6,539,287
Deferred income taxes............................... -- 1,597,000
Deferred financing costs, net of amortization....... 3,229,865
Other assets........................................ 104,085 108,885
------------ -----------
$ 69,481,902 $30,768,114
============ ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued expenses............. $ 27,439,488 $ 8,372,476
Accrued salaries and related taxes................ 1,656,367 756,159
Current portion of obligations under capital
leases........................................... 3,230,077 231,796
Current portion of notes payable.................. 1,705,141 1,196,400
------------ -----------
Total current liabilities........................... 34,031,073 10,556,831
Obligations under capital leases, net of current
portion............................................ 8,004,366 1,114,277
Notes payable to banks, net of current portion...... 51,918,492 7,130,671
Commitments and contingencies
Series A Redeemable Convertible Preferred Stock, par
value $1.00 per share; authorized 1,000,000 shares,
726,631 and no shares issued and outstanding at
March 31, 1999 and 1998, respectively (liquidation
preference $18,640,023 at March 31, 1999).......... 12,671,797 --
Stockholders' equity (deficit)
Common Stock, par value $.01 per share; authorized
25,000,000 shares, 10,352,513 and 9,980,661
shares issued and outstanding at March 31, 1999
and 1998, respectively........................... 103,525 99,806
Additional paid-in capital........................ 8,386,816 5,245,704
Deferred compensation............................. (212,410) (318,410)
Retained earnings (deficit)....................... (45,390,732) 7,075,060
------------ -----------
(37,112,801) 12,102,160
Amounts due from stockholders..................... (31,025) (135,825)
------------ -----------
Total stockholders' equity (deficit)................ (37,143,826) 11,966,335
------------ -----------
$ 69,481,902 $30,768,114
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CTC Communications Corp.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Telecommunications revenue........... $ 70,963,692 $16,171,716 $11,094,838
Agency commission revenue............ -- 24,775,420 29,195,261
------------ ----------- -----------
70,963,692 40,947,136 40,290,099
Operating Costs and Expenses:
Cost of telecommunications revenues
(excluding depreciation and
amortization)....................... 61,865,904 14,038,565 8,709,122
Selling, general and administrative
expenses............................ 52,521,397 29,488,097 23,076,819
Depreciation and amortization........ 3,778,083 1,417,866 742,895
------------ ----------- -----------
118,165,384 44,944,528 32,528,836
------------ ----------- -----------
Income (loss) from operations.......... (47,201,692) (3,997,392) 7,761,263
Other Income (Expense):
Interest income...................... 184,312 145,012 201,369
Interest expense..................... (5,825,328) (106,465) (17,753)
Other................................ 77,724 174,395 15,052
------------ ----------- -----------
(5,563,292) 212,942 198,668
------------ ----------- -----------
Income (loss) before income taxes...... (52,764,984) (3,784,450) 7,959,931
Income tax expense (benefit)........... (1,527,000) (1,286,760) 3,277,000
------------ ----------- -----------
Net income (loss)...................... $(51,237,984) $(2,497,690) $ 4,682,931
============ =========== ===========
Net Income (Loss) per Common Share:
Basic................................ $ (5.18) $ (0.25) $ 0.49
Diluted.............................. $ (5.18) $ (0.25) $ 0.43
Weighted Average Number of Shares Used
in Computing Net Income (Loss) per
Common Share:
Basic................................ 10,130,701 9,886,000 9,600,000
Diluted.............................. 10,130,701 9,886,000 10,773,000
</TABLE>
See accompanying notes.
F-4
<PAGE>
CTC Communications Corp.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Additional Retained Amount
--------------------- Paid-In Deferred Earnings Treasury Due From
Shares Par Value Capital Compensation (Deficit) Stock Stockholders Total
---------- --------- ---------- ------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1996................... 9,584,122 $ 95,841 $4,644,988 $ -- $ 4,889,819 $ -- $(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 -- (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............... -- -- -- -- (2,497,690) -- -- (2,497,690)
---------- -------- ---------- --------- ------------ -------- --------- ------------
Balance at March 31,
1998................... 9,980,661 99,806 5,245,704 (318,410) 7,075,060 -- (135,825) 11,966,335
Issuance of stock
pursuant to employee
stock purchase plan... 14,700 147 98,252 -- -- -- -- 98,399
Exercise of employee
stock options......... 366,482 3,665 235,806 -- -- -- (31,025) 208,446
Acquisitions of
treasury stock........ -- -- -- -- -- (107,462) -- (107,462)
Retirement of treasury
stock................. (9,330) (93) (107,369) -- -- 107,462 -- --
Deferred compensation.. -- -- -- 106,000 -- -- -- 106,000
Receipt of amounts due
from stockholders..... -- -- -- -- -- -- 135,825 135,825
Issuance of common
stock purchase
warrants.............. -- -- 2,914,423 -- -- -- -- 2,914,423
Preferred stock
dividend.............. -- -- -- -- (1,079,364) -- -- (1,079,364)
Accretion of offering
costs related to
redeemable convertible
preferred stock....... -- -- -- -- (28,000) -- -- (28,000)
Accretion of warrants
related to Series A
Redeemable Convertible
Preferred Stock....... -- -- -- -- (120,444) -- -- (120,444)
Net loss............... -- -- -- -- (51,237,984) -- -- (51,237,984)
---------- -------- ---------- --------- ------------ -------- --------- ------------
Balance at March 31,
1999................... 10,352,513 $103,525 $8,386,816 $(212,410) $(45,390,732) -- $ (31,025) $(37,143,826)
========== ======== ========== ========= ============ ======== ========= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CTC Communications Corp.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss).................... $(51,237,984) $(2,497,690) $ 4,682,931
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation....................... 2,956,609 1,283,509 742,895
Amortization....................... 821,474 134,357 --
Interest related to warrants and
certain fees...................... 1,103,960 -- --
Provision for doubtful accounts.... 4,988,698 1,421,000 316,669
Deferred income taxes.............. 1,597,000 (1,068,760) (289,000)
Stock-based compensation........... 106,000 20,678 --
Gain on sale of property and
equipment......................... -- (143,333) --
Changes in operating assets and
liabilities:
Accounts receivable................ (6,901,446) (7,804,363) (4,664,260)
Prepaid commissions................ (2,212,700) -- --
Prepaid expenses and other current
assets............................ (517,762) (382,937) (123,789)
Amounts due from officers and
employees......................... 29,182 -- --
Income taxes receivable............ (122,731) (2,152,579) 21,125
Other assets....................... (3,831,046) 4,800 4,800
Accounts payable and accrued
expenses.......................... 19,067,013 3,466,394 2,657,149
Accrued salaries and related
taxes............................. 900,208 -- --
Accrued income taxes............... -- (225,948) 225,948
Deferred revenue and other......... -- (6,588) (2,714)
------------ ----------- -----------
Net cash provided by (used in)
operating activities................ (33,253,525) (7,951,460) 3,571,754
Investing Activity
Additions to property and equipment.. (6,282,234) (4,765,025) (1,221,879)
------------ ----------- -----------
Net cash used in investing activity.. (6,282,234) (4,765,025) (1,221,879)
Financing Activities
Proceeds from issuance of Series A
Redeemable Convertible Preferred
Stock, net of offering costs........ 11,861,321 -- --
Proceeds from issuance of common
stock............................... 230,408 151,674 113,919
Amounts due from stockholders, net... 104,800 -- --
Borrowings under notes payable....... 51,455,924 8,327,071 --
Repayment of notes payable........... (23,171,071) -- --
Repayment of capital lease
obligations......................... (859,295) -- --
------------ ----------- -----------
Net cash provided by financing
activities........................... 39,622,087 8,478,745 113,919
------------ ----------- -----------
Increase (decrease) in cash and cash
equivalents........................... 86,328 (4,237,740) 2,463,794
Cash and cash equivalents at beginning
of year............................... 2,167,930 6,405,670 3,941,876
------------ ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 2,254,258 $ 2,167,930 $ 6,405,670
============ =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest............... $ 2,666,613 $ 57,886 $ 16,253
Cash paid (received) for income
taxes............................... $ (3,001,000) $ 2,160,527 $ 3,318,000
Noncash investing and financing
activities:
Receipt of common stock in exercise
of stock options.................... $ 107,462 $ 271,072 $ --
Network and related equipment
acquired under capital leases....... $ 10,747,665 $ 1,343,573 $ --
Network and related equipment
acquired under notes payable........ $ 19,010,820 $ -- $ --
Common stock purchase warrants issued
in connection with notes payable and
Series A Redeemable Convertible
Preferred Stock..................... $ 2,914,423 $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE>
CTC Communications Corp.
Notes to Financial Statements
March 31, 1999
1. Nature of Business
The Company
CTC Communications Corp. (the "Company") is an integrated communications
provider ("ICP"), which offers voice and data services predominantly to medium
and larger-sized business customers in New England and New York State. Prior to
becoming an ICP in January 1998, the Company had been a sales agent for Bell
Atlantic Corp. ("Bell Atlantic") since 1984. The Company has also offered long
distance and data services under its own brand name since 1994. In late 1998,
the Company began deploying a packet-switched network in its existing markets.
The Company operates in a single industry segment providing telecommunication
service to medium to larger-sized business customers.
As the Company continues to deploy its network, further penetrates its
existing region and expands into new markets throughout the Boston-Washington,
D.C. corridor, the Company will need significant additional capital. The
Company believes that proceeds available under the unsecured facility described
in Note 7 together with cash on hand and the amounts expected to be available
under its bank, lease and vendor financing arrangements will be sufficient to
fund its planned capital expenditures, working capital and operating losses for
at least the next 12 months. During this period the Company will seek to raise
additional capital through the issuance of debt or equity securities, the
timing of which will depend on market conditions. The Company may also seek to
raise additional capital through vendor financing, equipment lease financing or
bank loans.
There can be no assurance that additional financing will be available on
terms acceptable to the Company when needed. The agreements governing its
existing indebtedness limit its ability to obtain debt financing. If the
Company is unable to obtain financing when needed, it may delay or abandon its
development and expansion plans. That could have a material adverse effect on
its business, results of operations and financial condition. The actual timing
and amount of its capital requirements may be materially affected by various
factors, including the timing and actual cost of the network, the timing and
cost of its expansion into new markets, the extent of competition and pricing
of telecommunications services by others in its markets, the demand by
customers for its services, technological change and potential acquisitions.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less as cash equivalents.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. The Company accounts for internal use software under the
provisions of AICPA Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
Capitalization of costs commences when the preliminary project stage, as
defined under SOP 98-1, is completed. Amortization on a straight-line basis,
commences at the point that the software components have been subjected to all
significant testing phases and are substantially complete and ready for their
intended use. A significant portion of the network and related equipment costs
is subject to the risk of rapid technological change. Accordingly, the
Company's useful lives reflect this risk. Depreciation and amortization is
provided using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Furniture, fixture, and equipment................................ 3-5 years
Network and related equipment.................................... 3-5 years
</TABLE>
F-7
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
Leasehold improvements and assets under capital leases are amortized over
the lesser of the lease term or the useful life of the property, usually 3-5
years.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"), the Company reviews its long-lived
assets, including property and equipment, and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability
that future undiscounted net cash flows will be less than the carrying amount
of the assets. Impairment is measured at fair value. SFAS No. 121 had no effect
on the Company's financial statements.
Revenue Recognition
Telecommunications revenue is recognized as usage accrues. Agency revenue is
recognized when services are ordered and, if commissions are based on usage,
revenues are recognized as usage accrues. Provisions for cancellations are made
at the time revenue is recognized, and actual experience prior to the
developments described in Note 4 had consistently been within management's
estimates.
Deferred Financing Costs
In connection with certain financing arrangements consummated during fiscal
1999, the Company capitalized $3,835,846 of deferred financing costs. These
costs represent professional and debt origination fees and are being amortized
over the lives of the respective agreements. For the year ended March 31, 1999,
the Company recorded amortization of $605,981 related to deferred financing
costs.
Income Taxes
The Company provides for income taxes under the liability method prescribed
by 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 (loss). Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128 "Earnings per Share" ("SFAS No. 128"). 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 income (loss) 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, cash equivalents and
accounts receivable. Concentration of credit risk with respect to accounts
receivable in fiscal 1999 was minimized by the large number of customers across
New England and New York State. The Company reduces its risk of loss through
periodic review of customer creditworthiness and generally does not require
collateral.
F-8
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
Fair Value of Financial Instruments
Under SFAS No. 107, "Disclosure About the Fair Value of Financial
Instruments," the Company is required to disclose the fair value of financial
instruments. At March 31, 1999 and 1998, the Company's financial instruments
consist of cash, cash equivalents, accounts receivable, accounts payable and
accrued expenses, and notes payable. The fair value of these financial
instruments, excluding the notes payable, approximates their cost due to the
short-term maturity of these financial instruments. Of the $55,622,700 total
notes payable, the carrying value of $34,288,388 approximates fair value due to
the variable interest rates on the note. The carrying value of the remaining
notes payable of $19,335,000 approximates fair value due to no material change
in interest rates since their issuance in fiscal 1999.
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 allowance for doubtful accounts,
cancellation of orders and certain accrued expenses. Actual results could
differ from those estimates.
Accounting for Stock Options
The Company grants stock options for a fixed number of shares to employees
with an exercise price at least equal to the fair value of the shares at the
date of the grant. The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25")
and related interpretations in accounting for its employee stock options
because the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 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.
Stock options and other stock-based awards to non-employees are accounted
for based on the provisions of SFAS No. 123.
Leases
Leases, in which the Company is the lessee, which transfer substantially all
of the risks and benefits of ownership are classified as capital leases, and
assets and liabilities are recorded at amounts equal to the lesser of the
present value of the minimum lease payments or the fair value of the leased
properties at the beginning of the respective lease terms. Interest expense
relating to the lease liabilities is recorded to effect constant rates of
interest over the terms of the lease. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged to
expense as incurred.
Recent Accounting Pronouncements
During 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") was issued. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 is effective
beginning in 2000. The adoption of SFAS No. 133 is not expected to have a
material impact on the financial position or of results of operations of the
Company.
F-9
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
Effective April 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
superseded FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not affect
results of operations, financial position, or the footnote disclosure, as the
Company operates in a single industry segment. The Company will continue to
assess the impact of SFAS No. 131 and modify its reporting and disclosure
requirements if necessary.
3. Property and Equipment
Property and equipment, at cost, and related accumulated depreciation and
amortization balances are as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment...................... $ 4,358,950 $ 3,246,237
Network and related equipment.......................... 31,309,749 7,946,704
Leasehold improvements................................. 1,657,752 840,456
Assets under capital lease............................. 12,091,238 1,343,573
----------- -----------
49,417,689 13,376,970
Less accumulated depreciation and amortization......... 10,615,766 6,837,683
----------- -----------
$38,801,923 $ 6,539,287
=========== ===========
</TABLE>
4. Bell Atlantic Litigation
In December 1997, the Company terminated its agency contract and filed suit
against Bell Atlantic in Federal District Court for breach of contract,
including the failure of Bell Atlantic to pay approximately $11,500,000 of
agency commissions owed to the Company. The Company also asserted violations by
Bell Atlantic of the antitrust laws and Telecommunications Act. On February 24,
1999 the Company settled the lawsuit. Under terms of the settlement, the
Company received cash and other consideration. As a result of the settlement
the Company wrote off approximately $1,500,000 of accounts receivable. In
connection with the litigation, the Company incurred $614,000 of legal costs as
of March 31, 1998 attributable to the collection effort to recover the Bell
Atlantic receivable. During fiscal 1999 the Company incurred $8,386,000 of
legal and other costs associated with the litigation.
5. Related-Party Transactions
The installation of certain telecommunications equipment is generally
subcontracted to a company controlled by the Chairman of the Company. In
addition, equipment is purchased from this company. Amounts paid to this
company for hardware and services, based on fair market value, aggregated
$499,257, $232,775 and $97,190 during fiscal 1999, 1998 and 1997, respectively.
The Company leases office space from trusts in which the Chairman is a
beneficiary. Rent expense for these facilities aggregated $125,904, $132,656
and $132,656 in fiscal 1999, 1998 and 1997, respectively. One of those leases
expired during fiscal 1999. The remaining lease expires during fiscal 2002.
The Company subleases space to a company controlled by the Chairman of the
Company. Terms of the sublease are identical to those included in the Company's
lease. Sublease rental income totaled $106,293, $119,416 and $80,416 in fiscal
1999, 1998 and 1997, respectively.
F-10
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
----------------------
1999 1998
----------- ----------
<S> <C> <C>
Trade accounts payable............................... $17,788,702 $5,837,449
Accrued cost of telecommunications revenue........... 5,475,143 1,171,119
Sales tax payable.................................... 3,829,809 688,033
Bell Atlantic litigation expenses.................... -- 614,000
Other................................................ 345,834 61,875
----------- ----------
$27,439,488 $8,372,476
=========== ==========
</TABLE>
7. Financing Arrangements
In July 1998, the Company consummated a $20,000,000 interim bank credit
facility (the "Interim Credit Facility"). In connection with this agreement,
the Company issued warrants with a fair value of $109,443 to purchase 55,555
shares of common stock to Spectrum Equity Investors II, L.P. in consideration
for the commitment by Spectrum that upon the Company's request on or before
June 30, 1999, Spectrum would purchase $5,000,000 of convertible preferred
stock. The fair value of the warrants is being amortized and included in
interest expense over the one-year term of commitment ending June 30, 1999.
Borrowings under the Interim Credit Facility were repaid by proceeds from a
revolving line of credit consummated in September 1998, as described below.
In September 1998, the Company entered into a revolving line of credit
agreement (the "Revolving Line of Credit") with a consortium of lenders,
providing for a three year senior secured credit facility of up to $75,000,000.
Advances under the Revolving Line of Credit bear interest at the prime rate
plus 1.75% per annum. The outstanding debt is secured by all the Company's
assets excluding those acquired through purchase money financing. The Company
is required to pay a commitment fee of 0.5% per annum on any unused amounts
under the Revolving Line of Credit, as well as a monthly line fee of $150,000.
The availability of the initial $15,000,000 is not subject to specific
restrictions. However, the availability of the balance of $60,000,000 of the
Revolving Line of Credit is based upon trailing 120 day accounts receivable
collections, reducing to trailing 90 days of collections by March 31, 2000. The
Company paid a one-time up front fee of $2,531,250, representing 3.375% of the
facility. This one-time up front fee has been capitalized as deferred financing
costs and is being amortized as interest expense over the term of the Revolving
Line of Credit. A termination penalty of $1,500,000 applies during the first
eighteen months of the term of the Revolving Line of Credit. Warrants to
purchase an aggregate of 974,412 shares of the Company's common stock at an
exercise price of $6.75 per share were issued to the lenders in connection with
the transaction. The fair value of the warrants of $1,909,848 is being
amortized and included in interest expense over the three year term of the
Revolving Line of Credit. The Revolving Line of Credit provides for certain
financial and operational covenants, including, but not limited to, minimum
quarterly revenues, minimum earnings before interest, taxes, depreciation,
amortization, and non-recurring charges for rolling six-month periods, and a
minimum quarterly number of provisioned access line equivalents. As of March
31, 1999, the Company had availability under the Revolving Line of Credit of
$45,200,000. Aggregate outstanding borrowings were $36,145,000 at March 31,
1999. The terms of this Revolving Line of Credit require written consent prior
to declaring any cash dividends.
In October 1998, the Company entered into a three year vendor financing
facility (the "Vendor Financing Facility"). Under the terms of the agreement,
the Company agreed to a $25,000,000 volume purchase commitment from this
vendor. The Vendor Financing Facility also provides that up to an aggregate of
F-11
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
$10,000,000 may be borrowed to pay for costs associated with the integration of
this vendor's equipment. Outstanding borrowings under the Vendor Financing
Facility are secured by all products purchased from the vendor, all products
purchased by the first $15,000,000 of the Vendor Financing Facility, and a
subordinated security interest in all other assets of the Company. Outstanding
borrowings bear interest at 12.5% per annum. The Company is also required to
pay a facility fee of $15,000 per month and a commitment fee of 0.50% per annum
on any unused amounts under the Vendor Financing Facility. The terms provide
for repayment, at the end of the ninth, tenth and eleventh quarterly periods,
of 5% of the lesser of the outstanding balance, as defined, of the Vendor
Financing Facility and $15,000,000. The remaining principal is due at the end
of the three year term. As of March 31, 1999, the Company had an outstanding
balance of $15,425,998 and availability of $9,574,002. The outstanding balance
at March 31, 1999 includes amounts due to suppliers of $2,926,000 financed
subsequent to that date. The terms of the Vendor Financing Facility restricts
the Company's ability to declare or pay any cash dividends.
In March 1999, the Company entered into an unsecured credit facility (as
amended on June 30, 1999, the "Credit Facility") with a bank. Under this Credit
Facility, the Company may borrow $30,000,000. Additional commitment fees will
be due the bank if an outstanding balance exists on the dates six months, nine
months and one year after closing. The Company is required to pay a quarterly
availability fee of 1% of the unused balance as well as a fee on any advances.
Warrants to purchase 69,216 shares of the Company's common stock at an exercise
price of $11.8125 were issued in connection with the Credit Facility and
contingent warrants to purchase up to 573,913 shares of common stock at an
exercise price of up to $11.8125 per share may be issued to the lender if
advances under the Credit Facility are outstanding six months after the closing
date of the Credit Facility. The fair value of the warrants of $329,468 to
purchase 69,216 shares of common stock has been capitalized and is being
amortized ratably over the term of the Credit Facility as interest expense. In
the event the contingent warrants are issued, the fair value of the warrants at
that date will be determined and amortized over the then remaining term of the
Credit Facility as interest expense. Interest is payable based upon a variable
rate, which increases over the term of the agreement. The Credit Facility
expires June 2000. The terms of this Credit Facility require written consent
prior to declaring any cash dividends. The Credit Facility provides for certain
financial and operational covenants. No amounts were outstanding under this
facility at March 31, 1999.
Notes payable, net of the unamortized discount of related warrants,
consisted of the following:
<TABLE>
<CAPTION>
March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revolving Line of Credit.......................... $34,288,388 $ --
Revolving and working capital line of credit...... -- 7,345,071
Equipment line of credit.......................... -- 982,000
Vendor Financing Facility......................... 15,425,998 --
Notes payable for network and related equipment... 3,909,247 --
----------- -----------
53,623,633 8,327,071
Less current portion.............................. (1,705,141) (1,196,400)
----------- -----------
$51,918,492 $ 7,130,671
=========== ===========
</TABLE>
F-12
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
Long-term debt matures as follows:
<TABLE>
<S> <C>
Year ending March 31:
2000............................................................ $ 1,705,141
2001............................................................ 2,059,302
2002............................................................ 49,859,190
-----------
$53,623,633
===========
</TABLE>
8. 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,
1999:
<TABLE>
<CAPTION>
Sublease
Operating Rental
Leases Income Net
---------- --------- ----------
<S> <C> <C> <C>
Year ending March 31:
2000...................................... $2,094,925 $(109,897) $1,985,028
2001...................................... 2,007,121 (111,420) 1,895,701
2002...................................... 1,912,473 (111,420) 1,801,053
2003...................................... 1,668,232 (111,420) 1,556,812
2004...................................... 918,614 (111,420) 807,194
Thereafter................................ 273,990 (49,325) 224,665
---------- --------- ----------
Net future minimum lease payments.......... $8,875,355 $(604,902) $8,270,453
========== ========= ==========
</TABLE>
Rental expense for operating leases aggregated $1,779,608, $1,121,916 and
$1,001,919 in fiscal 1999, 1998 and 1997, respectively. Sublease rental income
amounted to $106,293, $119,416 and $90,016 in fiscal 1999, 1998 and 1997,
respectively.
The Company leases certain equipment under capital leases. At March 31,
1999, the Company has capitalized leased equipment totaling $12,091,238 with
related accumulated amortization of $955,831. Obligations under capital leases
mature as follows:
<TABLE>
<S> <C>
Year ending March 31:
2000........................................................... $ 4,235,411
2001........................................................... 4,260,012
2002........................................................... 3,093,937
2003........................................................... 1,527,344
2004........................................................... 78,418
Thereafter..................................................... --
-----------
13,195,122
Less amount representing interest............................... (1,960,679)
-----------
Present value of minimum lease payments......................... 11,234,443
Less current portion of obligations under capital leases........ (3,230,077)
-----------
Obligations under capital leases, net of current portion........ $ 8,004,366
===========
</TABLE>
F-13
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
9. Telecommunications Agreements
On January 15, 1996, the Company entered into a four-year non-exclusive
agreement with a long-distance service provider for the right to provide long
distance service to the Company's 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 year ended March 31, 1999.
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 the Company's customers at fixed prices by service during
the term of the agreement. On May 6, 1998, the Company entered into an
amendment to the agreement which extended the term of the agreement through
October 2000. On March 31, 1999, the Company entered into an amendment which
provides that the Company shall be liable for a minimum aggregate usage
commitment of $50,000,000. Based upon existing and expected usage, these
provisions had no effect on the financial statements for the year ended March
31, 1999.
Prior to the execution of the agreements described above, and through March
31, 1999, the Company also had 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
and there are no other performance obligations.
On January 8, 1999, the Company entered into agreements with two
communications companies for the provision of transmission and co-location
facilities for the Company's initial network build-out in New England in New
York State. The agreements, which total $11,600,000 of expenditures by the
Company over three years, provide for connectivity between the Company's 22
network hub sites and two fully redundant network operations centers.
10. Stockholders' Equity (Deficit)
At March 31, 1999, 6,357,142 shares of common stock are reserved for future
issuance upon exercise of outstanding stock options and common stock purchase
warrants and conversion of outstanding preferred stock.
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.
In April 1998, the Company completed a private placement of Series A
Redeemable Convertible Preferred Stock ("Series A") through the issuance of
666,666 shares of Series A with an initial liquidation amount per share of $18.
Proceeds to the Company aggregated $12,000,000 for the Series A and warrants to
purchase 133,333 shares of common stock at an exercise price of $9 per share.
Of the $12,000,000 in proceeds, $417,332 has been ascribed to the warrants and
$11,582,668 to the Series A. Each share of Series A accrues a cumulative
dividend equal to an annual rate of 9% of the $18 per share initial liquidation
amount per annum, compounded every six months, which has the effect of
increasing the Series A preference amount. The dividend is payable upon
redemption, liquidation, or conversion of the Series A.
A majority of the Series A stockholders may require a redemption by the
Company after April 9, 2003. Upon liquidation, dissolution, or winding up of
the Company, including a 50% change in ownership, holders of Series A would be
entitled to receive the payment of a preferential amount before any payment is
made with
F-14
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
respect to any junior class of stock. The preferential payment would be equal
to the greater of the purchase price plus accrued dividends through the date of
payment or $25.41, unless the value of common stock into which the Series A
converts is higher, in which event the Series A would convert to common stock.
On the date of issuance, 666,666 shares of the Series A were convertible
into 1,333,332 shares of common stock based on an initial Series A preference
amount of $18 per share and a conversion price of $9 per share. The number of
shares of common stock into which the Series A can be converted increases by an
amount equal to the quotient obtained by dividing (i) the amount by which the
Series A preference amount increases as a result of the accrued dividend by
(ii) $9.00. At March 31, 1999, 666,666 shares of Series A were convertible into
1,453,262 shares of common stock. In addition, the number of shares of common
stock into which Series A can be converted also adjusts upon certain dilutive
issuances of common stock or securities convertible into or exercisable for
common stock. The Series A also provides mandatory conversion by the Company if
the average closing trading price, as defined, is at least 300% of the highest
conversion price in effect prior to April 10, 2002 or is at least 100% of the
highest conversion price thereafter. In the event the mandatory conversion
occurs, the number of shares of common stock into which each share of Series A
will be converted will be calculated by dividing the greater of the Series A
preference amount or $21.39 by the conversion price in effect on the conversion
date. The conversion price of $9.00 is subject to adjustment based upon certain
issuances of common stock or securities convertible into or exercisable for
common stock below the conversion price and for stock splits, combinations,
dividends and similar events. In the event the mandatory conversion occurs, the
Company will recognize a $1.6 million dividend as of that date, representing
the intrinsic value of this contingent conversion feature. Prior to any
liquidation, dissolution, or winding up of the Company, the Series A would
automatically convert into common stock if the liquidation amount is less than
the amount the holder of Series A would have received had the holder converted
to common stock.
Holders of Series A are entitled to a number of votes equal to the lesser of
1) the whole number of common stock they would receive if they converted their
Series A plus the number of warrants they hold that were issued in connection
with the issuance of Series A shares or 2) the number of shares of Series A
held multiplied by 2.476.
On July 13, 1998, the Company received a commitment letter from a Series A
stockholder to purchase at the Company's option, an additional $5,000,000 of
preferred stock on the same terms and conditions as the Series A issued in
April 1998. No shares of Series A were issued under this commitment letter
which expired on June 30, 1999.
Common Stock Purchase Warrants
As of March 31, 1999, the Company issued warrants in connection with the
issuance of the Series A and the financing arrangements disclosed in Note 7 to
purchase an aggregate of 1,288,071 shares of common stock at exercise prices
ranging from $6.75 to $11.81 with exercise periods extending through March
2009. The values of the warrants range from $1.96 to $4.76 and were determined
using a Black-Scholes pricing methodology. Significant assumptions include the
interest rate of 5.21%, an expected volatility of 50% and an expected life of
the warrants of 2.5 to 3 years.
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 two 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,
1999. Indicated below is a summary of shares of common stock purchased by the
ESPP.
F-15
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
In July 1998 and February 1999, the ESPP purchased 6,737 shares and 7,963
shares, respectively, at $6.69 per share.
In July 1997, the ESPP purchased 5,438 shares at $6.48 per share and in
February 1998 the ESPP purchased 4,406 shares at $8.29 per share.
In July 1996, the ESPP purchased 2,998 shares at $11.05 per share and in
February 1997, the ESPP purchased 5,716 shares at $6.48 per share.
Stock Option Plans
Under the terms of its Employees Incentive Stock Option Plan, as amended,
1985 Stock Option Plan, 1993 Incentive Stock Option Plan, 1996 Stock Option
Plan and 1998 Incentive Plan, (collectively, the "Plans"), the Company may
grant qualified and non-qualified incentive stock options for the purchase of
common stock to all employees and, except for the 1993 Stock Option Plan, to
members of the Board of Directors. The Plans generally provide that the option
price will be fixed by a committee of the Board of Directors but for qualified
incentive stock options will not be less than 100% (110% for 10% stockholders)
of the fair market value per share on the date of grant. Non-qualified options
are granted at no less than 85% (110% for 10% stockholders) of the fair market
value per share on the date of 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 approved the repricing of options to purchase
1,175,500 shares of common stock with a new exercise price of $7.19 per share
($7.91 per share for 10% stockholders).
Stock Based Compensation
Pro forma information regarding net income (loss) and income (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 granted under the Plans
and shares issued pursuant to the ESPP under the fair value method of SFAS No.
123. The fair value for these options and shares issued pursuant to the ESPP
was estimated at the dates of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------- -------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)................. 3.09 2.96 3.98 0.50 0.50 0.50
Interest rate......................... 4.82% 5.93% 6.28% 5.05% 5.43% 5.40%
Volatility............................ 83.69 85.14 87.88 91.23 64.67 93.03
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.
F-16
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
For purposes of pro forma disclosures, the expense related to estimated fair
value of the options is recognized over the options' vesting period. The
Company's pro forma net income (loss) and income (loss) per common share are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)............. $(56,003,004) $(4,586,368) $4,094,000
Pro forma income (loss) per common share
(Basic)................................ $ (5.65) $ (0.46) $ 0.39
</TABLE>
The effects on fiscal 1997, 1998 and 1999 pro forma net income (loss) and
income (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>
1999 1998 1997
------------------- -------------------- -------------------
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................ 2,965,007 $5.50 1,953,112 $4.36 1,995,878 $4.01
Options granted....... 1,297,000 8.65 2,791,000 7.11 280,539 9.67
Options terminated.... (279,716) 6.49 (1,402,718) 8.36 (286,734) 7.54
Options exercised..... (366,482) 0.66 (376,387) .93 (36,571) 1.20
--------- ---------- ---------
Outstanding at end of
year................... 3,615,809 $7.05 2,965,007 $5.50 1,953,112 $4.36
========= ========== =========
Exercisable at end of
year................... 961,177 698,250 772,282
Weighted-average fair
value of options
granted during the
year................... $ 4.80 $ 4.01 $ 6.43
</TABLE>
The following table presents weighted-average price and life information
about significant option groups outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------
Weighted Average
Remaining Weighted Weighted
Range Number Contractual Average Number Average
Exercise Prices Outstanding Life--Years Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$ 0.90-1.10............. 129,261 0.5 $ 1.10 129,261 $ 1.10
2.70-2.98............. 238,681 1.0 2.75 238,681 2.75
5.25-5.75............. 213,000 4.4 5.72 32,500 5.75
6.00-7.06............. 882,867 3.1 6.48 89,453 6.23
7.19.................. 1,034,500 2.6 7.19 301,498 7.19
7.50-8.69............. 536,000 4.7 7.58 43,284 7.69
10.12-11.25............ 356,334 3.9 10.50 84,834 10.51
12.37-13.00............ 58,500 5.3 12.80 0 0.00
15.00.................. 83,333 3.9 15.00 20,833 15.00
20.00.................. 83,333 3.9 20.00 20,833 20.00
--------- -------
3,615,809 961,177
========= =======
</TABLE>
F-17
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
11. Benefit Plans
Defined Contribution Plan (the "401(k) Plan")
The Company maintains a defined contribution plan (the "401(k) Plan") which
covers all employees who meet certain eligibility requirements and complies
with Section 401(k) of the Internal Revenue Code ("IRC"). Participants may make
contributions to the 401(k) Plan up to 15% of their compensation, as defined
under the terms of the 401(k) Plan, up to the maximum established by the IRC.
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 401(k) Plan were $358,100, $310,788 and
$230,079 in fiscal 1999, 1998 and 1997, respectively.
12. Income (Loss) Per Share
Income (loss) per common share has been calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss)..................... $(51,237,984) $(2,497,690) $ 4,682,931
Less preferred stock dividends and
accretion to redemption value of
preferred stock...................... (1,227,808) -- --
------------ ----------- -----------
Equals: numerator for Basic and
Diluted income (loss) per common
share................................ $(52,465,792) $(2,497,690) $ 4,682,931
Denominator:
Denominator for Basic income (loss)
per common share-weighted average
shares............................... 10,130,701 9,886,000 9,600,000
Effect of employee stock options...... -- -- 1,173,000
------------ ----------- -----------
Denominator for Diluted income (loss)
per common share....................... 10,130,701 9,886,000 10,773,000
------------ ----------- -----------
Basic income (loss) per common share.... $ (5.18) $ (.25) $ .49
============ =========== ===========
Diluted income (loss) per common share.. $ (5.18) $ (.25) $ .43
============ =========== ===========
</TABLE>
13. Income Taxes
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $(3,124,000) $ (218,000) $2,660,000
State................................... -- -- 906,000
----------- ----------- ----------
(3,124,000) (218,000) 3,566,000
Deferred tax provision (benefit).......... 1,597,000 (1,068,760) (289,000)
----------- ----------- ----------
$(1,527,000) $(1,286,760) $3,277,000
=========== =========== ==========
</TABLE>
F-18
<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>
1999 1998
------------ ----------
<S> <C> <C>
Deferred tax assets:
Depreciation....................................... $ -- $ 64,000
Bell Atlantic litigation costs..................... -- 249,000
Bad debt allowance................................. 695,000 960,000
Accruals and allowances, other..................... 40,000 305,000
Net operating loss carryforward.................... 22,560,000 96,000
------------ ----------
Total deferred tax asset............................. 23,295,000 1,674,000
Deferred tax liability:
Prepaid expenses................................... (8,000) (38,000)
Cash value of life insurance....................... (38,000) (39,000)
Depreciation....................................... (784,000) --
------------ ----------
Total deferred tax liability......................... (830,000) (77,000)
------------ ----------
Net deferred tax asset before valuation allowance.... 22,465,000 1,597,000
Valuation allowance.................................. (22,465,000) --
------------ ----------
Net deferred tax asset............................... $ -- $1,597,000
============ ==========
</TABLE>
Management has provided a valuation allowance against deferred tax assets
as it is more likely than not that the Company will not realize these assets.
At March 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $55,700,000, which may be used to reduce future
income tax liabilities, and expire through 2014. Changes in the Company's
ownership will subject the net operating loss carryforwards and tax credits to
limitations pursuant to Sections 382 and 383 of the IRC.
The income tax expense is different from that which would be obtained by
applying the enacted statutory federal income tax rate to income (loss) before
income taxes. The items causing this difference are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Tax (benefit) at U.S. statutory rate.... $(17,940,000) $(1,286,760) $2,706,000
State income taxes, net of federal bene-
fit.................................... -- -- 552,000
Valuation allowance and other........... 16,413,000 -- 19,000
------------ ----------- ----------
$ (1,527,000) $(1,286,760) $3,277,000
============ =========== ==========
</TABLE>
14. Subsequent Events
Subsequent to year end, the Company filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission for the purpose of registering
the sale by the Company of up to 3,725,000 shares of common stock.
Subsequent to year end the Company initiated a statutory reorganization in
which the Company intends to merge, subject to shareholder approval, with a
newly formed holding company, CTC Group. In connection with the
reorganization, shareholders will have appraisal rights under Massachusetts
law to which they are otherwise not entitled. If the reorganization is
consummated and stockholders exercise their appraisal rights, the Company
would be required by law to acquire their shares for cash at their appraised
value. Management believes this will not have a material effect on the
Company's financial condition.
F-19
<PAGE>
CTC Communications Corp.
Notes to Financial Statements--(Continued)
15. Quarterly Information (Unaudited)
A summary of operating results and net income (loss) per share for the
quarterly periods in the two years ended March 31, 1999 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,
1999
Total revenues.......... $12,835,685 $ 14,516,189 $ 19,024,531 $ 24,587,287 $ 70,963,692
Net loss................ (8,029,000) (10,732,624) (11,480,025) (20,996,335) (51,237,984)
Net loss per share--
Basic.................. (.81) (1.10) (1.18) (2.07) (5.18)
Net loss per share--
Diluted................ (.81) (1.10) (1.18) (2.07) (5.18)
Year ended March 31,
1998
Total revenues.......... $11,658,954 $ 11,845,097 $ 11,155,646 $ 6,287,439 $ 40,947,136
Net income (loss)....... 1,374,000 1,244,000 506,000 (5,621,690) (2,497,690)
Income (loss) per
share--Basic........... .13 .13 .05 (.56) (.25)
Income (loss) per
share--Diluted......... .14 .12 .05 (.56) (.25)
</TABLE>
The first two quarters of fiscal year 1998 net income per share amounts have
been restated to comply with SFAS No.128.
The fiscal 1999 quarterly net loss and net loss per share for the quarters
ended June 30, September 30 and December 31, 1998 disclosed above are different
than previously reported on the Company's quarterly reports on Form 10-Q as a
result of certain year end adjustments. As a result, net loss and net loss per
share increased by $98,000 and $.02, for the quarter ended June 30, 1998,
decreased by $251,000 and $.03 for the quarter ended September 30, 1998 and
decreased by $517,000 and $.02 for the quarter ended December 31, 1998.
F-20
<PAGE>
Inside Back Cover
[A montage of pictures: The top left picture shows people at CTC's Network
Operations Center and the caption reads "CTC's Main Network Operations Center is
located in the new Technology Center building in Waltham, Mass." The top right
picture shows a person working on one of CTC's Cisco Systems data switch and the
caption reads "CTC's new integrated communications network incorporates advanced
Cisco Systems data switches and is designated as a Cisco-Powered Network/TM/."
There are four pictures on the bottom of the page that depict various screens
from CTC's electronic billing system, IntelliVIEW/TM/. The captions for these
four screens are as follows:
"IntelliVIEW/TM/ is a searchable,
sortable electronic billing system that gives customers better control over
their telecommunications usage."
"Summary Screen
A concise summary page shows customers their telecommunications
totals with "drill down" capability at the click of a mouse."
"Line Usage
This report is one of several available to customers. It shows inbound and
outbound line usage, enabling customers to better manage and monitor line
utilization."
"Advanced Query
An advanced query lets customers sort calls by a variety of parameters,
including: originating line, destination, time, duration, cost, code, or date."]
<PAGE>
3,500,000 Shares
[CTC Logo Appears Here]
Common Stock
-------------
PROSPECTUS
, 1999
-------------
Lehman Brothers
Credit Suisse First Boston
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
Item Amount
---- --------
<S> <C>
SEC Registration Fee............................................ $ 18,708
NASD Filing Fee................................................. 7,904
Nasdaq National Market Listing Fee.............................. 19,500
Accounting Fees and Expenses.................................... 100,000
Legal Fees and Expenses......................................... 350,000
Printing Expenses............................................... 100,000
Miscellaneous................................................... 3,888
--------
Total......................................................... $600,000
========
</TABLE>
The Registrant will bear all expenses shown above.
- --------
Item 14. Indemnification of Directors and Officers
Section 67, Chapter 156B of the General Laws of the Commonwealth of
Massachusetts, as amended (the "Massachusetts Business Corporation Law"), and
Article IV of the Registrant's Bylaws, to which reference is hereby made,
contain provisions authorizing indemnification by the Registrant of directors
and officers, against certain liabilities and expenses, which they may incur as
directors and officers of the Registrant or of certain other entities. Section
67, Chapter 156B of the Massachusetts Business Corporation Law provides that
the indemnification of directors, officers, employees and agents of a
corporation and persons who serve at the corporation's request as directors,
officers, employees and other agents of another organization may be provided to
whatever extent as shall be specified by (i) the articles of organization of
the corporation or (ii) a bylaw adopted by the stockholder or (iii) a vote
adopted by the holders of a majority of the shares of stock entitled to vote on
the election of directors.
Article IV of the Registrant's Bylaws provide that the Registrant shall, to
the fullest extent legally permissible, indemnify each of its directors and
officers (including persons who were acting at its request as directors,
trustees or officer of another organization), against all expenses and
liabilities (including attorneys' fees, judgments, court costs, and the costs
of reasonable settlement) reasonably incurred by such person in connection
therewith; provided, however, no such indemnification shall be made in relation
to matters as to which such director or officer shall be finally adjusted in
any such action, suit or proceeding not to have acted in good faith in the
reasonable belief that this action was in the best interests of the Registrant.
In the event that a settlement or compromise of such action, suit or proceeding
is effected, indemnification may be had but only if the Board of Directors
shall have been furnished with an opinion of counsel for the Registrant to the
effect that such settlement or compromise is in the best interest of the
Registrant and that such director or officer does not appear not to have acted
in good faith in the reasonable belief that his action was in the best
interests of the Registrant, and if the Board of Directors shall have adopted a
resolution approving such settlement or compromise.
Section 13, Chapter 156B of the Massachusetts Business Corporation Law
provides that the articles of organization of a corporation may contain a
provision eliminating or limiting the personal liability of a director
II-1
<PAGE>
to the corporation or its stockholders for monetary damages for breach of a
fiduciary duty as a director notwithstanding any provision of law imposing such
liability; provided, however, that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Sections 61 or 62, Chapter 156B of the Massachusetts Business
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. Article Six of the Restated Articles of Organization
of the Registrant contains a provision consistent with Section 13, Chapter 156B
of the Massachusetts Business Corporation Law and provides that a director of
the Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Item 15. Recent Sales of Unregistered Securities
The following information is furnished with regard to all Securities sold by
the Registrant within the past three years which were not registered under the
Securities Act.
(a) From April 1, 1996 to July 9, 1999, the Registrant issued a total of
808,535 shares of common stock for an aggregate consideration of $738,969
pursuant to the exercise of employee incentive stock options by employees of
the registrant.
(b) On April 10, 1998, the Registrant issued to Spectrum Equity Investors
II, L.P. and certain other private investors for $12 million, 666,666 shares of
Series A preferred stock and five-year warrants to purchase an aggregate of
133,333 shares of its Common Stock at an exercise price of $9.00 per share.
(c) On July 16, 1998, the Registrant issued to Spectrum five-year warrants
to purchase up to 55,555 shares of common stock at a purchase price of $9.00
per share in consideration for the commitment by Spectrum that, at any time
prior to June 30, 1999, Spectrum will, upon the Registrant's request, purchase
an additional $5 million of preferred stock containing the same terms and
conditions as the Series A preferred stock.
(d) On September 1, 1998, the Registrant issued to Goldman, Sachs & Co. and
Fleet National Bank, in consideration of the lenders providing a three-year
senior secured credit facility to the Registrant, five-year warrants to
purchase an aggregate of 974,412 shares of Common Stock at a purchase price of
$6.75 per share.
(e) On January 15, 1999, the Registrant issued to Relational Funding
Corporation, in consideration for the provision of a master equipment lease
agreement, warrants to purchase 55,555 shares of common stock at a purchase
price of $9.00 per share.
(f) On March 24, 1999 the Registrant issued to Toronto Dominion (Texas),
Inc. in consideration for the provision of a standby credit facility in the
aggregate amount of up to $30 million, warrants to purchase an aggregate of
69,216 shares of common stock at a purchase price of $11.1825 per share.
All of the above shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended, as transactions by an issuer not involving a public offering.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The following is a list of exhibits filed as a part of this registration
statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1 Form of Underwriting Agreement(13)
2.1 Amended and Restated Agreement and Plan of Reorganization dated as
of March 1, 1999 among the Registrant, CTC Communications Group,
Inc. and CTC-Newco, Inc.(13)
3.1 Restated Articles of Organization, as amended(6)
3.2 Amended and Restated By-Laws(6)
4.1 Form of Common Stock Certificate(5)
5.1 Opinion of Ropes & Gray(13)
9.1 Voting Agreement dated April 10, 1998 among Robert Fabbricatore
and certain of his affiliates and Spectrum(7)
10.1 1996 Stock Option Plan, as amended (3)
10.2 1993 Stock Option Plan(5)
10.3 Employee Stock Purchase Plan(4)
10.4 Lease for premises at 360 Second Ave., Waltham MA(5)
10.5 Sublease for premises at 360 Second Ave., Waltham MA(5)
10.6 Lease for premises at 110 Hartwell Ave., Lexington MA(5)
10.7 Lease for premises at 120 Broadway, New York, NY(5)
10.8 Agreement dated February 1, 1996 between NYNEX and the Company(5)
10.9 Agreement dated May 1, 1997 between Pacific Bell and the Company
(5)
10.10 Agreement dated January 1, 1996 between SNET America, Inc. and the
Company(5)
10.11 Agreement dated June 23, 1995 between IXC Long Distance Inc. and
the Company, as amended(5)
10.12 Agreement dated August 19, 1996 between Innovative Telecom Corp.
and the Company(5)
10.13 Agreement dated October 20, 1994 between Frontier Communications
International, Inc. and the Company, as amended(5)
10.14 Agreement dated January 21, 1997 between Intermedia Communications
Inc. and the Company(5)
10.15 Employment Agreement between the Company and Steven Jones dated
February 27, 1998(7)
10.16 Securities Purchase Agreement dated April 10, 1998 among the
Company and Spectrum and its affiliates named therein(6)
10.17 Registration Rights Agreement dated April 10, 1998 among the
Company and Spectrum and its affiliates named therein(6)
10.18 Form of Warrant dated April 10, 1998(6)
10.19 Loan and Security Agreement dated as of September 1, 1998 by and
between the Company, Goldman Sachs Credit Partners L.P. and Fleet
National Bank(8)
10.20 Agreement with Cisco Systems Capital Corp. dated as of October 14,
1998(9)
10.21 Warrant dated July 15, 1998 issued to Spectrum(10)
10.22 Lease for premises at 220 Bear Hill Road, Waltham MA(10)
10.23 Warrant dated September 1, 1998 issued to Goldman, Sachs & Co.(10)
10.24 Warrant dated September 1, 1998 issued to Fleet National Bank(10)
10.25 1998 Incentive Plan(3)
10.26 Loan Agreement dated as of March 15, 1999 by and between the
Company, TD Dominion (Texas), Inc., and TD Securities (USA)
Inc.(12)
10.27 Warrant dated March 24, 1999 issued to Toronto Dominion (Texas),
Inc.(12)
10.28 Amendment to Resale Agreements dated July 1, 1999 between Bell
Atlantic and the Company(11)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
23.1 Consent of Ropes & Gray (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP(13)
24.1 Power of Attorney(12)
24.2 Power of Attorney of Ralph S. Troupe(12)
</TABLE>
- --------
(1) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
(2) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Registration Statement on Form S-18 (Reg. No. 2-96419-B)
(3) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Registration Statement on Form S-8 (File No. 333-68767).
(4) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Registration Statement on Form S-8 (File No. 33-44337).
(5) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Annual Report on Form 10-K for the Fiscal Year Ended March
31, 1997.
(6) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated May 15, 1998.
(7) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Annual Report on Form 10-K for the Fiscal Year Ended March
31, 1998.
(8) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated October 2, 1998.
(9) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated November 6, 1998.
(10) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
(11) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated July 9, 1999.
(12) Previously filed.
(13) Filed herewith.
(b) Financial Statement Schedules
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CTC COMMUNICATIONS CORP.
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
---------- ---------- ---------- ---------- ----------
Additions
(1) (2)
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31,
1999:
Allowance for doubtful
accounts............. $492,000 $4,988,698 $-- $3,763,698 $1,717,000
Year ended March 31,
1998:
Allowance for doubtful
accounts............. $377,000 $1,421,000 $-- $1,306,000(a) $ 492,000
Year ended March 31,
1997:
Allowance for doubtful
accounts............. $190,215 $ 316,669 $-- $ 129,884(a) $ 377,000
</TABLE>
- --------
(a) Bad debts written off, net of collections.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
II-4
<PAGE>
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on this 12th day of July, 1999.
CTC Communications Corp.
By: /s/ Robert J. Fabbricatore
---------------------------------
Name:Robert J. Fabbricatore
Title:Chairman of the Board and
Chief Executive Officer
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert J. Fabbricatore Chairman of the Board and July 12, 1999
______________________________________ Chief Executive Officer,
Robert J. Fabbricatore Director
/s/ John D. Pittenger Chief Financial Officer July 12, 1999
______________________________________
John D. Pittenger
/s/ Richard J. Santagati* Director July 12, 1999
______________________________________
Richard J. Santagati
/s/ J. Richard Murphy* Director July 12, 1999
______________________________________
J. Richard Murphy
/s/ Henry Hermann* Director July 12, 1999
______________________________________
Henry Hermann
/s/ Ralph C. Sillari* Director July 12, 1999
______________________________________
Ralph C. Sillari
/s/ Kevin J. Maroni* Director July 12, 1999
______________________________________
Kevin J. Maroni
/s/ Robert A. Nicholson* Director July 12, 1999
______________________________________
Robert A. Nicholson
/s/ Carl Redfield* Director July 12, 1999
______________________________________
Carl Redfield
/s/ Katherine D. Courage* Director July 12, 1999
______________________________________
Katherine D. Courage
/s/ Ralph S. Troupe* Director July 12, 1999
______________________________________
Ralph S. Troupe
*By /s/ John D. Pittenger
______________________________________
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1 Form of Underwriting Agreement(13)
2.1 Amended and Restated Agreement and Plan of Reorganization dated as
of March 1, 1999 among the Registrant, CTC Communications Group,
Inc. and CTC-Newco, Inc.(13)
3.1 Restated Articles of Organization, as amended(6)
3.2 Amended and Restated By-Laws(6)
4.1 Form of Common Stock Certificate(5)
5.1 Opinion of Ropes & Gray(13)
9.1 Voting Agreement dated April 10, 1998 among Robert Fabbricatore
and certain of his affiliates and Spectrum(7)
10.1 1996 Stock Option Plan, as amended (3)
10.2 1993 Stock Option Plan(5)
10.3 Employee Stock Purchase Plan(4)
10.4 Lease for premises at 360 Second Ave., Waltham MA(5)
10.5 Sublease for premises at 360 Second Ave., Waltham MA(5)
10.6 Lease for premises at 110 Hartwell Ave., Lexington MA(5)
10.7 Lease for premises at 120 Broadway, New York, NY(5)
10.8 Agreement dated February 1, 1996 between NYNEX and the Company(5)
10.9 Agreement dated May 1, 1997 between Pacific Bell and the Company
(5)
10.10 Agreement dated January 1, 1996 between SNET America, Inc. and the
Company(5)
10.11 Agreement dated June 23, 1995 between IXC Long Distance Inc. and
the Company, as amended(5)
10.12 Agreement dated August 19, 1996 between Innovative Telecom Corp.
and the Company(5)
10.13 Agreement dated October 20, 1994 between Frontier Communications
International, Inc. and the Company, as amended(5)
10.14 Agreement dated January 21, 1997 between Intermedia Communications
Inc. and the Company(5)
10.15 Employment Agreement between the Company and Steven Jones dated
February 27, 1998(7)
10.16 Securities Purchase Agreement dated April 10, 1998 among the
Company and the Purchasers named therein(6)
10.17 Registration Rights Agreement dated April 10, 1998 among the
Company and the Holders named therein(6)
10.18 Form of Warrant dated April 10, 1998(6)
10.19 Loan and Security Agreement dated as of September 1, 1998 by and
between the Company, Goldman Sachs Credit Partners L.P. and Fleet
National Bank(8)
10.20 Agreement with Cisco Systems Capital Corp. dated as of October 14,
1998(9)
10.21 Warrant dated July 15, 1998 issued to Spectrum(10)
10.22 Lease for premises at 220 Bear Hill Road, Waltham MA(10)
10.23 Warrant dated September 1, 1998 issued to Goldman, Sachs & Co.(10)
10.24 Warrant dated September 1, 1998 issued to Fleet National Bank(10)
10.25 1998 Incentive Plan(3)
10.26 Loan Agreement dated as of March 15, 1999 by and between the
Company, TD Dominion (Texas), Inc., and TD Securities (USA)
Inc.(12)
10.27 Warrant dated March 24, 1999 issued to Toronto Dominion (Texas),
Inc.(12)
10.28 Amendment to Resale Agreements dated July 1, 1999 between Bell
Atlantic and the Company(11)
23.1 Consent of Ropes & Gray (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP(13)
24.1 Power of Attorney(12)
24.2 Power of Attorney of Ralph S. Troupe (12)
</TABLE>
- --------
(1) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
(2) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Registration Statement on Form S-18 (Reg. No. 2-96419-B)
1
<PAGE>
(3) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Registration Statement on Form S-8 (File No. 333-68767).
(4) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Registration Statement on Form S-8 (File No. 33-44337).
(5) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Annual Report on Form 10-K for the Fiscal Year Ended March
31, 1997.
(6) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated May 15, 1998.
(7) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Annual Report on Form 10-K for the Fiscal Year Ended March
31, 1998.
(8) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated October 2, 1998.
(9) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated November 6, 1998.
(10) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
(11) Incorporated by reference to an Exhibit filed as part of CTC
Communications' Current Report on Form 8-K dated July 9, 1999.
(12) Previously filed.
(13) Filed herewith.
(b) Financial Statement Schedules
2
<PAGE>
Exhibit 1.1
3,500,000 SHARES
CTC COMMUNICATIONS CORP.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
July ___, 1999
Lehman Brothers Inc.
Credit Suisse First Boston Corporation
As Representatives of the several Underwriters named in Schedule B
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
1. Introductory. CTC Communications Corp., a Massachusetts corporation
("COMPANY"), proposes to issue and sell 3,200,000 shares of its Common Stock and
the selling stockholders named in Schedule A hereto ("SELLING STOCKHOLDERS")
propose severally to sell an aggregate of 300,000 outstanding shares of the
Company's Common Stock (such 3,500,000 shares of Common Stock being hereinafter
referred to as the "FIRM SECURITIES"). The Company also proposes to sell to
the Underwriters, at the option of the Underwriters, an aggregate of not more
than 525,000 additional shares of its Common Stock as set forth below (such
525,000 additional shares being hereafter referred to as the "OPTIONAL
SECURITIES"). The Firm Securities and the Optional Securities are herein
collectively called the "OFFERED SECURITIES". The Company and the Selling
Stockholders hereby severally agree with the several Underwriters named in
Schedule B hereto ("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to the several Underwriters
that:
(i) A registration statement (No. 333-77709) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("COMMISSION") and either (i) has
been declared effective under the Securities Act of 1933 ("ACT") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("INITIAL REGISTRATION STATEMENT") has been declared effective, either
(i) an additional registration statement ("ADDITIONAL REGISTRATION
STATEMENT") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("RULE 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and
<PAGE>
upon such filing the Offered Securities will all have been duly
registered under the Act pursuant to the initial registration statement
and such additional registration statement. If the Company does not
propose to amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose
to amend it, and if any post-effective amendment to either such
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent amendment (if
any) to each such registration statement has been declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c) ("RULE 462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement,
"EFFECTIVE TIME" with respect to the initial registration statement or,
if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (i) if the Company has advised
the Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement, or
the most recent post-effective amendment thereto (if any) filed prior to
the execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c), or (ii) if the Company has advised the Representatives that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as
the case may be, is declared effective by the Commission. If an
additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "EFFECTIVE TIME" with
respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION
STATEMENT". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"REGISTRATION STATEMENTS" and individually as a "REGISTRATION
STATEMENT". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "PROSPECTUS". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("RULES AND
2
<PAGE>
REGULATIONS") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to
the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects
to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement
of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and no Additional Registration Statement has been or will be
filed. The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any Selling Stockholder
for use therein or by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(b) and
Section 7(c) hereof, respectively.
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the Commonwealth of
Massachusetts, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and
the Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or lease
of property or the conduct of its business requires such qualification,
except to the extent such failure to be qualified would not have,
individually or in the aggregate, a material adverse effect on the
financial condition, business, properties or results of operations of
the Company and the Subsidiary taken as a whole ("MATERIAL ADVERSE
EFFECT").
(iv) CTC Communications of Virginia, Inc. is the only subsidiary
of the Company (the "SUBSIDIARY"). The Subsidiary has been duly
incorporated and is an existing corporation in good standing under the
laws of its state of incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus, and the Subsidiary is duly qualified to do business
as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business
requires such qualification; all of the issued and outstanding capital
stock of the Subsidiary has been duly authorized and validly issued and
is fully paid and nonassessable; and all of the issued and outstanding
capital stock of the
3
<PAGE>
Subsidiary is owned by the Company free from liens, encumbrances and
defects, except as described in the Prospectus. As of the date hereof,
the fair market value of the Company's investment in the Subsidiary
(measured as of the time such investment or investments were made) is
less than $100,000.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and will conform, in all material respects, to the description thereof
contained in the Prospectus; the stockholders of the Company have no
preemptive rights with respect to the Offered Securities being offered
by the Company; and, to the best of the Company's knowledge no
preemptive rights have been granted with respect to the Offered
Securities being offered by the Selling Stockholders.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(vii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant
to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under
the Act, and all rights arising under such contracts, agreements or
understandings have either been effectively satisfied or waived in
connection with the sale of the Offered Securities.
(viii) The Offered Securities have been approved for listing on
Nasdaq Stock Market's National Market, subject to notice of issuance.
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the transactions
contemplated by this Agreement in connection with the sale of the
Offered Securities, except such as have been obtained and made under the
Act and such as may be required under state securities laws.
(x) The execution, delivery and performance of this Agreement by
the Company, and the consummation by the Company of the transactions
herein contemplated, will not result in (i) a breach or violation of any
of the terms and provisions of, or constitute a default under, any
statute, any rule, regulation (including, without limitation, the
Communications Act of 1934, as amended by the Telecommunications Act of
1996 and the rules and regulations of the Federal Communications
Commission (the "FCC")) or order of any governmental agency or body or
any court, domestic or foreign, having jurisdiction over the Company or
the Subsidiary or any of their properties, or any agreement or
instrument to which the Company or the Subsidiary is a party or by which
the
4
<PAGE>
Company or the Subsidiary is bound or to which any of the properties of
the Company or the Subsidiary is subject, except as would not,
individually or in the aggregate, have a Material Adverse Effect, or
(ii) a violation of the charter or by-laws of the Company or the
Subsidiary.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and the
Subsidiary have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof
or materially interfere with the use made or to be made thereof by them;
and except as disclosed in the Prospectus, the Company and the
Subsidiary hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(xiii) The Company and the Subsidiary possesses adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies (including, without limitation, the FCC and
applicable state regulatory authorities) necessary to conduct the
business now operated by them and have not received any notice of
proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company or the Subsidiary, would individually or in the aggregate have a
Material Adverse Effect.
(xiv) Except as disclosed in the Prospectus, the business and
operations conducted and proposed to be conducted by the Company and the
Subsidiary as described in the Prospectus are not regulated by any
public service or public utility commissions in the states in which the
Company and the Subsidiary conduct or propose to conduct such business
and operations as described in the Prospectus.
(xv) The Company and the Subsidiary have filed, when due, all
reports required to be filed with the FCC and applicable state
regulatory authorities, except to the extent that failure to file such
reports would not have a Material Adverse Effect.
(xvi) No labor dispute with the employees of the Company or the
Subsidiary exists or, to the knowledge of the Company, is imminent that
could reasonably be expected to have a Material Adverse Effect.
(xvii) The Company and the Subsidiary own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights
to inventions, know-how, patents, copyrights, confidential information
and other intellectual property (collectively, "INTELLECTUAL PROPERTY
RIGHTS") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to the
Company or the Subsidiary, would individually or in the aggregate have a
Material Adverse Effect.
5
<PAGE>
(xviii) Except as disclosed in the Prospectus, neither the
Company nor the Subsidiary is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or contamination
pursuant to any environmental laws, or is subject to any claim relating
to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a Material Adverse
Effect; and the Company is not aware of any pending investigation which
could reasonably be expected to lead to such a claim.
(xix) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, the
Subsidiary or any of their respective properties that, if determined
adversely to the Company or the Subsidiary, would individually or in the
aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of
the sale of the Offered Securities; and, to the Company's knowledge, no
such actions, suits or proceedings are threatened or contemplated.
(xx) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and the Subsidiary as of the dates shown and their results
of operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis
and the schedules included in each Registration Statement present fairly
the information required to be stated therein.
(xxi) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the financial
condition, business, properties or results of operations of the Company
and the Subsidiary taken as a whole, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(xxii) The Company is not (A) and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940,
or (B) a "holding company" or a "subsidiary company" or an "affiliate"
of a holding company within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
(b) Each Selling Stockholder severally represents and warrants to, and
agrees with, the several Underwriters that:
6
<PAGE>
(i) Such Selling Stockholder on the First Closing Date hereinafter
mentioned will have valid and unencumbered title to the Firm Securities
to be delivered by such Selling Stockholder on the First Closing Date
and full right, power and authority to enter into this Agreement and to
sell, assign, transfer and deliver the Firm Securities to be delivered
by such Selling Stockholder on the First Closing Date hereunder; on or
prior to the date hereof such Selling Stockholder has irrevocably
exercised warrants to purchase such Firm Securities on a "net issuance"
basis, subject only to the closing of the offering of the Firm
Securities as described in Section 3 below; such Selling Stockholder
will surrender to the Company on the First Closing Date warrants to
purchase that number of shares of the Company's Common Stock as will
suffice to pay the conversion price in respect of the shares of Common
Stock being sold by the Selling Stockholder pursuant hereto; and upon
the payment of the conversion price by or on behalf of such Selling
Stockholder and the delivery of and payment for the Offered Securities
on the First Closing Date hereunder the several Underwriters will
acquire valid and unencumbered title to the Offered Securities to be
delivered by such Selling Stockholder on the First Closing Date.
(ii) The information pertaining to such Selling Stockholder under
the captions "Principal and Selling Stockholders" and "Certain
Relationships and Related Transactions" in the Prospectus is accurate
and complete in all respects.
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling Stockholder
and any person that would give rise to a valid claim against such
Selling Stockholder or any Underwriter for a brokerage commission,
finder's fee or other like payment in connection with this offering.
(iv) Each Selling Stockholder will deliver to Lehman Brothers,
attention: Syndicate Department on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form
W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
(v) The "piggyback registration rights" obligations owed by the
Company to the Selling Stockholders arising due to the occurrence of
this offering have been satisfied or waived.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and each Selling Stockholder, at a purchase price of $ _____ per share, that
number of shares of the Firm Securities (rounded up or down, as determined by
Lehman Brothers Inc. ("LEHMAN BROTHERS") in its discretion, in order to avoid
fractions) obtained by multiplying 3,500,000 shares of the Firm Securities, in
the case of the Company, and the number of shares of the Firm Securities set
forth opposite the name of such Selling Stockholder in Schedule A hereto, in the
case of a Selling Stockholder, in each case by a fraction the numerator of which
is the number of shares of the Firm Securities set forth opposite the name of
such Underwriter in Schedule B hereto and the denominator of which is the total
number of shares of the Firm Securities.
The Company and each Selling Stockholder will deliver the Firm Securities
to the Representatives for the accounts of the Underwriters, against payment of
the purchase price in Federal
7
<PAGE>
(same day) funds by wire transfer to an account at a bank reasonably acceptable
to Lehman Brothers drawn to the order of CTC Communications Corp. in the case of
3,200,000 shares of the Firm Securities, Fleet National Bank in the case of
100,000 shares of the Firm Securities and Goldman, Sachs & Co. in the case of
200,000 shares of the Firm Securities, at the office of Ropes & Gray, Boston,
Massachusetts, at 10:00 A.M., New York time, on _________, 1999, or at such
other time not later than seven full business days thereafter as Lehman Brothers
and the Company determine, such time being herein referred to as the "FIRST
CLOSING DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of
1934, the First Closing Date (if later than the otherwise applicable settlement
date) shall be the settlement date for payment of funds and delivery of
securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as Lehman Brothers
requests at least 48 hours prior to the First Closing Date and will be made
available for checking and packaging at the above office of Ropes & Gray at
least 24 hours prior to the First Closing Date. Each Selling Stockholder hereby
acknowledges and agrees that unless it shall have paid on the First Closing Date
the conversion price of the warrants underlying its shares of the Firm
Securities on a "net issuance" basis as described in Section 2(b)(i) hereof,
such exercise price shall be deducted by Lehman Brothers from the cash otherwise
owing to the Selling Stockholder under this paragraph and remitted to the
Company.
In addition, upon written notice from Lehman Brothers given to the Company
from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Securities at the purchase price per share to be paid for the Firm Securities.
The Company agrees to sell to the Underwriters the number of shares of Optional
Securities specified in such notice and the Underwriters agree, severally and
not jointly, to purchase such Optional Securities. Such Optional Securities
shall be purchased from the Company for the account of each Underwriter in the
same proportion as the number of shares of Firm Securities set forth opposite
such Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by Lehman Brothers to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by Lehman Brothers to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by Lehman
Brothers but shall be not later than five full business days after written
notice of election to purchase Optional Securities is given. The Company will
deliver the Optional Securities being purchased on each Optional Closing Date to
the Representatives for the accounts of the several Underwriters, against
payment of the purchase price therefor in Federal (same day) funds by wire
transfer to an account at a bank reasonably acceptable to Lehman Brothers drawn
to the order of CTC Communications Corp., at the above office of Ropes & Gray.
The certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as Lehman Brothers requests upon reasonable notice prior to such
Optional Closing Date and will be made available for checking and packaging at
the above office of Ropes & Gray at a reasonable time in advance of such
Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
8
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5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if reasonably consented to by Lehman Brothers,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second
business day following the execution and delivery of this Agreement or (B) the
fifteenth business day after the Effective Date of the Initial Registration
Statement.
The Company will advise Lehman Brothers promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not occurred
as of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b) on or
prior to 10:00 P.M., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and distributed to
any Underwriter, or will make such filing at such later date as shall have been
reasonably consented to by Lehman Brothers.
(b) The Company will advise Lehman Brothers promptly of any proposal
to amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without Lehman Brothers' consent, not to be
unreasonably withheld; and the Company will also advise Lehman Brothers promptly
of the effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any amendment
or supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the issuance of
any such stop order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify Lehman Brothers of such event and
will promptly prepare and file with the Commission, at its own expense, an
amendment or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither Lehman Brothers' consent
to, nor the Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of
such fourth fiscal quarter.
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(e) The Company will furnish to the Representatives copies of each
Registration Statement (one of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
Lehman Brothers reasonably requests. The Prospectus shall be so furnished on or
prior to 3:00 P.M., New York time, on the business day following the later of
the execution and delivery of this Agreement or the Effective Time of the
Initial Registration Statement. All other such documents shall be so furnished
as soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as Lehman Brothers
designates and will continue such qualifications in effect so long as required
for the distribution; provided, however, that the Company shall not be obliged
to file any general consent to service of process or to qualify as a foreign
corporation or as a securities dealer in any jurisdiction or to subject itself
to taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other publicly available information concerning the Company as Lehman
Brothers may reasonably request.
(h) The Company and each Selling Stockholder severally agree with the
several Underwriters that, as between the Company and the Selling Stockholders,
on the one hand, and the Underwriters, on the other hand, the Company and such
Selling Stockholder will pay all expenses incident to the performance of the
obligations of the Company and such Selling Stockholder, as the case may be,
under this Agreement, for any filing fees and other expenses (including fees and
disbursements of their counsel) incurred in connection with qualification of the
Offered Securities for sale under the laws of such jurisdictions as Lehman
Brothers designates and the printing of memoranda relating thereto, for the
filing fee incident to, and the reasonable fees and disbursements of counsel to
the Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. of the Offered Securities, for any travel expenses of
the Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Stockholders of the Offered Securities to the Underwriters and for expenses
incurred in distributing preliminary prospectuses and the Prospectus (including
any amendments and supplements thereto) to the Underwriters. The purpose of
this paragraph (h) is to allocate responsibility for expenses of the offering as
between the Company and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, and nothing in this paragraph (h) shall be
deemed to limit the Company's obligations to pay certain expenses of the Selling
Stockholders as provided in Section 9.4 of the Warrant dated September 1, 1998
issued to Goldman Sachs Co. (the "GOLDMAN WARRANT") and of the Warrant dated
September 1, 1998 issued to Fleet National Bank (the "FLEET WARRANT" and
together with the Goldman Warrant, the "WARRANTS").
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(i) For a period of 90 days after the date of the first public
offering of the Offered Securities, the Company will not, directly or
indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter
into any transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any shares
of Common Stock or securities convertible into or exchangeable for Common Stock,
or sell or grant options, rights or warrants with respect to any shares of
Securities or securities convertible into or exchangeable for Common Stock, or
(2) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of ownership
of such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case without the prior written consent
of Lehman Brothers, except: issuances of Common Stock pursuant to the conversion
or exchange of convertible or exchangeable securities or the exercise of
warrants or options, in each case outstanding on the date hereof, issuances of
preferred stock and common stock pursuant to the holding company reorganization
of the Company whereby preferred stock and common stock of the Company will be
exchanged for the same number of preferred stock and common stock of the holding
company, issuances of warrants in connection with any offering of debt
securities by the Company or any holding company formed to hold the Company
(provided that such warrants are not exercisable within the 90 day period
referenced above), grants of employee stock options pursuant to the terms of a
plan in effect on the date hereof and issuances of Common Stock pursuant to the
exercise of such options or the exercise of any other employee stock options
outstanding on the date hereof. For purposes of paragraph (i) and paragraph (j)
of this Section 5, the term "Common Stock" shall include common equity
securities issued by any holding company formed to hold the Company pursuant to
the holding company reorganization described in the Prospectus.
(j) Each Selling Stockholder acknowledges and agrees that, during the
90 day period referred to in paragraph (i), without the prior written consent of
Lehman Brothers the Company (or any holding company formed to hold the Company)
will not file a registration statement covering Common Stock or securities
convertible into or exchangeable for Common Stock owned by such Selling
Stockholder, notwithstanding the demand registration rights provided for in
Section 9.1 of the Warrants.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Ernst & Young LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations;
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(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements included in the Registration Statements, or from which
interim financial information appearing in the Registration Statements
is derived;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements of
the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other specified
procedures, nothing came to their attention that caused them to believe
that:
(A) the telecommunications revenues, loss from operations and
net loss for the three-month periods ended March 31, 1998, June 30,
1998, September 30, 1998, December 31, 1998 and March 31, 1999
included in the Prospectus do not agree with the amounts set forth
in the unaudited financial statements for those same periods or were
not determined on a basis substantially consistent with that of the
corresponding amounts in the audited statements of income;
(B) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than
three business days prior to the date of such letter, there was any
change in the capital stock or any increase in short-term
indebtedness or long-term debt of the Company and its consolidated
Subsidiary or, at the date of the latest available balance sheet
read by such accountants, there was any decrease in consolidated net
current assets or net assets, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the
latest available income statement read by such accountants there
were any decreases, as compared with the corresponding period of the
previous year, in total revenues, income from operations, EBITDA or
in the total or per share amounts of net income.
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and the
Subsidiary subject to the internal controls of the Company's accounting
system or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a reading of such
general accounting records and other procedures specified in such letter
and have found such dollar amounts, percentages and other financial
information to be in agreement with such results, except as otherwise
specified in such letter.
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For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"REGISTRATION STATEMENTS" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or such later date as shall have been consented to by Lehman Brothers.
If the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by Lehman Brothers. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
the Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Stockholder, the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving a
prospective change, in the financial condition, business, properties or results
of operations of the Company and the Subsidiary taken as one enterprise which,
in the judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse to the Company and makes it impractical
or inadvisable to proceed with completion of the public offering or the sale of
and payment for the Offered Securities; (ii) any downgrading in the rating of
any debt securities of the Company by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance or
review its rating of debt securities of the Company other than an announcement
with positive implications of a possible upgrading, and no implication of a
possible downgrading, of such rating); (iii) any material suspension or material
limitation of trading in securities generally on the New York Stock Exchange, or
any setting of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the over-the-
counter market; (iv) any banking moratorium declared by U.S. Federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the judgment
of a majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
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(d) The Representatives shall have received an opinion, dated such
Closing Date, of Ropes & Gray, counsel for the Company substantially in the form
attached hereto as Exhibit A.
(e) The Representatives shall have received an opinion, dated such
Closing Date, of Swidler Berlin Shereff Friedman, LLP, regulatory counsel for
the Company, to the effect that:
(i) The Company and the Subsidiary have all of the licenses,
permits and authorizations (collectively, the "PERMITS"), if any,
required by the FCC and, to the knowledge of such counsel, the Permits
required by any state regulatory authorities for the provision of
telecommunications services except where the failure to obtain or hold
such Permit would not have a Material Adverse Effect on the Company.
(ii) The Company and the Subsidiary are not subject to any pending
complaint or, to the knowledge of such counsel, any pending
investigation before the FCC or, to the best knowledge of counsel, to
any threatened complaint or investigation before the FCC, or any pending
or threatened complaint or investigation before any state regulatory
authority based on any alleged violation by the Company in connection
with their provision of or failure to provide telecommunications and
services of a character required to be disclosed in the Prospectus.
(iii) The statements in the Prospectus under the heading of "Risk
Factors - Changes to the regulations applicable to our business could
increase our costs and limit our operations" and "Business - Government
Regulation" fairly summarize the matters therein described and the
descriptions of federal and state telecommunications statutes in the
Registration Statements and Prospectus fairly present the information
required to be shown.
(iv) The Company and the Subsidiary have the consents, approvals,
authorizations, licenses, certificates, permits or orders of the FCC or
any state regulatory authority, if any, for the consummation of the
transactions contemplated in this Agreement except where the failure to
obtain the consents, approvals, authorizations, licenses, certificates,
permits or orders would not have a Material Adverse Effect on the
Company and the Subsidiary.
(v) Neither the execution and delivery of this Agreement nor the
sale of the Offered Securities contemplated hereby will conflict with or
result in a violation of any order or regulation of the FCC or any state
regulatory authority applicable to the Company and the Subsidiary except
where the conflict with or the violation of which would not have a
Material Adverse Effect on the Company and the Subsidiary.
(f) The Representatives shall have received an opinion, dated such
Closing Date, of Palmer & Dodge LLP, counsel for Fleet National Bank and
Goldman, Sachs & Co., to the effect that:
(i) Each Selling Stockholder had valid and unencumbered title to
the Offered Securities delivered by such Selling Stockholder on the
First Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by such
Selling Stockholder on the First Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholders on the First
Closing Date hereunder;
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(ii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by any Selling Stockholder for the consummation of the
transactions contemplated by this Agreement in connection with the sale
of the Offered Securities sold by the Selling Stockholders, except such
as have been obtained and made under the Act and such as may be required
under state securities laws or clearance of the offering or sale with
the NASD, as to which counsel need express no opinion;
(iii) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court having
jurisdiction over any Selling Stockholder or any of their properties or
any agreement or instrument of which such counsel has knowledge and to
which any Selling Stockholder is a party or by which any Selling
Stockholder is bound or to which any of the properties of any Selling
Stockholder is subject, or the charter or by-laws of any Selling
Stockholder which is a corporation in any case, which breach, violation
or default could reasonably be expected to have a material adverse
effect on the ability of such Selling Stockholder to perform its
obligations under this Agreement; and
(iv) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.
(g) The Representatives shall have received from Latham & Watkins,
counsel for the Underwriters, such opinion or opinions, dated such Closing Date,
with respect to the Registration Statements, the Prospectus and other related
matters as the Representatives may require, and the Selling Stockholders and the
Company shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(h) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal financial
or accounting officer of the Company in which such officers, to the best of
their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the financial
condition, business, properties or results of operations of the Company and the
Subsidiary taken as a whole except as set forth in or contemplated by the
Prospectus or as described in such certificate.
(i) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP, which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three days prior to such Closing Date
for the purposes of this subsection.
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(j) The Representatives shall have received lock-up agreements, dated
such Closing Date, from each officer and director of the Company, Spectrum
Equity Investors II, L.P. and Toronto Dominion (Texas), Inc. substantially in
the form attached hereto as Exhibit B.
(k) The Representatives shall have received from each Selling
Stockholder documentation satisfactory to the Representatives that the warrants
have been duly exercised by the Selling Stockholders, such that each Selling
Stockholder has valid and unencumbered title to the Firm Securities required to
be delivered by such Selling Stockholder on the First Closing Date.
(l) Each Selling Stockholder shall have furnished to the
Representatives on the First Closing Date a certificate, dated the First Closing
Date, signed by, or on behalf of, the Selling Stockholder stating that the
representations, warranties and agreements of the Selling Stockholder contained
herein are true and correct as of the First Closing Date and that the Selling
Stockholder has complied with all agreements contained herein to be performed by
the Selling Stockholder at or prior to the First Closing Date.
The Selling Stockholders and the Company will furnish the Representatives
with such conformed copies of such opinions, certificates, letters and documents
as the Representatives reasonably request. Lehman Brothers may in its sole
discretion waive on behalf of the Underwriters compliance with any conditions to
the obligations of the Underwriters hereunder, whether in respect of an Optional
Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter, its
partners, directors and officers and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in or omission
or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by (i) any
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below and (ii) any Selling Stockholder specifically for use therein, it being
understood and agreed that only such information furnished by any Selling
Stockholder consists of the information described as such in subsection (b)
below, and provided, further, that with respect to any untrue statement or
alleged untrue statement in or omission or alleged omission from any preliminary
prospectus the indemnity agreement set forth in this Section 7(a) shall not
inure to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased the Offered Securities
concerned, to the extent that a prospectus relating to such Offered Securities
was required to be delivered by such Underwriter under the Act in connection
with such purchase and any such loss, claim, damage or liability
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of such Underwriter results from the fact that there was not sent or given to
such person, at or prior to the written confirmation of the sale of such Offered
Securities to such person, a copy of the Prospectus if the Company had
previously furnished copies thereof to such Underwriter.
Insofar as the foregoing indemnity agreement, or the representations and
warranties contained in Section 2(a)(ii), may permit indemnification for
liabilities under the Act of any person who is an Underwriter or a partner or
controlling person of an Underwriter within the meaning of Section 15 of the Act
and who, at the date of this Agreement, is a director, officer or controlling
person of the Company, the Company has been advised that in the opinion of the
Commission such provisions may contravene Federal public policy as expressed in
the Act and may therefore be unenforceable. In the event that a claim for
indemnification under such agreement or such representations and warranties for
any such liabilities (except insofar as such agreement provides for the payment
by the Company of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such a person, the Company will submit to a court of appropriate
jurisdiction (unless in the opinion of counsel for the Company the matter has
already been settled by controlling precedent) the question of whether or not
indemnification by it for such liabilities is against public policy as expressed
in the Act and therefore unenforceable, and the Company will be governed by the
final adjudication of such issue.
(b) Each Selling Stockholder, severally and not jointly, will
indemnify and hold harmless each Underwriter, its partners, directors and
officers and each person who controls such Underwriter within the meaning
of Section 15 of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
each Selling Stockholder will only be liable to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by such Selling Stockholder;
specifically for use in the preparation of such Registration Statement,
Prospectus or amendment or supplement thereto; it being understood and
agreed that the only such information being provided by or on behalf of
each Selling Stockholder consists of the information pertaining
specifically to such Selling Stockholder under the caption "Principal and
Selling Stockholders" and "Certain Relationships and Related Transactions"
in the Prospectus; and, provided further, that in no event shall the
aggregate liability of any Selling Stockholder hereunder be greater in
amount than the dollar amount of the net proceeds received by such Selling
Stockholder upon the sale of the Firm Securities giving rise to such
indemnification obligation.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
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otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company and each Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the information contained under the caption "Underwriting".
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action for which indemnity could have
been sought hereunder and (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act by or on behalf of an
indemnified party.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company or a
Selling Stockholder, as the case may be, on the one hand and the Underwriters on
the other from the offering of the Securities or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company or a Selling Stockholder, as
the case may be, on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company or a Selling Stockholder, as the case
may be, on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company or a Selling Stockholder, as the
case may be, bear to the
18
<PAGE>
total underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or a Selling Stockholder, as the case may be, or the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (e). Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section shall be in addition to any liability which the Company or the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
Selling Stockholder, to each director of the Company, to each officer of the
Company who has signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, Lehman
Brothers may make arrangements satisfactory to the Company and the Selling
Shareholders for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to Lehman Brothers, the Company and the Selling
Shareholders for the purchase of such Offered Securities by other persons are
not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company
or the Selling Shareholders, except as provided in Section 9 (provided that if
such default occurs with respect to Optional Securities after the First Closing
Date, this Agreement will not terminate as to the Firm Securities or any
Optional Securities purchased prior to such termination). As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
19
<PAGE>
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by them pursuant to Section 5 and the
respective obligations of the Company, the Selling Stockholders and the
Underwriters pursuant to Section 7 shall remain in effect, and if any Offered
Securities have been purchased hereunder the representations and warranties in
Section 2 and all obligations under Section 5 shall also remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in Section 6(c),
the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Lehman Brothers Inc., Three World Financial Center,
New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588),
with a copy, in the case of any notice pursuant to Section 7(d), to the Director
of Litigation, Office of the General Counsel, Lehman Brothers Inc., Three World
Financial Center, 10th Floor, New York, New York 10285; or, if sent to the
Company, will be mailed, delivered or telegraphed and confirmed to it at 360
Second Avenue, Waltham, Massachusetts 02451, Attention: Robert J. Fabbricatore,
with a copy to Ropes & Gray, One International Place, Boston, Massachusetts
02110, Attention: Mary E. Weber, Esq. and the Law Offices of Leonard R. Glass,
P.A., 45 Central Avenue, Tenafly, New Jersey 07670, Attention: Leonard R. Glass,
Esq.; or, if sent to the Selling Stockholders, will be mailed, delivered or
telegraphed and confirmed to Goldman, Sachs & Co., 85 Broad Street, New York,
New York 10004, Attention: Norman Feit, Esq., Assistant General Counsel, and to
Fleet National Bank, One Federal Street, Boston, MA 02110, Attention: Paula H.
Lang, Media and Communications Group, with a copy to Fleet National Bank's
Office of the General Counsel (at the Fleet National Bank address provided) and
Palmer & Dodge, One Beacon Street, Boston, MA 02108, Attention: George Ticknor;
provided, however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
Lehman Brothers will be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
20
<PAGE>
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
21
<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement among the Selling
Stockholders, Company and the several Underwriters in accordance with its terms.
Very truly yours,
CTC COMMUNICATIONS CORP.
By
--------------------------------------
FLEET NATIONAL BANK
By
---------------------------------------
GOLDMAN, SACHS & CO.
By
---------------------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written.
LEHMAN BROTHERS INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By LEHMAN BROTHERS INC.
By
------------------------
Authorized Representative
22
<PAGE>
SCHEDULE A
NUMBER OF SHARES OF THE
---------------------------------------
SELLING STOCKHOLDER FIRM SECURITIES TO BE SOLD
- ------------------------------------- ---------------------------------------
Fleet National Bank 100,000
Goldman, Sachs & Co. 200,000
Total................................
-------
300,000
=======
<PAGE>
SCHEDULE B
NUMBER OF
---------
SHARES OF THE
-------------
FIRM SECURITIES
---------------
UNDERWRITER TO BE PURCHASED
----------- ---------------
Lehman Brothers Inc...............................
Credit Suisse First Boston Corporation............
Total........................................
---------
3,500,000
=========
<PAGE>
EXHIBIT A
OPINION OF ROPES & GRAY
<PAGE>
EXHIBIT B
LOCK-UP LETTER AGREEMENT
LEHMAN BROTHERS INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
As Representatives of the
several underwriters
c/o LEHMAN BROTHERS INC.
Three World Financial Center
New York, New York 10285
Dear Sirs:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Securities") of Common Stock, par value $.01 per share (the "Common Stock"), of
CTC Communications Corp. (the "Company", which term shall include CTC
Communications Group, Inc. or other entity formed in connection with the
Company's proposed holding company reorganization) and that the Underwriters
propose to reoffer the Securities to the public (the "Offering").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Lehman
Brothers Inc., the undersigned will not, directly or indirectly, (1) offer for
sale, sell, pledge, or otherwise dispose of (or enter into any transaction or
device that is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common Stock
(including, without limitation, shares of Common Stock that may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission and shares of Common Stock
that may be issued upon exercise of any option or warrant) or securities
convertible into or exchangeable for Common Stock (other than the Securities)
owned by the undersigned on the date of the final Prospectus relating to the
Offering, or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, for a period of 90 days after
the date of the final Prospectus relating to the Offering.
The foregoing shall not be deemed to preclude option exercises or exchanges
or surrender of equity securities to the Company but any securities
received upon exercise or in exchange therefor shall be subject to this
Agreement.
In furtherance of the foregoing, the Company and its Transfer Agent are
hereby authorized to decline to make any transfer of securities if such transfer
would constitute a violation or breach of this Lock-Up Letter Agreement.
It is understood that, if the Company notifies you that it does not intend
to proceed with the Offering, if the Underwriting Agreement does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
and delivery of the Securities, we will be released from our obligations under
this Lock-Up Letter Agreement.
<PAGE>
The undersigned understands that the Company, the Underwriters and the
stockholders selling shares in the Offering will proceed with the Offering in
reliance on this Lock-Up Letter Agreement.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Letter Agreement and that,
upon request, the undersigned will execute any additional documents necessary in
connection with the enforcement hereof. Any obligations of the undersigned
shall be binding upon the heirs, personal representatives, successors and
assigns of the undersigned.
Very truly yours,
[NAME OF NON-SELLING STOCKHOLDER]
By:
----------------------------------
Name:
Dated: _______________
<PAGE>
EXHIBIT 2.1
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
CTC COMMUNICATIONS GROUP, INC.
A DELAWARE CORPORATION,
CTC-NEWCO, INC.
A DELAWARE CORPORATION
AND
CTC COMMUNICATIONS CORP.,
A MASSACHUSETTS CORPORATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is dated as of March 1, 1999 among CTC COMMUNICATIONS CORP., a
Massachusetts corporation, CTC COMMUNICATIONS GROUP, INC., a Delaware
corporation, and CTC-NEWCO, INC., a Delaware corporation and a wholly-owned
subsidiary of CTC COMMUNICATIONS GROUP, INC.
BACKGROUND
A. CTC COMMUNICATIONS CORP ("CTC Massachusetts") is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts and, on the date of this Agreement, has authority
to issue 26,000,000 shares consisting of 25,000,000 shares of Common Stock, $.01
par value, and 1,000,000 shares of Preferred Stock, $1.00 par value, of which
10,291,126 shares of Common Stock and 666,666 shares of Series A Convertible
Preferred Stock are issued and outstanding.
B. CTC COMMUNICATIONS GROUP, INC. ("Delaware Parent") is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and, on the date of this Agreement, has authority to issue
110,000,000 shares consisting of 100,000,000 shares of Common Stock, $.01 par
value, and 10,000,000 shares of Preferred Stock, $1.00 par value, none of which
are issued and outstanding.
C. CTC-NEWCO, INC. ("Delaware Subsidiary") is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and, on the date of this Agreement, has authority to issue 200 shares
of Common Stock, $.01 par value, all of which are issued and outstanding and
owned by Delaware Parent.
D. The Board of Directors of each of CTC Massachusetts, Delaware Parent
and Delaware Subsidiary have determined that it is advisable and in the best
interests of each of such corporations that Delaware Subsidiary merge into CTC
Massachusetts upon the terms and subject to the conditions set forth in this
Agreement, for the purpose of effecting the reincorporation of CTC Massachusetts
in the State of Delaware by becoming a wholly-owned subsidiary of Delaware
Parent and have, by resolutions duly adopted, approved this Agreement and
directed that it be submitted to a vote of their respective stockholders and
executed by the undersigned officers.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
When used in this Agreement (and in any Exhibit in which such terms are not
otherwise defined) the following terms shall have the following meanings:
"Certificate of Merger" shall mean the Certificate of Merger of Delaware
Subsidiary into CTC Massachusetts to be filed with the Secretary of State of the
Commonwealth of Massachusetts.
<PAGE>
"CTC Massachusetts Common Stock" shall mean shares of Common Stock, $.01
par value, of CTC Massachusetts.
"CTC Massachusetts Preferred Stock" shall mean shares of Preferred Stock,
$1.00 par value, of CTC Massachusetts.
"Delaware Parent Common Stock" shall mean shares of Common Stock, $0.01 par
value, of Delaware Parent.
"Delaware Parent Preferred Stock" shall mean shares of Preferred Stock,
$1.00 par value, of Delaware Parent.
"Delaware Subsidiary Common Stock" shall mean shares of Common Stock, $0.01
par value, of Delaware Subsidiary.
"Effective Time" shall mean the time when the Certificate of Merger is
filed with the Secretary of the Commonwealth of Massachusetts and the Merger
becomes effective.
"Merger" shall mean the merger of Delaware Subsidiary into CTC
Massachusetts.
"Shareholders' Meeting" shall mean the meeting of shareholders of CTC
Massachusetts to be held in 1999 approve and adopt this Agreement, among other
things.
"Surviving Parent" shall mean Delaware Parent from and after the Effective
Time.
"Surviving Subsidiary" shall mean CTC Massachusetts from and after the
Effective Time.
ARTICLE II
MERGER
2.1 Merger. At the Effective Time, the Merger shall become effective under
Section 252 of the Delaware General Corporation Law and Section 79 of Chapter
156B of the Massachusetts General Corporation Law, and Delaware Subsidiary shall
merge into CTC Massachusetts, the separate existence of Delaware Subsidiary
shall cease and CTC Massachusetts shall continue in existence as the surviving
wholly-owned subsidiary of Delaware Parent under the Massachusetts General
Corporation Law.
2.2 Filings. On or prior to the Effective Time, CTC Massachusetts and
Delaware Subsidiary shall cause:
(a) the Certificate of Merger to be filed with the Secretary of
the Commonwealth of Massachusetts; and
(b) the Certificate of Merger to be filed with the Secretary of
State of Delaware.
2.3 Effects of the Merger. At the Effective Time:
(a) the separate existence of Delaware Subsidiary shall cease
and Delaware Subsidiary shall be merged into CTC Massachusetts;
(b) the Articles of Incorporation of CTC Massachusetts shall
continue as the Articles of Incorporation of the Surviving Subsidiary;
(c) the Bylaws of CTC Massachusetts continue as the Bylaws of
the Surviving Subsidiary;
-2-
<PAGE>
(d) each share of CTC Massachusetts Common Stock and CTC
Massachusetts Preferred Stock outstanding immediately prior to the Effective
Time shall be converted into one share of Surviving Parent Common Stock and one
share of Surviving Parent Preferred Stock, respectively, pursuant to Article III
herein;
(e) without further transfer, act, or deed, the separate
existence of Delaware Subsidiary shall cease and CTC Massachusetts shall possess
all the rights, privileges, powers and franchises, and shall be subject to all
the restrictions, disabilities and duties, of Delaware Subsidiary; and all
property, real, personal and mixed, and all debts due to Delaware Subsidiary on
whatever account, as well as stock subscriptions and all other things belonging
to Delaware Subsidiary shall be vested in CTC Massachusetts; and all property,
rights, privileges, powers and franchises, and all and every other interest of
Delaware Subsidiary shall be thereafter as effectually the property of the CTC
Massachusetts as they were of Delaware Subsidiary, and the title to any real
estate vested by deed or otherwise in Delaware Subsidiary shall not revert or be
in any way impaired by reason of the Merger; and all rights of creditors of
Delaware Subsidiary and all liens upon any property of Delaware Subsidiary shall
be preserved unimpaired and all debts, liabilities and duties of Delaware
Subsidiary shall attach to CTC Massachusetts and may be enforced against it to
the same extent as if such debts, liabilities and duties had been incurred or
contracted by it.
2.4 Further Assurances. Delaware Subsidiary agrees that if, at any time
after the Effective Time, CTC Massachusetts shall consider or be advised that
any further deeds, assignments or assurances are necessary or desirable to vest,
perfect or confirm in the CTC Massachusetts title to any property or rights of
Delaware Subsidiary, the CTC Massachusetts and its officers and directors may
execute and deliver all such deeds, assignments and assurances and do all other
things necessary or desirable to vest, perfect or confirm title to such property
or rights in the CTC Massachusetts and otherwise to carry out the purposes of
this Agreement, in the name of Delaware Subsidiary or otherwise.
ARTICLE III
CONVERSION OF STOCK
3.1 Conversion of Stock. At the Effective Time, the stock of CTC
Massachusetts shall be converted into stock of Surviving Parent, as follows:
(a) each share of CTC Massachusetts Common Stock and each share
of Preferred Stock issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into one share of Surviving Parent Common Stock and
one share of Preferred Stock, respectively; and
(b) each share of Delaware Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted into one
share of common stock of the Surviving Subsidiary.
3.2 Stock Certificates. At and after the Effective Time, all of the
outstanding certificates which immediately prior to the Effective Time
represented shares of CTC Massachusetts Common Stock and shares of Preferred
Stock shall be deemed for all purposes to evidence ownership of, and to
represent, shares of Surviving Parent Common Stock and Preferred Stock into
which the shares of CTC Massachusetts Common Stock and Preferred Stock formerly
represented by such certificates have been converted as provided in this
Agreement. The registered owner on the books and records of Surviving Parent or
its transfer agent of any outstanding stock certificate shall, until such
certificate shall have been surrendered for transfer or otherwise accounted for
to Surviving Parent or its transfer agents, have and be entitled to exercise any
voting and other rights with respect to, and to receive any dividends and other
distributions upon, the shares of CTC Massachusetts Common Stock and Preferred
Stock evidenced by such outstanding certificates as provided above.
-3-
<PAGE>
3.3 Stock Options. Each right or option to purchase shares of CTC
Massachusetts Common Stock granted under the 1993 Employee Stock Option Plan,
the 1996 Employee Stock Option Plan, the Employee Stock Purchase Plan, the
Employee Stock Benefit Plan and the 401(k) Savings Plan, and, upon approval of
the stockholders of CTC Massachusetts, the 1998 Incentive Plan,(collectively,
the "Plans"), and all other rights, options and warrants to purchase CTC
Massachusetts Common Stock which is outstanding immediately prior to the
Effective Time, shall by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and become an option, right and warrant
to purchase the same number of shares of Surviving Parent Common Stock at the
same price per share, and upon the same terms and subject to the same conditions
as in effect at the Effective Time. The same number of shares of Delaware Common
Stock shall be reserved for purposes of said Plans and upon exercise of such
rights, options and warrants as is equal to the number of shares of CTC
Massachusetts Common Stock so reserved as of the Effective Time. As of the
Effective Time, Surviving Parent hereby assumes the Plans and all obligations of
CTC Massachusetts under the Plans including the outstanding options or awards or
portions thereof granted pursuant to the Plans and assumes all obligations of
CTC Massachusetts under all other options, rights and warrants.
3.4 Validity of Surviving Parent Common Stock and Preferred Stock. All
shares of Surviving Parent Common Stock and Preferred Stock into which CTC
Massachusetts Common Stock and Preferred are to be converted pursuant to the
Merger shall not be subject to any statutory or contractual preemptive rights,
shall be validly issued, fully paid and nonassessable and shall be issued in
full satisfaction of all rights pertaining to such CTC Massachusetts Common
Stock and Preferred Stock.
3.5 Rights of Former Holders. From and after the Effective Time, no holder
of certificates which evidenced CTC Massachusetts Common Stock and Preferred
Stock immediately prior to the Effective Time shall have any rights with respect
to the shares formerly evidenced by those certificates, other than to receive
the shares of Surviving Parent Common Stock and Preferred Stock into which such
CTC Massachusetts Common Stock and Preferred Stock shall have been converted
pursuant to the Merger.
ARTICLE IV
GENERAL
4.1 Consents. Each of the parties hereto shall use its best efforts to
obtain the consent and approval of each person whose consent or approval shall
be required in order to permit consummation of the Merger.
4.2 Governmental Authorizations. Each of the parties shall cooperate in
filing any necessary reports or other documents with any federal, state, local
or foreign authorities having jurisdiction with respect to the Merger.
4.3 Waiver and Amendment. This Agreement may be amended by action of the
Board of Directors of each party hereto without any action by the stockholders
of the parties, except that (a) any amendment to Section 3.1, (b) any amendment
changing the terms, rights, powers or preferences of the Surviving Parent Common
Stock or Preferred Stock, or (c) any amendment altering any terms of this
Agreement if such alteration would adversely affect the holders of CTC
Massachusetts Common Stock or Preferred Stock, or Surviving Parent Common Stock
or Preferred Stock, must be approved by a majority of the voting power of the
outstanding CTC Massachusetts Common Stock and Preferred Stock.
4.4 Termination. This Agreement may be terminated and the Merger and other
transactions provided for by this Agreement abandoned at any time prior to the
Effective Time, whether before or after adoption and approval of this Agreement
at the Shareholders' Meeting, by action of the Board of Directors of CTC
Massachusetts if the Board determines that the consummation of the transactions
contemplated by this Agreement would not, for any reason, be in the best
interests of Delaware Subsidiary and its shareholders.
-4-
<PAGE>
4.5 Entire Agreement. This Agreement (including any exhibits), contains
the entire agreement among the parties with respect to the Merger and supersedes
all prior and concurrent arrangements, letters of intent or understandings
relating to the Merger.
4.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which when taken
together shall constitute one and the same agreement. This Agreement shall
become effective when one or more counterparts has been signed by each of the
parties and delivered to each of the other parties.
4.7 Headings. The article, section and paragraph headings in this
Agreement have been inserted for identification and reference and shall not by
themselves determine the meaning or interpretation of any provision of this
Agreement.
4.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and, so far as applicable, the
merger provisions of the Massachusetts General Corporation Law.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
CTC COMMUNICATIONS CORP.,
a Massachusetts corporation
____________________________
By:
Title:
CTC COMMUNICATIONS GROUP, INC.
a Delaware corporation
____________________________
By:
Title:
CTC-NEWCO, INC.
a Delaware corporation
____________________________
By:
Title:
-5-
<PAGE>
EXHIBIT 5.1
[ROPES & GRAY LETTERHEAD]
July __, 1999
CTC Communications Corp.
220 Bear Hill Road
Waltham, MA 02451
Re: CTC Communications Corp
-----------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form S-1 (the "Registration Statement"), filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, for the
registration of up to 4,025,000 shares of Common Stock, $.01 par value (the
"Shares"), of CTC Communications Corp., a Massachusetts corporation (the
"Company"). The Shares are to be sold pursuant to an underwriting agreement (the
"Underwriting Agreement") to be entered into among the Company, the selling
stockholders named therein and Lehman Brothers, Inc. and Credit Suisse First
Boston as representatives of the underwriters named therein.
We have acted as counsel for the Company in connection with the issue and
sale by the Company and the selling stockholders of the Shares. For purposes of
this opinion, we have examined and relied upon such documents, records,
certificates and other instruments as we have deemed necessary.
We express no opinion as to the applicability of, compliance with or effect
of Federal law or the law of any jurisdiction other than the Commonwealth of
Massachusetts.
Based on the foregoing, we are of the opinion that (i) the Shares have been
duly authorized; (ii) the Shares to be received by the selling stockholders upon
exercise of warrants, when issued upon exercise of such warrants in accordance
with their terms, will be validly issued, fully paid and nonassessable; and
(iii) when issued and sold by the Company in accordance with the terms of the
Underwriting Agreement, the Shares being sold by the Company will be validly
issued, fully paid and nonassessable.
<PAGE>
CTC Communications Corp. -2- July __, 1999
We hereby consent to your filing this opinion as an exhibit to the
Registration Statement and to the use of our name therein and in the related
prospectus under the caption "Legal Matters".
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
Ropes & Gray
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated May 19, 1999,
except for Note 7, as to which the date is June 30, 1999, included in Amendment
No. 2 to the Registration Statement (Form S-1) and related Prospectus of CTC
Communications Corp. for the registration of 3,500,000 shares of its Common
Stock.
Our audits also included the financial statement schedule listed in Part II.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Boston, Massachusetts
July 11, 1999
