<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 3)
Filed by Registrant [X]
Filed by a Party other than Registrant [ ]
Check the Appropriate Box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CTC COMMUNICATIONS CORP.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the Appropriate Box):
[X] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined)
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing:
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
Copies of all communications to:
Leonard R. Glass, Esq. Mary E. Weber, Esq.
Law Offices of Leonard R. Glass, P.A. Ropes & Gray
45 Central Ave, P.O. Box 579 One International Place
Tenafly, New Jersey 07670-0579 Boston, MA 02110
(201) 894-9300
<PAGE>
Subject to Completion; Preliminary Prospectus Dated ______________, 1999
CTC Communications Corp.
Proxy Statement/Prospectus
Dear Stockholder:
We are calling a special meeting of stockholders of CTC Communications to be
held on ___________, 1999 at 9:30 a.m., local time, at 220 Bear Hill Road,
Waltham, Massachusetts 02451-1104.
At the special meeting, holders of record of CTC Communications' common stock
and Series A convertible preferred stock, voting together as a single class, and
the holders of the Series A convertible preferred stock, voting separately, will
consider and vote upon a proposal to:
. Approve a plan of merger and reorganization which would have the following
effects:
. CTC Communications will become a wholly-owned subsidiary of CTC
Communications Group, Inc., a Delaware corporation, and continue to
conduct the business it currently conducts.
. The assets, liabilities and operations of CTC Group on a consolidated
basis will be the same as the assets, liabilities and operations of
CTC Communications on a consolidated basis.
. Shares of capital stock of CTC Communications will automatically convert
into the same number of shares of similar shares of capital stock of
CTC Group.
While you are, of course, welcome to join us at this special meeting, we
understand that this may not be possible. It is important that your shares be
represented and voted at the meeting whether or not you plan to attend. If
enough stockholders do not return their proxies, the company may have to incur
the expense of follow-up solicitations. Please take a moment to sign, date and
promptly mail your proxy in the enclosed prepaid envelope. This will not limit
your right to vote in person should you decide to attend the meeting.
This document also constitutes the prospectus of CTC Communications Group, Inc.
for the offering to you of the CTC Group common stock and Series A convertible
preferred stock to be issued in the reorganization.
On behalf of your board of directors, thank you for your continued support.
Sincerely,
Robert J. Fabbricatore
Chairman and Chief Executive Officer
_____________
The reorganization involves elements of risk. See "Risk Factors" on pages 7-15.
_____________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
document is truthful or complete. Any representation to the contrary is a
criminal offense.
______________
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<PAGE>
The last sale price of CTC Communications common stock on the Nasdaq National
Market on June 23, 1999 was $15.25 per share.
CTC Group's common stock will be listed on the Nasdaq National Market under the
symbol "CPTL" following the consummation of the reorganization.
_______________
The date of this document is ____________,1999.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Where You Can Find More Information................................................... 1
Notice of Special Meeting of Stockholders............................................. 2
Summary
Questions and Answers............................................................ 3
The Proposed Reorganization...................................................... 3
Our Business..................................................................... 5
Summary Financial and Operating Data............................................. 6
Risk Factors.......................................................................... 7
Risks Relating to the Reorganization............................................. 7
If our stockholders exercise appraisal rights or if we do not
consummate the reorganization, we could default under our
credit facilities and be unable to pay those debts............................... 7
Risks Relating to an Investment in our Stock..................................... 7
Because our revenues prior to January 1998 resulted from a
business strategy we are no longer pursuing, you may have
difficulty evaluating us......................................................... 7
If we do not successfully execute our new business strategy,
we may be unable to compete effectively.......................................... 7
Our incurrence of negative cash flows and operating losses
during the next several years may adversely affect the
price of our common stock........................................................ 7
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..................................... 7
If we do not obtain interconnection agreements with other carriers,
we will be unable to provide enhanced services on our network.................... 7
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................................ 7
Our high leverage creates financial and operating risk that
could limit the growth of our business........................................... 7
We will need to refinance our existing indebtedness when due,
and we may be unable to do so.................................................... 7
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................................... 7
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............................. 7
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...................... 7
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........... 7
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.................... 7
Increases in customer attrition rates could adversely affect our
operating results................................................................ 7
We may be unable to effectively manage our growth, which could materially
adversely affect all aspects of our business..................................... 7
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...................................................................... 7
Changes to the regulations applicable to our business could increase
our costs and limit our operations............................................... 10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.................. 11
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..................................................... 11
We may pursue acquisitions which would could disrupt our business and
may not yield the benefits we expect............................................. 11
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................ 11
Fluctuations in our operating results could adversely affect
the price of our common stock.................................................... 11
Our stock price is likely to be volatile......................................... 13
The market price of our common stock could be depressed by the substantial
number of our shares that are eligible for future sale........................... 14
We have anti-takeover defenses that could delay or prevent an acquisition
and could adversely affect the price of our common stock......................... 14
The forward looking statements we make in this document are
inherently uncertain............................................................. 14
Information about Special Meeting...................................................... 14
Security Ownership of Certain Beneficial Owners........................................ 15
Appraisal Rights of Dissenting CTC Communications Stockholders......................... 17
The Reorganization..................................................................... 17
Proposed Reorganization................................................................ 17
Reasons for the Reorganization......................................................... 18
Reorganization Procedure............................................................... 19
Capitalization of the Delaware Holding Company......................................... 19
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Significant Changes Caused by the Reorganization....................................... 23
Disadvantages of Reincorporation in Delaware........................................... 34
Selected Financial Data................................................................ 35
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 37
Business of the Company................................................................ 43
Management............................................................................. 55
Description of Senior Secured Facilities............................................... 61
Federal Income Tax Consequences........................................................ 64
Securities Act Consequences............................................................ 65
Transfer Agent and Registrar........................................................... 65
Independent Auditors................................................................... 65
Legal Matters.......................................................................... 66
Expense of Solicitation................................................................ 66
Stockholders' Proposals................................................................ 66
Other Matters That May Come Before the Meeting......................................... 66
</TABLE>
<PAGE>
Where You Can Find More Information
This document is part of a registration statement on Form S-4 filed with
the Securities and Exchange Commission, or the SEC, covering the shares of
capital stock that CTC Group will issue in the reorganization. The document also
is the proxy statement of CTC Communications for the special meeting.
This document does not contain all of the information, exhibits and
undertakings contained in the registration statement. We will provide you
without charge, upon your written or oral request, a copy of any documents
contained in such registrations statement, but not exhibits filed with theses
documents unless those exhibits are specifically referred to in this document.
Please direct your requests for such documents to John D. Pittenger, CTC
Communications, Inc. , 220 Bear Hill Road, Waltham, Massachusetts 02451-1104
(telephone 781-466-8080). We will deliver such documents by first class mail or
other equally prompt means. To ensure delivery of these documents before the
special meeting, you should make requests for such documents no later than
_________, 1999.
CTC Communications is subject to the information reporting requirements of
the Exchange Act of 1934. Following the reorganization CTC Group will be subject
to those requirements. Under the Exchange Act, reporting companies file
reports, proxy statements and other information with the SEC. You may inspect
and copy such reports, proxy statements and other information at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048, and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. You may also obtain copies of such material by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC also maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC on the Internet at
http://www.sec.gov. CTC Communications common stock is listed on the Nasdaq
National Market, and therefore you can also inspect such reports, proxy
statements and other information at the offices of The Nasdaq Stock Market, 1735
K Street, N.W., Washington, D.C. 20006.
You should rely only on the information contained or referred to in this
document or any supplement. CTC Communications has not authorized anyone else
to provide you with different or additional information.
<PAGE>
CTC Communications Corp.
220 Bear Hill Road
Waltham, Massachusetts 02451
(781) 466-8080
Notice of Special Meeting of Stockholders
To the Stockholders of CTC Communications Corp.
A special meeting of stockholders of CTC Communications Corp. will be held at
the offices of the company, 220 Bear Hill Road, Waltham, Massachusetts 02451 on
_________, 1999 at 9:30 a.m. to vote on:
. A proposal to approve an agreement and plan of reorganization providing for
the conversion of shares of common stock and Series A convertible preferred
stock of CTC Communications into an equal number of shares of common stock
and Series A convertible preferred stock of CTC Communications Group, Inc.,
a company organized under Delaware law by CTC Communications to be a
holding company of CTC Communications.
. Any other business that may lawfully come before the meeting or any
adjournment.
The proposal to approve the agreement and plan of reorganization must be
approved by:
. the affirmative vote of two-thirds of the voting power of the shares of CTC
Communications common stock and Series A preferred stock entitled to vote,
voting together as a single class; and
. the affirmative vote of two-thirds of the shares of CTC Communications
Series A convertible preferred stock entitled to vote, voting separately.
We describe the reorganization more fully in the attached document. Appendix A
to the attached document is a copy of the agreement and plan of reorganization.
________, 1999 is the record date for this meeting. Accordingly, only
stockholders of record on that date will be entitled to vote at the meeting.
Please sign the enclosed proxy and return it in the enclosed postage-paid
envelope as soon as possible. If you decide to attend the meeting in person, you
can withdraw your proxy and vote at that time.
The board of directors has determined that the reorganization is in the best
interests of the stockholders and unanimously recommends that stockholders vote
"FOR" the reorganization at the special meeting.
By Order of the Board of Directors
Robert J. Fabbricatore, Chairman
___________, 1999
Mailed at Boston, Massachusetts
Please promptly date, sign and mail the enclosed proxy, a postage-paid envelope
-------------------
is provided for mailing in the United States. If stockholders don't
return the proxies in sufficient numbers, we will have to incur the expense of
follow-up solicitations. If any other business is brought before the meeting,
your shares will be voted at the board's discretion.
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<PAGE>
Summary
Questions and Answers
The following questions and answers are designed to help you understand the
reorganization proposal and the proxy voting process. These questions and
answers and the rest of the summary only highlights information in this
document. You should carefully read this entire document and the attached
appendices.
The Proposed Reorganization
What are you proposing?
We are asking you to approve an agreement and plan of reorganization that would
result in our reorganization into a holding company structure. Under the plan,
CTC Communications, a Massachusetts corporation, will become a wholly-owned
subsidiary of CTC Communications Group, Inc., a Delaware corporation.
Why are you forming a Delaware holding company?
We are forming a holding company:
. to comply with the terms of our loan and security agreement with Goldman
Sachs Partners and Fleet National Bank;
. to take advantage of the benefits of Delaware corporate law; and
. to enable us to issue debt at different corporate levels.
What will happen to my stock?
In the reorganization, your shares of common stock and Series A convertible
preferred stock of CTC Communications will automatically convert into the same
number of shares of common stock and Series A convertible preferred stock of CTC
Group. The CTC Group common stock will be listed on the Nasdaq National Market
under the symbol "CPTL."
Will I have to turn in my stock certificates?
No. Do not turn in your stock certificates. We will not require you to
exchange your stock certificates as a result of the reorganization. After the
reorganization, your CTC Communications stock certificates will represent the
same number of shares of CTC Group capital stock.
Does formation of a holding company affect my federal income taxes?
The proposed reorganization will be a tax-free reorganization under federal tax
laws. You will not recognize any gain or loss for federal income tax purposes
upon your receipt of CTC Group stock in exchange for your shares of CTC
Communications stock. You should consult your own tax advisors concerning the
specific tax consequences of the reorganization to you, including any foreign,
state, or local tax consequences of the reorganization. For further information,
see "Federal Income Tax Consequences."
Will the management of the company change after the reorganization?
The management of CTC Communications will not change as a result of the
reorganization. The entire board of directors and several of the current
principal executive officers of CTC Communications will also serve as the board
of directors and as executive officers of CTC Group upon completion of the
reorganization.
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<PAGE>
If the stockholders approve the reorganization, when will it occur?
We would like to complete the reorganization as soon as possible after the
special meeting. In order to complete the reorganization, CTC Communications
must first obtain the approval of state regulatory agencies in states in which
it operates. We plan to complete the reorganization immediately after obtaining
stockholder approval, unless these approvals have not been obtained at that
time.
The board of directors of CTC Communications recommends that the stockholders
vote for approval of the reorganization.
Who can vote on the reorganization proposal?
Any holder of record of CTC Communications common stock or Series A convertible
preferred stock at the close of business on ________, 1999 will be entitled to
vote on the proposal at the special meeting.
What percentage of the outstanding shares do directors and executive officers
hold?
Directors, executive officers and their affiliates own:
. 46% of the combined voting power of the outstanding common stock and the
Series A convertible preferred stock; and
. 98.6% of the outstanding Series A convertible preferred stock.
Robert J. Fabbricatore and Spectrum Equity Investors II, L.P. have indicated
their intention to vote in favor of the proposal.
How will the reorganization be treated for accounting purposes?
In accordance with generally accepted accounting principles, we will use the
historical cost basis of the assets and liabilities of CTC Communications and
CTC Group to account for the reorganization. Because CTC Group has only nominal
assets and liabilities, the combination will effectively represent the
historical basis of the assets and liabilities of CTC Communications and the
capital structure of CTC Group.
How do I vote? What do I need to do now?
After carefully reading and considering the information contained in this
document, please fill out and sign the enclosed proxy card. Then mail your
signed proxy card in the enclosed prepaid return envelope as soon as possible so
that your shares will be represented at the special meeting. Your proxy card
will instruct the persons named on the card to vote your shares at the special
meeting as you direct on the card. If you do not vote or if you abstain on the
proposal, the effect will be a vote against the proposal. The Board of
Directors recommends that you vote for approval of the reorganization.
May I change my vote after I have mailed my signed proxy card?
You may change your vote at any time before your shares are voted at the special
meeting by:
. notifying the Clerk of the company in writing;
. voting in person at the meeting; or
. returning a later-dated proxy card.
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<PAGE>
If you choose either of the first two methods, you must submit your notice of
revocation or your new proxy card to the attention of the Clerk at CTC
Communications Corp., 220 Bear Hill Road, Waltham, Massachusetts 02451.
If my shares are held in street name by my broker, will my broker vote my
shares for me?
Your broker will vote your shares only if you provide your broker with
instructions. If you fail to instruct your broker, your shares will not be
voted. Shares that are not voted will have the effect of being voted against
the proposal.
What rights will I have under Massachusetts law if I vote against the plan of
reorganization?
If you vote against the agreement and plan of reorganization and comply with the
statutory requirements of Massachusetts law, you will be entitled to receive
payment of the fair value of your shares if the reorganization is completed. A
copy of the applicable Massachusetts law is attached to this document as
Appendix D. For more information see "Appraisal Rights of Dissenting CTC
Communications Stockholders."
Our credit facilities prohibit us from making payments to stockholders who
exercise their appraisal rights and demand payment for their stock. If any
stockholders remain entitled to make this demand after the special meeting, we
may ask our lenders to waive their requirement that we consummate the
reorganization and abandon the reorganization or ask our lenders to permit us to
make any required payments to stockholders. We do not know whether they would
grant either of those requests.
Our Business
We are a rapidly growing single-source provider of voice and data
telecommunications services, or integrated communications provider. 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 are currently
deploying our own state-of-the-art network facilities to carry
telecommunications traffic. 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.
Financial Statements
We have not included complete pro forma and comparative financial
information concerning the company that gives effect to the reorganization
because, immediately following the effective time of the reorganization, the
consolidated financial statements of CTC Group will be substantially the same as
CTC Communications' financial statements immediately prior to the
reorganization. Prior to the closing of the reorganization, CTC Group will not
have commenced operations and will have no material assets or liabilities.
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<PAGE>
Summary Financial and Operating Data
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus.
<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 30,074 51,935
Depreciation and amortization.................... 743 1,418 5,122
Income (loss) from operations.................... 7,761 (4,583) (47,960)
Net income (loss)................................ 4,683 (2,884) (51,996)
Other Financial Data
EBITDA (loss).................................... $8,519 $(2,992) $(42,760)
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 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
---------------------------
(dollars in thousands)
<S> <C>
Balance Sheet Data
Cash and cash equivalents .................................. $ 2,254
Total assets ............................................... 68,337
Total long-term debt, including current portion ............ 64,858
Series A redeemable convertible preferred stock ............ 12,672
Stockholders' equity (deficit) ............................. (38,289)
</TABLE>
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<PAGE>
Risk Factors
You should carefully consider all information in this document, especially
the risk factors below, in determining how to vote on the proposal. The risk
factors apply to the business and operations of CTC Communications and will
apply equally to CTC Group after the reorganization because CTC Group's primary
asset will be its ownership of the equity of CTC Communications.
Risk Relating to the Reorganization
If our stockholders exercise appraisal rights or if we do not consummate
the reorganization, we would default under our credit facilities and be unable
to pay those debts.
Stockholders of CTC Communications have appraisal rights under
Massachusetts law described in this document. This would include both existing
stockholders and new stockholders resulting from our proposed public offering of
common stock. If any of our stockholders exercise their appraisal rights, CTC
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 did 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
happened, 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.
Risks Relating to an Investment in our Stock
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.
If we do not successfully execute our new business strategy, we may be unable to
compete effectively.
Our business strategy is complex and requires that we successfully
complete many tasks, a number of which we must complete simultaneously. If we
are unable to effectively implement or coordinate the implementation of these
multiple tasks, we may be unable to compete effectively in our markets and our
financial results may suffer.
Our incurrence of negative cash flows and operating losses during the next
several years may adversely affect the price of our common stock.
During recent periods we have experienced substantial net losses,
operating losses and negative cash flow. Our expenses have increased
significantly, and we expect our expenses to continue to increase as we deploy
our network and implement our business plan. Accordingly, we expect to incur
significant operating losses,
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<PAGE>
net losses and negative cash flow during the next several years, which may
adversely affect the price of our common stock.
If our network does not function properly, we will be unable to provide
the telecommunications services on which our future performance will in large
part depend.
Because the design of our network has not been widely deployed, we
cannot assure you that our network will provide the functionality that we
expect. We also cannot be sure that we will be able to incorporate local dial
tone capabilities into our network because this technology has not been widely
implemented. Without this capability we will not be able to provide on our
network all of our target customers' fixed line telecommunications
services.
If we do not obtain interconnection agreements with other carriers, we
will be unable to provide enhanced services on our network.
Negotiation of interconnection agreements with incumbent local exchange
carriers can take considerable time, effort and expense, and these agreements
are subject to federal, state and local regulation. We may not be able to
effectively negotiate the necessary interconnection agreements. Without these
interconnection agreements, we will be unable to provide enhanced connectivity
to our network and local dial tone services and to achieve the financial results
we expect.
Because of our limited experience, we may not be able to properly or
timely deploy, operate and maintain our network, which could materially adversly
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;
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<PAGE>
. 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
plan to satisfy part of this need by a public offering of common stock in the
near future and by additional financing 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.
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.
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<PAGE>
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.
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 legislation in federal and state legislatures may increase our costs,
increase competition and limit our operations.
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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 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.
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Our existing principal stockholders, executive officers and directors control a
substantial amount of our voting shares and will be able to significantly
influence any matter requiring shareholder approval.
Our officers and directors and parties related to them now control
approximately 46% of the voting power of our outstanding capital stock. Robert
J. Fabbricatore, our Chairman and Chief Executive Officer, controls
approximately 26% 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.
Fluctuations in our operating results could adversely affect the price of our
common stock.
Our annual and quarterly revenue and results could fluctuate as a result of
a number of factors, including:
. variations in the rate of timing of customer orders,
. variations in our provisioning of new customer services,
. the speed at which we expand our network and market presence,
. the rate at which customers cancel services, or churn,
. costs of third party services purchased by us, and
. competitive factors, including pricing and demand for competing services.
Also, our revenue and results may not meet the expectations of securities
analysts and our stockholders. As a result of such fluctuations or such 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
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<PAGE>
. 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 the 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 CTC 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 CTC Group even if a change in control would be
beneficial to our stockholders. These provisions may negatively affect the price
of our common stock and may discourage third parties from bidding for CTC Group.
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, but are
not limited to, statements about our plans, objectives, expectations, intentions
and assumptions and other statements in 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.
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Information about Special Meeting
Time and Place of Meeting
We have furnished this document to you to solicit your proxy for use at the
special meeting of stockholders to be held on __________, 1999 at 9:30 a.m., and
at all adjournments thereof.
We will hold the meeting at the principal executive offices of CTC
Communications, located at 220 Bear Hill Road, Waltham, Massachusetts 02451
(781-466-8080).
At the meeting, we will vote all proxies received in time and not revoked
in accordance with the instructions indicated on the proxies. If no
instructions are indicated on a properly executed proxy, the shares represented
by that proxy will be voted to approve the proposed reorganization. You may
revoke your proxy at any time before your shares are voted by filing a later
dated proxy with CTC Communications, by attending the meeting and voting in
person, or by notifying CTC Communications of the revocation in a later dated
writing to its Clerk at 220 Bear Hill Road, Waltham, MA 02451.
Voting Rights and Vote Required
The close of business on _________, 1999 is the record date for the special
meeting. As of the record date, _________, 1999, CTC Communications had
__________ shares of common stock and ________ shares of Series A convertible
preferred stock outstanding and entitled to vote. Each outstanding share of
common stock entitles the record holder to one vote. As of the record date, each
holder of Series A convertible preferred stock is entitled to ___votes per
share.
The holders of a majority interest of common stock and Series A convertible
preferred stock outstanding and entitled to vote at the meeting must be present,
in person or by proxy for a quorum for the meeting. In the absence of a quorum,
the special meeting may be adjourned from time to time until the necessary
stockholders are present.
The reorganization will be consummated only if approved by both:
. Two-thirds or more of the voting power of the CTC Communications' common
stock and Series A convertible preferred stock entitled to vote, voting
together as a single class; and
. Two-thirds or more of the shares of the CTC Communications' Series A
convertible preferred stock entitled to vote, voting separately.
Votes cast by proxy or in person at the special meeting will be counted by
persons appointed by us who will act as election inspectors for the meeting. The
election inspectors will count the total number of votes cast "for" the approval
of the reorganization for purposes of determining whether sufficient affirmative
votes have been cast. The election inspectors will count shares that reflect
abstentions and "broker non-votes" as shares that are present and entitled to
vote on the matter for purposes of determining the presence of a quorum.
Abstentions and broker non-votes have the effect of votes cast against the
reorganization proposal. "Broker non-votes" are shares represented at the
meeting held by brokers or nominees as to which instructions have not been
received from the beneficial owners or persons entitled to vote and the broker
or nominee does not have the discretionary voting power on a particular
matter.
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<PAGE>
Security Ownership of Certain Beneficial Owners
Common Stock
The following table sets forth information as of June 17, 1999 with respect
to the beneficial ownership of CTC Communications common stock by:
. each person known by us to beneficially own more than 5% of the outstanding
shares of our common stock;
. our directors and our Named Executive Officers; and
. all executive officers and directors as a group.
Based on the information furnished by the beneficial owners of the common stock
listed below, we believe that each such stockholder exercises sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Name Number Percent
- ---- --------- --------
<S> <C> <C>
Robert J. Fabbricatore(1) 2,830,870 27.0%
Spectrum Equity Investors II, L.P.(2) 1,646,902 13.7%
Kevin J. Maroni(2)(3) 1,646,902 13.7%
Robert A. Nicholson(2)(4) 1,652,994 13.7%
Goldman, Sachs & Co. (5) 662,600 6.0%
Henry Hermann(6) 225,755 2.2%
Richard J. Santagati(7) 96,000 *
Carl Redfield(8) 24,000 *
J. Richard Murphy(9) 25,167 *
Ralph C. Sillari(10) 6,334 *
Katherine Dietze Courage (11) 10,000 *
Steven P. Milton(12) 489,432 4.7%
David E. Mahan(13) 187,100 1.8%
John D. Pittenger(14) 263,588 2.5%
Steven C. Jones(15) 237,500 2.2%
Ralph S. Troupe(16) 6,250 *
All directors and executive
officers as a group (13 persons)(17) 6,378,536 53.4%
- ---------------
</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 June 17, 1999. Mr. Fabbricatore's address is
c/o CTC Communications Corp., 220 Bear Hill Road, Waltham, Massachusetts
02451.
(2) Includes 187,066 shares issuable upon the exercise of warrants exercisable
within 60 days of June 17, 1999 and 1,480,063 shares issuable upon
conversion of Series A convertible preferred stock as of June 17, 1999. As
partners of Spectrum Equity Investors II, L.P., Mr. Maroni, Mr. Nicholson,
Mr. 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.
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<PAGE>
(3) Includes 5,000 shares issuable to Mr. Maroni upon the exercise of options
exercisable within 60 days of June 17, 1999. The address of Spectrum and
its partners is One International Place, 29th Floor, Boston, Massachusetts
02110.
(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 June 17, 1999, and 926 shares issuable upon conversion of Series
A Preferred Stock as of June 17, 1999. The address of Spectrum and its
partners is One International Place, 29th Floor, Boston, Massachusetts
02110.
(5) Includes 662,600 shares issuable upon exercise of a warrant exercisable
within 60 days of June 17, 1999. The address of Goldman, Sachs & Co. is 85
Broad St., New York, NY 10004.
(6) Includes 9,750 shares held by Mr. Hermann's spouse and 20,167 shares
issuable upon the exercise of options exercisable within 60 days of June
17, 1999.
(7) Includes 21,000 shares issuable to Mr. Santagati upon the exercise of
options exercisable within 60 days of June 17, 1999.
(8) Includes 10,000 shares issuable to Mr. Redfield upon the exercise of
options exercisable within 60 days of June 17, 1999.
(9) Includes 24,167 shares issuable to Mr. Murphy upon the exercise of options
exercisable within 60 days of June 17, 1999.
(10) Includes 5,834 shares issuable to Mr. Sillari upon the exercise of options
exercisable within 60 days of June 17, 1999.
(11) Includes 10,000 shares issuable to Ms. Courage upon the exercise of options
exercisable within 60 days of June 17, 1999.
(12) 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 June 17, 1999.
(13) Includes 120,000 shares issuable to Mr. Mahan upon the exercise of options
exercisable within 60 days of June 17, 1999.
(14) Includes 65,000 shares issuable to Mr. Pittenger upon the exercise of
options exercisable within 60 days of June 17, 1999.
(15) Includes 187,500 shares issuable to Mr. Jones upon the exercise of options
exercisable within 60 days of June 17, 1999.
(16) Includes 6,250 shares issuable to Mr. Troupe upon the exercise of options
exercisable within 60 days of June 17, 1999.
(17) Includes the shares described in footnotes (1) through (4), (6) through
(14) and (16) above.
Preferred Stock
As of June 17, 1999, Spectrum owned 657,555, or 98.6%, of the outstanding
Series A convertible preferred stock of CTC Communications.
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Appraisal Rights of Dissenting CTC Communications Stockholders
The following is a summary of the rights of dissenting stockholders under
Massachusetts law. Appendix D is a copy of these rights as set forth in
Sections 86 through 98 of Chapter 156B of the General Laws of Massachusetts.
Dissenter's rights entitle shareholders to demand payment for their shares
instead of participating in the reorganization.
In accordance with Section 87 of Chapter 156B of the General Laws of
Massachusetts, we advise you: if the action proposed is approved by the
stockholders at the meeting and effected by the corporation, any stockholder (1)
who files with the corporation before the taking of the vote on the approval of
such action, written objection to the proposed action stating that he intends to
demand payment for his shares if the action is taken and (2) whose shares are
not voted in favor of such action has or may have the right to demand in writing
from CTC Communications, within twenty days after the date of mailing to him of
notice in writing that the corporate action has become effective, payment for
his shares and an appraisal of the value thereof. Such corporation and any such
stockholder shall in such cases have the rights and duties and shall follow the
procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of Massachusetts.
If you have made your demand for appraisal rights in a timely manner, we
will be required to pay you the fair market value of your shares within 30 days
after the expiration of the 20-day period referenced above. If during the 30-
day period we do not come to agreement as to the fair value of the shares,
either you or we may, within four months after the end of the 30-day period,
have the fair value of stock of all dissenting stockholders determined by
judicial proceedings by filing a bill in equity in the Superior Court in
Middlesex County, Massachusetts. For the purposes of the Superior Court's
determination, the value of the shares of CTC Communications would be determined
as of the date preceding the date of the vote of the stockholders approving the
proposal and would be exclusive of any element of value arising from the
expectation or accomplishment of the reorganization. Upon making written demand
for payment, you will no longer be entitled to notices of meetings of
stockholders, to vote, or to dividends unless no suit is filed within four
months to determine the value of the stock, any suit is dismissed as to you, or
you, with our written approval withdraw your objection in writing.
The enforcement of your appraisal rights as set forth in Sections 85
through 98 of Chapter 156B of the Massachusetts General Laws is an exclusive
remedy except for your right to bring a proceeding to obtain relief on the
ground that the merger will be or is illegal or fraudulent as to you.
The provisions of Sections 85 through 98 of Chapter 156B of the
Massachusetts General Laws are technical in nature and are complex. If you would
like to exercise your appraisal rights, you should consult legal counsel for
assistance since your failure to comply strictly with any of the provisions may
nullify your rights.
Our credit facilities would prohibit us from making payments to
stockholders who exercise their appraisal rights to demand payment for their
stock. See the section entitled "We may default under our credit facilities if
we pay money to stockholders that exercise appraisal rights or if we do not
consummate the reorganization" under "Risk Factors."
The Reorganization
Your approval of the reorganization will constitute approval of the
agreement and plan of reorganization, the certificate of incorporation of CTC
Group and the bylaws of CTC Group.
Proposed Reorganization
The board of directors of CTC Communications has approved the agreement and
plan of reorganization to permit the reorganization of the corporate structure
of CTC Communications and recommends
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<PAGE>
that the stockholders of CTC Communications also approve it. The reorganization
will result in CTC Communications becoming a wholly-owned Massachusetts
subsidiary of the Delaware holding company, CTC Group.
Reasons for the Reorganization
Requirement under our Credit Facility
In September 1998, CTC Communications entered into a $75 million loan and
security agreement with Goldman Sachs Partners L.P. and Fleet National Bank. In
this agreement, CTC Communications agreed to restructure the company as a
Delaware holding company. The lenders under this facility have extended the date
by which we must obtain stockholder approval until August 14, 1999. Following
the reorganization, CTC Group is required to pledge the shares of its
subsidiary, CTC Communications, to the lenders as collateral for the loan. If we
do not obtain stockholder approval of the reorganization before August 14, 1999,
we will be in default under this facility and the lenders could require us to
repay our loans.
Predictability, Flexibility and Responsiveness to Corporate Needs.
For many years, Delaware has followed a policy of encouraging incorporation
in that state and has adopted comprehensive, modern and flexible corporate laws
which are updated and revised to meet changing business needs. As a result of
this deliberate policy to provide a hospitable climate for corporate
development, many major corporations have chosen Delaware for their domicile.
In addition, the Delaware courts have developed considerable expertise in
dealing with corporate issues. A substantial body of case law has developed
construing Delaware corporations law and establishing specific legal principles
and policies regarding Delaware corporations. This provides greater legal
predictability with respect to the corporate legal affairs of Delaware
corporations than other jurisdictions such as Massachusetts, our current state
of incorporation. We believe that Delaware will continue its leadership
position in the development of corporate law in the United States, and that the
Delaware legislature will continue to ensure that Delaware corporate law is up
to date and flexible. We believe that as a result Delaware law will provide
greater efficiency, predictability and flexibility in our legal affairs than is
presently available under Massachusetts law.
Directors and Officers.
We believe that organizing a holding company under Delaware law will
enhance our ability to attract and retain qualified directors and officers. The
corporate law of Delaware offers directors and officers more certainty and
stability. Under Delaware law the parameters of director and officer liability
are more clearly defined and better understood than under Massachusetts law. To
date, we have not experienced difficulty in retaining directors or officers, but
directors of public companies are exposed to significant potential liability and
are paid relatively little. Thus, we believe that providing the benefits
afforded directors by Delaware law will enable us to compete more effectively
with other public companies in the recruitment of talented and experienced
directors and officers.
We believe Delaware law provides appropriate protection for stockholders
from possible abuses by directors and officers. Under Delaware law, directors'
personal liability cannot be eliminated for
. any breach of the director's duty of loyalty to the corporation or its
stockholders,
. acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law,
. unlawful payment of dividends or unlawful repurchases or redemptions of
stock, or
. any transactions from which the director derived an improper personal
benefit.
Takeover Response.
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<PAGE>
In general, Delaware case law provides a well developed body of law
defining the proper duties and decision making process expected of a board of
directors in evaluating potential and proposed corporate takeover offers and
business combinations. We believe that this will provide our directors with
better guidance if they are faced with a hostile takeover attempt.
Also, we may consider adopting measures designed to protect stockholder
interests in the event of a hostile takeover attempt. Such anti-takeover
measures have not been as fully tested in the Massachusetts courts as in the
Delaware courts. As a result, Delaware law affords greater certainty that any
such measures would be interpreted, sustained and applied in accordance with the
intentions of the board. We believe that such anti-takeover measures and
related Delaware law could help us to protect our corporate strategies, to
consider fully any proposed takeover and alternatives, and, if appropriate, to
negotiate terms that maximize the benefit to our stockholders.
Financing Flexibility.
In addition to the benefits that Delaware law affords, we believe that a
holding company structure will be beneficial to stockholders because it will
provide the Company with more flexibility in structuring financing arrangements.
For example, in a holding company structure, we could issue debt at the
operating company level that would be structurally senior to debt at the holding
company level. Many financial institutions prefer this structural subordination
over the subordination provided solely by contract.
Reorganization Procedure
The reorganization involves two steps. First, we incorporated two new
corporations in the state of Delaware. We organized CTC Communications Group,
Inc. as a holding company and CTC-Newco as its wholly-owned subsidiary. Neither
of these companies have any business. Pursuant to the plan of reorganization,
CTC-Newco will merge into CTC Communications. CTC Communications will survive
the merger as a wholly-owned Massachusetts subsidiary of CTC Communications
Group, Inc.
On the effective date of the reorganization, each outstanding share of
common stock and Series A convertible preferred stock of CTC Communications will
automatically convert into one share of common stock and one share of Series A
convertible preferred stock of CTC Group. Stockholders of CTC Communications
will automatically become stockholders of CTC Group. Assuming that no
stockholder exercises his or her appraisal rights, the same number of shares of
CTC Group will be outstanding immediately after the reorganization as there were
outstanding shares of CTC Communications immediately before. In addition, on
exercise of any outstanding option, warrant or right to acquire shares of common
stock of CTC Communications, the holders of those options, warrants or rights
will be entitled to receive an equal number of shares of common stock of CTC
Group, under the same terms as the original options, warrants or rights. All of
CTC Communications' employee benefit plans, including the 1993 Employee Stock
Option Plan, the 1996 Employee Stock Option Plan, the Employee Stock Purchase
Plan, the Employee Stock Benefit Plan, the 401(k) Savings Plan, and the 1998
Incentive Plan, will be adopted and continued by CTC Group following the
reorganization. Your approval of the proposed reorganization will constitute
approval of the adoption and assumption of those plans by CTC Group.
You do not need to take any action to exchange your stock certificates. Do
not turn in your stock certificates. Certificates for shares of CTC
Communications' stock will automatically represent an equal number of shares of
CTC Group stock upon completion of the reorganization.
Capitalization of the Delaware Holding Company
CTC Communications is authorized to issue up to 25,000,000 shares of common
stock, and up to 1,000,000 shares of preferred stock. 10,376,974 shares of
common stock and 666,666 shares of Series A convertible preferred stock are
outstanding as of June 17, 1999. In addition, options to purchase 3,615,809
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<PAGE>
shares of our common stock and warrants to purchase 1,288,071 shares of common
stock were outstanding on June 17, 1999.
CTC Group is authorized to issue up to 100,000,000 shares of common stock
and 10,000,000 shares of preferred stock. CTC Group's authorized capital is
significantly greater than that of CTC Communications.
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 Communications, 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.
Although we have no plans to approve future issuances of additional shares
of common stock of CTC Group other than in the proposed public offering or the
shares reserved for issuance upon exercise of stock options or warrants, we have
authorized a larger number of shares of common stock of CTC Group so that we
have shares available to provide us with additional business and financing
flexibility in the future. However, we do expect to increase the number of
shares issuable under our employee stock option plan and are considering
adopting a non-employee directors option plan. Each of these would be subject
to shareholders approval. The board may use the additional shares without
further stockholder approval to, among other things
. issue additional dividends in the form of stock splits,
. raise capital,
. provide equity incentives to employees, officers or directors,
. establish strategic relationships with other companies, and
. expand CTC Communications' business or product lines through the
acquisition of other businesses.
We could also use the additional shares of common stock to oppose a hostile
takeover attempt or delay or prevent changes in control of our management. For
example, without further stockholder approval, we could strategically sell
shares of common stock in a private transaction to purchasers who would oppose a
takeover or favor the current board. Although this proposal to increase the
authorized common stock has been prompted by business and financial
considerations and not by the threat of any hostile takeover attempt, you should
be aware that approval of this proposal could facilitate future efforts by CTC
Communications to deter or prevent changes in control, including transactions in
which you might otherwise receive a premium for your shares over then current
market prices.
Preferred Stock
Each share of our Series A convertible 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 convertible preferred
stock. The holders of a majority of the Series A preferred stock may elect to
cause us to redeem the Series A convertible preferred stock after April 9, 2003.
Upon any liquidation, dissolution or winding up of CTC Communications, holders
of the Series A convertible 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 convertible 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
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. 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 Communications, the Series A convertible preferred
stock will automatically convert into common stock if the liquidation
amount is less than the amount the holder of Series A convertible preferred
stock would have received had the holder converted to common stock.
The Series A convertible 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 convertible 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 convertible 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 convertible preferred stock can
be converted increases by an amount equal to the accrued dividend divided by
$9.00. The number of shares of common stock also adjusts on some issuances of
common stock, or securities convertible into or exercisable for common stock,
that would dilute the economic interest of the holders of the Series A
convertible preferred stock. Holders of the Series A convertible 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 convertible preferred stock plus the number of
warrants they hold that were issued with the convertible preferred stock;
and
. the number of shares of Series A convertible preferred stock they hold
multiplied by 2.476.
For example, on June 17, 1999, the aggregate accrued dividend on the Series
A convertible preferred stock was $1,320,523. Dividing this accrued dividend by
$9.00 equals 146,725, 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
Communications 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 1,480,057, plus the 133,333 warrants issued with
the Series A convertible preferred stock is 1,613,390. 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 June 17, 1999 is
1,613,396. 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.
The certificate of incorporation of CTC Group, like the existing articles
of organization of CTC Communications, will give the board the authority to
designate one or more additional series of preferred stock. Such provisions are
often referred to as "blank check" provisions, since they give the board the
flexibility, without further stockholder approval, to create one or more series
of preferred stock and to determine the designations, preferences and
limitations of each such series. For each series of preferred stock it
authorizes, the board will have the authority to determine, among other things:
. the number of shares,
. dividend rights,
. voting rights,
. conversion privileges,
. redemption provisions,
. sinking fund provisions,
. rights upon liquidation, dissolution or winding up of CTC Group and
. other relative rights, preferences and limitations of such series.
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If the board authorizes a series of preferred stock that provides for
dividends, the dividends may be cumulative and the designations of the series
may require that no dividends may be paid on the common stock until the
cumulative dividends are paid on the preferred stock. In addition, the board
may designate a series of preferred stock that in the event of any dissolution,
liquidation or winding up of CTC Group, entitles its holders to receive a
liquidation preference together with all accumulated and unpaid dividends, prior
to the distribution of any assets or funds to the holders of common stock.
Depending upon the consideration paid for preferred stock, the liquidation
preference of preferred stock and other matters, the issuance of preferred stock
could therefore result in a reduction in the assets available for distribution
to the holders of common stock in the event of liquidation of CTC Group. Holders
of common stock do not have any preemptive rights to acquire preferred stock or
any other securities of CTC Group.
Giving the board the authority to issue blank check preferred stock will
provide us with the flexibility to create a series of preferred stock customized
to meet the needs of any particular transaction or market condition. In
addition, we could use blank check preferred stock to frustrate attempts at
hostile takeover of the company by creating voting impediments. The issuance of
additional preferred stock at below market rates would dilute the value of the
outstanding securities of CTC Group and similarly hamper a takeover attempt. We
could also privately place such shares with friendly purchasers who might oppose
a hostile takeover bid. We do not currently have any plans, agreements,
commitments or understandings with respect to the issuance of additional shares
of preferred stock.
We believe that CTC Group should have available additional shares of
preferred stock for issuance by the board of directors of CTC Group in the
future, to the extent deemed advisable by the board.
Registration Rights
Under the terms of a registration rights agreement with the purchasers of
the Series A convertible 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 convertible preferred stock under
the Securities Act. Toronto Dominion, Relational Funding Corporation, Goldman
Sachs and Fleet also have registration rights under the terms of warrants we
issued to them.
The certificate of incorporation of CTC Group is attached to the agreement
and plan of reorganization. That agreement is attached to this document as
Appendix B. You should review Appendix B carefully.
Interests of the Company's Directors and Officers
You should be aware that reincorporation in Delaware may benefit our
directors by:
. reducing the directors' potential personal liability and increasing the
scope of permitted indemnification,
. strengthening the directors' ability to resist a takeover bid, and
. limiting the ability of stockholders to remove directors.
In considering the reorganization proposal, you should be aware that the
reorganization may make it more difficult for holders of a majority of the
outstanding shares of our common stock to replace directors or to remove
existing management. In particular, a proxy contest may become a less
effective means of removing or replacing existing directors and could make a
change in control that is opposed by the board more difficult. This could
result in a board which is less responsive to specific stockholder initiatives.
For a more complete discussion of the principal differences between
Massachusetts and Delaware law and the charters and bylaws of CTC Communications
and CTC Group as they affect stockholders, see "Significant Changes Caused by
the Reorganization."
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Significant Changes Caused by the Reorganization
In general, the corporate law of Massachusetts, CTC Communications' state
of incorporation, and the articles of organization and by-laws of CTC
Communications govern CTC Communications' corporate affairs at present. You can
inspect the Massachusetts articles and bylaws during business hours at the
principal executive offices of CTC Communications. In addition, you may obtain
copies by writing to CTC Communications Corp., 220 Bear Hill Road, Waltham,
Massachusetts, 02451, attention: John D. Pittenger, Executive Vice President -
Chief Financial Officer.
If the stockholders approve the plan of reorganization, you will become a
stockholder of a Delaware corporation. Following the reorganization, Delaware
law rather than Massachusetts law will determine issues of corporate governance
and control. The Massachusetts articles of organization and bylaws of CTC
Communications, will, in effect, be superseded by the Delaware certificate of
incorporation and bylaws of CTC Group. Accordingly, it is important for you to
understand the differences among these documents and between Delaware and
Massachusetts law in deciding whether to approve the reorganization.
There are a number of differences between Massachusetts and Delaware law
and among the various charter documents of CTC Communications and CTC Group. The
following discussion summarizes the more important differences between the
Massachusetts General laws Annotated, or the MGLA, and the Delaware General
Corporation Law, or the DGCL, and between the articles of incorporation and
bylaws of CTC Communications, or the Massachusetts articles and bylaws, and the
proposed certificate of incorporation and bylaws of CTC Group, or the Delaware
certificate and bylaws. We do not intend this summary to be a complete
discussion of all of the differences. You should refer to the actual terms of
CTC Communications' Articles of Organization and Bylaws and to CTC Group's
Certificate of Incorporation and Bylaws.
Special Meeting of Stockholders
The DGCL provides that only its directors or someone else specifically
authorized by the certificate of incorporation or bylaws may call special
meetings of stockholders. The Delaware bylaws provide that the Chairman of the
board of directors, the Chief Executive Officer or the President, or the CTC
Group board of directors may call a special meeting at anytime. If the
reorganization is approved stockholders will not be able to call a special
meeting.
Under the MGLA, unless otherwise provided in the articles of organization
or bylaws, the Clerk of a public corporation must call special meetings of
stockholders upon written application by stockholders who hold at least 40% of
the capital stock entitled to vote. The Massachusetts bylaws provide that the
President or the board of directors of CTC Communications may call special
meetings of stockholders. In addition the Clerk or any other officer must call
a special meeting of stockholders upon written application of stockholders who
hold at least 40% of the capital stock entitled to vote.
Voting Requirements and Quorums for Stockholder Meetings
Under the DGCL, a majority of stock entitled to vote at any meeting of
stockholders constitutes a quorum for the transaction of business at the
meeting, unless the certificate of incorporation or bylaws specify a different
percentage. The certificate of incorporation and bylaws, however, may not
provide that a quorum consist of less than one-third of the shares entitled to
vote at the meeting. Unless the DGCL, the certificate of incorporation or the
bylaws specify a different voting requirement under the DGCL, the stockholders
can approve a proposal if a majority of shares present in person or represented
by proxy at meeting at which a quorum is present vote "for" the proposal.
The Delaware bylaws provide that, except as otherwise provided by law or in
the Delaware certificate or bylaws, a quorum for the transaction of business is
reached when the holders of a majority of the stock of CTC
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Group is present or represented by proxy. The Delaware bylaws provide that when
a quorum is present, stockholders will approve an action by vote of a majority
of the total vote cast, unless the Delaware certificate, Delaware bylaws or DGCL
requires a higher percentage of affirmative votes.
Under the MGLA, unless the articles of organization or bylaws provide
otherwise, a majority of the stock entitled to vote at any meeting constitutes a
quorum. Except for the election of directors and other fundamental matters, the
MGLA does not prescribe the percentage vote required for stockholder action.
Under the Massachusetts bylaws, a majority of the shares of CTC
Communications entitled to vote constitutes a quorum at a meeting. The
Massachusetts bylaws provide that, except where a different vote is required by
law, the Massachusetts articles or the Massachusetts bylaws, a vote of a
majority of each class voting shall determine all questions. Generally, under
Massachusetts law, two-thirds of the shares of each class of stock outstanding
and entitled to vote or which would be adversely affected by the transaction
must approve a merger or a sale of all of the corporation's assets. The
reorganization proposal submitted for approval in this document constitutes such
a merger.
Business Conducted at Stockholder Meetings
The Delaware bylaws provide that at an annual meeting the only business
that may be conducted is that which has been:
. specified in the notice of meeting,
. proposed at the time of the meeting by the CTC Group board of directors, or
. proposed at the time by a stockholder who had given timely prior written
notice to the Secretary of CTC Group of his intention to bring such
business before the meeting.
In all cases, a notice is timely if CTC Group receives it not less than sixty
days nor more than ninety days prior to the meeting. If CTC Group gives fewer
than seventy days' notice or prior public disclosure of the meeting date, the
notice is timely if CTC Group receives it no later than the tenth day following
the day on which the company mailed notice of the date of the meeting or made
such public disclosure, whichever occurs first. The notice must contain:
. a brief description of the business the stockholder proposes to bring
before the meeting,
. the name and address of the stockholder,
. the reasons for conducting the business at the meeting,
. the class and number of shares of stock of CTC Group beneficially owned by
such stockholder, and
! any material interest of such stockholder in the business proposed.
If the chairman of a meeting of CTC Group stockholders determines that business
was not properly brought before the meeting in accordance with these procedures,
stockholders may not act on the business at the meeting.
The Massachusetts bylaws contain the same provisions as the Delaware bylaws
described above.
Nomination and Election of Directors
The Delaware bylaws provide that, except as otherwise provided by law, the
holders of a plurality of the shares of stock present, in person or by proxy, at
the meeting and entitled to vote, elect the directors of the corporation.
Neither the Delaware certificate nor the Delaware bylaws allows cumulative
voting for the election of directors. The Delaware bylaws provide that
stockholders must notify the secretary of CTC Group of proposed stockholder
nominations of candidates for election as directors by not less than sixty days
nor more than ninety days prior to the meeting. If the company gives or makes
less than seventy days' notice or prior public disclosure of the date of the
meeting, the stockholder must mail or deliver notice to the secretary not later
than the tenth day following
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the day on which such notice of the date of the meeting was mailed or such
public disclosure was made, whichever occurs first. The notice must contain the
following information about the proposed nominee:
. age,
. business and residence addresses,
. principal occupation,
. the number of shares of stock of CTC Group he or she beneficially owns and
. any other information that would be required in a proxy statement
soliciting proxies for the election of the proposed nominee.
In addition the notice must provide information about the stockholder proposing
to nominate that person. CTC Group may also require any proposed nominee to
furnish other information reasonably necessary to determine the proposed
nominee's eligibility to serve as a director. If the Chairman of a meeting of
CTC Group stockholders determines that the stockholders did not nominate the
stockholder's candidate in accordance with the foregoing procedures, the
candidate is not eligible for election as a director.
The Massachusetts bylaws contain provisions substantially similar to the
provisions of the Delaware bylaws described above.
Inspection Rights
Under the DGCL, every stockholder has a right to examine during usual
business hours, for any proper purpose, the corporation's stock ledger, a list
of its stockholders and its other books and records. Stockholders also have the
right to make copies or extracts of these documents. In order to exercise this
right, you must submit a written demand to the corporation, under oath, stating
the purpose of your inspection. If the corporation refuses to permit the
inspection or fails to reply to your demand within five business days after you
made the demand, you may apply to the Delaware Court of Chancery to compel the
inspection. When you seek to have the Chancery Court compel an inspection of
the corporation's books and records, other than its stock ledger or list of
stockholders, you must first establish that you have complied with the formal
requirements of making a demand for inspection and that the inspection is for a
proper purpose. For purposes of this provision of the DGCL, a "proper purpose"
is one that is reasonably related to your interest as a stockholder. The
Delaware bylaws also provide that CTC Group must prepare a complete list of
stockholders entitled to vote at a given meeting, at least ten days before such
meeting. The corporation must make the list available to stockholders for any
purpose germane to the relevant meeting, during ordinary business hours, for a
period of at least ten days prior to such meeting.
The MGLA requires that every domestic corporation maintain in
Massachusetts, and make available for inspection by its stockholders, the
corporation's articles of organization, bylaws, records of all meetings of
incorporators and stockholders, and the stock and transfer records listing the
names of all stockholders, their record addresses and the amount of stock each
holds. You also have the right to copy materials and to be represented by agent
or counsel in exercising these rights. The MGLA further provides that if any
officer or agent of a corporation refuses or neglects to exhibit the corporate
records in legible form or to produce for examination a stockholder list, such
officer or agent will be liable to you for actual damages sustained by you
because of their refusal or neglect. If you proceed against the company under
the foregoing provision, however, the company may raise the defense that the
actual purpose and reason for your inspection is to secure a list of
stockholders or other information for the purpose of selling the information or
of using it for purposes other than in your interest as a stockholder. In
addition to your inspection rights set forth in the MGLA, you have a common law
right to inspect additional documents, which, if your request is refused by the
corporation, may be obtained by petitioning a court for an order to produce the
documents. In petitioning a court for such an order, you must show that
. you are acting in good faith
. your purpose is to advance the interests of the corporation and protect
your own interests as a stockholder, and
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. the requested documents are relevant to those purposes.
Action by Consent of Stockholders
Under the DGCL and the Delaware certificate, stockholders may take any
stockholder action without a meeting and without prior notice, if the
stockholders having the number of votes that would be necessary to take such
action at a meeting at which all stockholders were present and voted, consent to
the action in writing. The corporation must file the written consents with the
records of the meetings of stockholders. In order for the action to be
effective, stockholders must sign and deliver the consents to the corporation
within sixty days after the corporation receives the earliest dated consent.
Under the MGLA, stockholders may take any stockholder action without a
meeting if all stockholders entitled to vote on the matter consent to the action
in writing and the corporation files the written consents with the records of
the meetings of stockholders. The Massachusetts bylaws provide that stockholders
may take any action without a meeting if all stockholders entitled to vote on
the matter consent to the action by writing.
Dividends and Stock Repurchases
Under the DGCL, a corporation may declare and pay dividends if the capital
of the corporation is not less than the total amount of capital represented by
all classes of stock having a liquidation preference. In addition, under the
DGCL a corporation may generally redeem or repurchase shares of its stock if its
capital is not currently impaired and if the redemption or repurchase will not
impair its capital. Under the DGCL, the directors of a corporation are jointly
and severally liable if they negligently or willfully make improper dividend
payments, stock repurchases or redemptions. If a stockholder receives dividends
on, or assets for the sale or redemption of, their stock with knowledge that
such dividend, repurchase or redemption was unlawful, any director held liable
pursuant to this provision may recover from such stockholder.
The Delaware certificate provides that CTC Group may declare and pay
dividends on the common stock from lawfully available funds as and when
determined by its board of directors after making payments to any outstanding
preferred stock which has preferential dividend rights.
Under the MGLA, the directors of a corporation will be jointly and
severally liable if a payment of dividends or a repurchase of a corporation's
stock is made when the corporation is insolvent, renders the corporation
insolvent or violates the corporation's articles of organization. If a
stockholder receives a distribution other than a distribution of stock when the
corporation is insolvent or which renders the corporation insolvent, he will be
liable to the corporation for the amount of the distribution, or for the amount
of the distribution which exceeds the amount of distribution which could have
been made without rendering the corporation insolvent. In either event the
stockholders are only liable for the amount paid or distributed to them. A
stockholder who pays more than his proportionate share of such distribution or
excess may recover from the other stockholders.
Classification, Number and Qualification of the Board of Directors
The DGCL permits, but does not require, classification of a corporation's
board of directors into one, two or three classes. Under the DGCL, the bylaws
must set forth how the number of directors will be determined unless the
corporation's certificate of incorporation fixes the number of directors. If
the certificate of incorporation fixes the number of directors, in order to
change the number of directors, the corporation must amend its certificate of
incorporation. The Delaware certificate and bylaws provide for three classes of
directors. The terms of the classes are staggered so that the stockholders
elect the directors of one class each year. The stockholders elect each
director for a three-year term or until a successor to each director in each
such class is elected. The classification of CTC Group's board is substantially
similar to the classification provided in the Massachusetts bylaws.
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The MGLA requires classification of a public corporation's board of
directors into three classes, each having a three-year term. The directors of a
public corporation may elect by majority vote to be exempt from such requirement
or the stockholders of such public corporation may elect to be exempt from such
requirement by a vote of two-thirds of each class of stock outstanding. In
accordance with the MGLA, the Massachusetts articles and bylaws provide for the
classification of CTC Communications' board of directors into three classes, as
nearly equal in number as possible. The terms of the classes are staggered so
that the stockholders elect the directors of only one class each year. The
stockholders elect each director for a three-year term or until a successor to
each director in each such class is elected.
The MGLA requires that the bylaws fix the number of directors, but whenever
there are more than two stockholders of record the corporation must not have
less than three directors. The Massachusetts bylaws provide that the number of
directors of CTC Communications consist of at least three but not more than
eleven members. They also provide that the number of directors may be increased
or decreased by vote of a majority of the directors then in office.
Neither the Massachusetts articles nor the Massachusetts bylaws set forth
specific qualification requirements for directors.
Removal of Directors
Under the DGCL and Delaware certificate, stockholders may generally remove
directors with or without cause by a majority vote. However, stockholders may
remove members of a classified board only for cause, unless the certificate of
incorporation provides otherwise.
The Massachusetts bylaws provide that stockholders may remove a director
from office at any time, but only for cause. The holders of not less than a
majority of the shares then entitled to vote or a majority of the directors then
in office may vote to remove a director for cause.
Vacancies on the Board of Directors
Under the DGCL, unless otherwise provided in the certificate of
incorporation or bylaws the vote of a majority of directors then in office, even
though less than a quorum, may fill vacancies on the board of directors and
newly created directorships. The DGCL also provides that where classes or
series of stock elect specific directors, the remaining directors elected by the
class or series in whose directorships the vacancy occurs must vote to fill the
vacancy. The Delaware certificate and bylaws provide that only a majority of
the directors then in office or the sole remaining director, although less than
a quorum, may vote to fill newly created directorships or any other vacancies on
the CTC Group board of directors. A director elected to fill a vacancy holds
office until the next election of his class of directors, unless he or she dies,
resigns or is removed before the end of the term.
The MGLA provides that in the case of a classified board like CTC
Communications', only the affirmative vote of a majority of the directors then
in office, even though less than a quorum, may fill any vacancy in the board of
directors, including a vacancy resulting from the enlargement of the board of
directors. The Massachusetts bylaws also provide that CTC Communications' board
of directors or the stockholders at the next annual meeting or at a special
meeting called for that purpose, shall fill newly created directorships
resulting from any increase in the number of directors.
Exculpation of Directors
The DGCL permits a corporation to provide in its certificate of
incorporation that a director is not personally liable for monetary damages
caused by his breach of his fiduciary duties. Under the DGCL, a charter
provision limiting liability cannot relieve a director of personal liability for
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. any breach of the director's duty of loyalty to the corporation or its
stockholders,
. acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law,
. unlawful payment of dividends or unlawful repurchases or redemptions of
stock or
. any transactions from which the director derived an improper personal
benefit.
In Massachusetts, a corporation's articles of organization may limit the
personal liability of its directors for breaches of their fiduciary duties.
Under the MGLA, a corporation's articles of organization may not limit the
directors' liability for acts or omission by a director which
. were in violation of the director's duty of loyalty to the corporation or
its stockholders,
. were not in good faith or which involved intentional misconduct or a
knowing violation of law, or
. involved a financial profit or other advantage to which the director was
not legally entitled.
The MGLA also prohibits the elimination or limitation of director liability for
unauthorized loans to insiders or distributions that occur when a corporation
is, or which renders a corporation, insolvent.
The Delaware certificate and the Massachusetts articles provide for
limitations on directors' liability as permitted by the DGCL and the MGLA.
Indemnification of Directors, Officers and Others
Both the DGCL and the MGLA generally permit a corporation to indemnify its
directors, officers, employees and others for expenses incurred by them because
of their position with the corporation. For the corporation to provide
indemnity, the person must have acted in good faith and with the reasonable
belief that his or her conduct was not opposed to the best interest of the
corporation. However, unlike the MGLA, the DGCL does not permit a corporation
to provide indemnity against judgments in actions brought by or in the right of
the corporation and for expenses related to such actions. The DGCL only permits
such indemnification if approved by the Delaware Court of Chancery.
The Delaware certificate indemnifies directors for any monetary damages for
any breach of fiduciary duty as a director, to the maximum extent permitted
under Delaware law. The Delaware certificate also provides that CTC Group will
indemnify any director or officer of CTC Group against:
. all expenses, judgments, fines and settlement amounts incurred in
connection with any legal proceeding, other than an action by or in the
right of CTC Group, brought against him by virtue of his position as a
director or officer of CTC Group and
. all expenses and amounts paid in settlement incurred in connection with any
action by or in the right of CTC Group brought against him by virtue of his
position as a director or officer of CTC Group,
in each case, only if
. he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of CTC Group, and
. with respect to any criminal action or proceeding, he had no
reasonable cause to believe his conduct was unlawful.
CTC Group will not indemnify any director officer in any matter in which he is
held liable to CTC Group, unless a court determines that he is entitled to
indemnification of such expenses. Notwithstanding the foregoing, if a director
or officer is successful in a suit, CTC Group must indemnify him against all
expenses, incurred in connection with the suit, unless the company determines
that the director or officer has not met the required standard of conduct. If
CTC Group determines that the director or officer did not meet the applicable
standard of conduct required for
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indemnification, or if CTC Group fails to make an indemnification payment to the
director or officer within sixty days after the director or officer claims
payment, he may petition the court to determine whether he is entitled to
indemnification. In order to claim indemnification, the director or officer must
give CTC Group notice of the action for which indemnity is sought and CTC Group
may participate in and assume the defense of such action. The Delaware
certificate further provides that, if Delaware amends its law to expand the
scope of permitted indemnification of directors or officers, CTC Group must
indemnify those persons to the fullest extent permitted by the amended law.
The Massachusetts bylaws provide that CTC Communications must, to the
fullest extent allowed by law, indemnify each of its directors and officers,
against all expenses and liabilities reasonably incurred by them in connection
with their actions on the corporation's behalf. If a settlement or compromise
of such action, suit or proceeding is reached, the company will provide
indemnification only if
. counsel for CTC Communications has provided to the board of directors an
opinion stating that the settlement or compromise is in the best interest
of CTC Communications and that the 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 CTC Communications, and
. the board of directors has adopted a resolution approving such settlement
or compromise.
If it is determined that such director or officer did not act in good faith in
the reasonable belief that his action was in the best interests of CTC
Communications, the company shall not provide indemnification for such matter.
Transactions with Interested Parties
The DGCL provides that a transaction
. between a corporation and any of its directors or officers, or an entity in
which any of its directors or officers have a financial or other interest,
. where the interested director or officer is present at or votes at the
meeting of the board of directors or committee which authorizes the
transaction or where his or her votes are counted for such purpose,
will not be void or voidable only under the following circumstances:
. the board or committee of the board knows the material facts about the
relationship or interest and the transaction and a majority of the
disinterested directors approve the transaction, even though the
disinterested directors number less than a quorum,
. the stockholders entitled to vote on such transaction know the
material facts about the interested director's or officer's
relationship or interest and the transaction and the stockholders vote
to approve the transaction in good faith, or
. the transaction is fair to the corporation when it is authorized,
approved or ratified by the board of directors or committee or the
stockholders.
The DGCL permits a corporation to count common or interested directors in
determining the presence of a quorum at a meeting of the board or of a committee
that authorizes transaction with an interested party. The Delaware bylaws
contain a provision regarding transactions with interested parties that
substantially tracks the provisions of the DGCL summarized above.
The MGLA contains no provision on interested party transactions comparable
to that of the DGCL. The MGLA only expressly provides that directors who vote
for and officers who knowingly participate in loans to officers or directors are
jointly and severally liable to the corporation for any part of the loan that
the borrower does not repay. Such directors will not be liable if a majority of
the directors who are not direct or indirect recipients of
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such loans, or the holders of a majority of the shares entitled to vote for such
directors, approved or ratified the loan because they reasonably expected the
loan to benefit the corporation.
Fundamental Transactions
The DGCL generally requires a vote of both the directors and a majority of
the stockholders to approve mergers and consolidations, and sales, leases or
exchanges of all of a corporation's property and assets. A corporation's
certificate of incorporation may require a greater-than-majority vote to approve
these transactions. Under the DGCL, a corporation that survives a merger need
not have stockholder approval for the merger if:
. each share of the surviving corporation's stock outstanding prior to the
merger remains outstanding in identical form after the merger,
. there is no amendment to its certificate of incorporation and
. the consideration going to stockholders of the non-surviving corporation is
not common stock or securities convertible into common stock of the
surviving corporation or, if it is such stock or convertible securities,
the aggregate number of shares of common stock issued, or initially
issuable upon conversion, is not more than twenty percent of the shares of
the surviving corporation's common stock outstanding immediately prior to
the merger.
The Delaware certificate does not provide anything different from the DGCL
requirements.
The MGLA generally requires a vote of two-thirds of the shares of each
class of stock entitled to vote, to approve mergers and consolidations and
sales, mortgages, leases or exchanges of all of a corporation's property. The
MGLA states that the articles of organization may provide for a vote of a lesser
proportion but not less than a majority of each class. The Massachusetts
articles do not permit a vote of lesser proportion. In addition, unless
required by the corporation's articles of incorporation, the stockholders of the
surviving corporation do not need to approve an agreement providing for a merger
and such agreement may be approved by vote of its directors if:
. the agreement of merger does not change the name, the amount of shares
authorized of any class of stock or other provisions of the articles of
organization of such corporation,
. the authorized unissued shares or shares held in the treasury of the
corporation of any class of stock of such corporation to be issued or
delivered pursuant to the agreement of merger do not exceed 15% of the
shares of such corporation of the same class outstanding immediately prior
to the merger, and
. the issue of any unissued stock pursuant to the agreement of merger has
been authorized in accordance with the provision of the MGLA governing the
issue of authorized but unissued capital stock.
The Massachusetts articles do not require a merger agreement to be submitted to
the stockholders if the corporation is to survive the merger as long as the
above statutory requirements are met.
Anti-Takeover Legislation
CTC Communications is subject to the provisions of the MGLA anti-takeover
law. In general, this statute prohibits a Massachusetts corporation with more
than 200 record stockholders from engaging in a "business combination" with
"interested stockholders" for three years after the date on which the person
becomes an interested stockholder, unless
. the interested stockholder obtains the approval of the board of directors
prior to becoming an interested stockholder,
. the interested stockholder acquires ninety percent of the outstanding
voting stock of the corporation, excluding shares held by certain
affiliates of the corporation, at the time the stockholder becomes an
interested stockholder, or
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. the board of directors and holders of two-thirds of the outstanding voting
stock of the corporation, excluding shares held by the interested
stockholder, approve the business combination.
An "interested stockholder" is a person who, together with affiliates and
associates, owns or at any time within the prior three years did own five
percent or more of the corporation's voting stock. A "business combination"
includes a merger, consolidation, certain stock or asset sales, and other
transactions resulting in a financial benefit to the interested stockholder. The
company may elect not to be governed by this anti-takeover law by amending its
Restated Articles of Organization or By-Laws. Any amendment would not be
effective for twelve months and would not apply to a business combination with
any person who became an interested stockholder prior to the adoption of the
amendment.
The DGCL regulates tender offers by restricting permitted business
combinations with "interested stockholders." This provision is intended to limit
coercive takeovers of companies. Under that section, "business combinations"
with "interested stockholders" of Delaware corporations are subject to a three
year moratorium unless the corporation meets specified conditions.
A section of the MGLA, entitled "Regulation of Control Shares
Acquisitions," provides, in general, that any stockholder of a corporation
subject to this statute who acquires twenty percent or more of the corporation's
outstanding voting stock may not vote the stock unless the other stockholders
authorize him to do so. The company has elected to "opt out" of this section of
the MGLA in its Massachusetts bylaws.
Another section of the MGLA requires that publicly held Massachusetts
corporations that have not "opted out" of the section have a classified board of
directors consisting of three classes as nearly equal in size as possible. It
also provides that stockholders may only remove directors who are so classified
for cause. The Company's Amended and Restated By-Laws contain provisions which
meet the requirements of this section.
Anti-Takeover Measures
The Massachusetts articles and bylaws include provisions available under
Massachusetts law to deter hostile takeover attempts and to help provide
adequate opportunity for the board to consider and respond to a takeover offer.
These provisions include a classified board, elimination of cumulative voting,
and an advance notice requirement for stockholder proposals. The Delaware
certificate and bylaws following the reorganization will include similar
provisions.
CTC Group will also have the rights currently available to CTC
Communications to issue shares of its authorized but unissued capital stock.
CTC Group could issue shares of authorized but unissued common stock and
preferred stock, which have terms, provisions and rights, that would make a
takeover of CTC Group more difficult. Any issuance of additional stock could
dilute the earnings per share and book value per share of existing shares of
common stock and preferred stock. The corporation could also issue the
additional shares to dilute the stock ownership of persons seeking to obtain
control of CTC Group.
In addition to specific anti-takeover measures, a number of differences
between Massachusetts and Delaware law could have a bearing on unapproved
takeover attempts. One difference is the existence of a DGCL provision
regulating tender offers by restricting permitted business combinations with
"interested stockholders." This provision is intended to limit coercive
takeovers of companies. See "Anti-takeover Legislation" above. Any corporation
may decide to opt out of the statute in its original certificate of
incorporation or, at anytime, by vote of its stockholders. The company does not
currently intend to opt out of the statute. The MGLA's comparable provision
prohibits a Massachusetts corporation from engaging in a business combination
with any person owning 5% or more of the outstanding voting stock of the
corporation for three years following the date on which the person becomes an
interested stockholder.
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Delaware law may permit a corporation greater flexibility in implementing
various anti-takeover measures, than do the laws of Massachusetts. In addition
to the measures described above, certain types of "poison pill" defenses, such
as stockholder rights plans, have been upheld by Delaware courts. Massachusetts
courts have not yet dispositively addressed these defenses and thus their
effectiveness in Massachusetts is less certain.
We recognize that hostile takeover attempts do not always have unfavorable
consequences and may provide stockholders with considerable value for their
shares. The reorganization may have the effect of discouraging or defeating
future takeover attempts which CTC Group's stockholders might wish to accept and
which might provide a substantial premium over market prices. We believe,
however, that the potential disadvantages of unapproved takeover attempts are
sufficiently great that, on balance, prudent steps to reduce the likelihood of
such takeover attempts are in the best interests of CTC Communications and its
stockholders. Adopting these measures will ensure that we have adequate
opportunity to fully consider and respond to any takeover attempt and actively
negotiate its terms. We believe that such measures will prevent disruption of
CTC Communications' business and the possibility of terms of a takeover that may
be less favorable to all of the stockholders than would be available in a board-
approved transaction. We also believe that any additional defenses and
deterrence provided by the reorganization are minimal in light of CTC
Communications' existing takeover defenses.
Charter Amendments
Under the DGCL, charter amendments require the approval of the board of
directors and both a general vote of a majority of all outstanding shares
entitled to vote, and a class vote of a majority of outstanding shares of each
class entitled to vote as a class. In addition, the DGCL requires a class vote
when, among other things, an amendment will adversely affect the powers,
preferences or special rights of a particular class of stock. Under the DGCL, a
provision in a corporation's certificate of incorporation requiring a
supermajority vote of the board of directors or stockholders may be amended only
by such supermajority vote.
Under the MGLA, a majority vote of each class of stock outstanding and
entitled to vote is required to authorize an amendment of the articles of
organization effecting one or more of the following:
. an increase or reduction of the capital stock of any authorized class;
. a change in the par value of authorized shares with par value, or any class
of such shares;
. a change of authorized shares, or any class of shares, from shares with par
value to shares without par value, or from shares without par value to
shares with par value;
. changes in the number of authorized shares, or any class of shares; or
. a corporate name change.
Subject to conditions set forth in the statute, a two-thirds vote of each class
of stock outstanding and entitled to vote must authorize any other amendment of
the articles of organization. The articles of organization may provide for a
vote of a lesser proportion but not less than a majority of each class of stock
outstanding and entitled to vote. A two-thirds vote of the affected class
voting separately, or a two-thirds vote of the affected series, voting together
with any other series of the same class adversely affected in the same manner
must approve any amendment requiring a two-thirds vote that would adversely
affect the rights of any class or series of stock.
Amendments to By-Laws
Under the DGCL, the stockholders entitled to vote may adopt, amend or
repeal bylaws. Any corporation may, in its certificate of incorporation, confer
the power to adopt, amend or repeal bylaws upon the directors.
The Delaware bylaws grant the CTC Group board of directors the authority to
amend or repeal the Delaware bylaws by the affirmative vote of a majority of the
directors present at any meeting of the board at which a quorum is present. If
the notice of meeting sent to stockholders contains notice of amendment or
repeal of the bylaws, the stockholders may amend or repeal the Delaware bylaws
by the affirmative vote of the holders of a
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majority of the outstanding shares of capital stock entitled to vote at the
meeting. The affirmative vote of the holders of at least 75% of the outstanding
shares of capital stock of CTC Group entitled to vote is required to amend or
repeal provisions, or adopt any inconsistent provision, of the Delaware bylaws
relating to:
. special meetings of stockholders,
. nomination of directors,
. notice of business at annual meetings,
. stockholder action without meetings
. organization of stockholder meetings,
. amendment of the Delaware bylaws and
. any provisions relating to the election, powers, meetings and removal of
directors.
Under the MGLA, the power to make, amend or repeal bylaws also lies in the
stockholders entitled to vote. The directors may also make, amend or repeal any
provision of the bylaws except those provisions which by applicable law, the
articles of organization, or the bylaws requires action by the stockholders.
The Massachusetts articles provide that CTC Communications' board of
directors may amend or repeal the Massachusetts bylaws, except as provided by
law or the Massachusetts bylaws. The Massachusetts bylaws provide that either
the stockholders or a majority of the directors then in office may amend or
repeal the Massachusetts bylaws. The directors may not amend any bylaw
provision that changes the provisions of the Massachusetts bylaws relating to
meetings of stockholders, removal of directors, or the election of committees by
directors and the delegation of powers to such committees.
Appraisal Rights
Under the DGCL, dissenting stockholders have appraisal rights when the
corporation merges or consolidates in specified situations. Appraisal rights are
not available under the DGCL when a corporation will survive the merger or
consolidation and no vote of its stockholders is required to approve the merger.
In addition, unless otherwise provided in a corporation's charter, stockholders
do not have appraisal rights if their stock is either listed on a national
securities exchange or designated as a national market system security on an
inter-dealer quotation system by the National Association of Securities Dealers,
Inc., or is held of record by more than 2,000 stockholders, unless the merger
requires stockholders to accept in exchange for their shares anything other
than:
. shares of stock of the surviving corporation;
. shares of stock of another corporation which are or will be listed on a
national securities exchange or designated as a national market system
security on an inter-dealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 stockholders;
. cash in lieu of fractional shares of such stock; or
. any combination thereof.
Stockholders do not have appraisal rights under the DGCL in the event of the
sale, lease or exchange of all of a corporation's assets or the adoption of an
amendment to its certificate of incorporation, unless these rights are granted
in the certificate of incorporation. The Delaware certificate does not grant
these rights.
Under the MGLA, unless a vote of the stockholders was not required to
approve the action, a properly dissenting stockholder is entitled to receive the
appraised value of his shares when the corporation votes:
. to sell, lease or exchange all of its property and assets,
. to adopt an amendment to its articles of organization that adversely
affects the rights of the stockholder, or
. to merge or consolidate with another corporation.
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See "Appraisal Rights of Dissenting CTC Communications Corp. Stockholders" for a
more detailed description of those rights.
Disadvantages of Reincorporation in Delaware
Although we believe reincorporation in Delaware will be beneficial to the
company, you may find the reorganization disadvantageous for several reasons.
As discussed above, Delaware law contains a statutory provision intended to
discourage takeover attempts of Delaware corporations that are not approved by
the board of directors. This anti-takeover provision could lessen the
possibility that you would receive a premium above market value for your shares
in the event of a takeover. This provision could also have an adverse effect on
the market value of the shares of CTC Group stock. This provision may also
restrict or discourage takeover attempts and therefore may make removal of the
board of directors or management less likely.
As discussed above, the Delaware certificate and bylaws will contain
provisions that limit director and officer liability. These provisions could
operate to the potential disadvantage of the stockholders of CTC Group. For
example, these provisions may reduce the likelihood that CTC Group will recover
monetary damages from directors as a result of derivative litigation against
them for breach of their duty of care. The limitation on liability provision,
which is part of the certificate of incorporation of CTC Group, may also require
the stockholders of CTC Group to forego potential causes of action for breach of
duty of care involving grossly negligent business decisions, including those
relating to attempts to change control of CTC Group.
The proposed certificate of incorporation authorizes CTC Group to issue up
to 10,000,000 shares of preferred stock in one or more series, without any
further vote or action by the stockholders. In addition, it authorizes the board
to determine the designations, powers, preferences and relative, participating,
optional or other rights of the preferred stock, including without limitation,
the dividend rate the cumulative or non-cumulative nature of dividends,
conversion rights, voting rights, rights and terms of redemption, redemption
price and liquidation preference. We have no current plans to issue any
additional shares of preferred stock. However, the rights of the holders of
shares of common stock would be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that we issue in the future.
Issuance of preferred stock could have the effect of delaying, deterring or
preventing a change in control of CTC Communications. In connection with an
issuance, the board could impose procedural requirements that could make it more
difficult for holders of common stock to effect corporate actions such as
replacing incumbent directors or accomplishing transactions opposed by the
incumbent board of directors.
We may in the future seek your approval of any amendments to, or make
changes in, CTC Communications' charter documents that have "anti-takeover"
implications.
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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 $ --Z
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 14,038 61,866
Selling, general and administrative
expenses ...................................... 16,663 19,349 23,077 30,074 51,935
Depreciation and amortization................... 656 660 743 1,418 5,122
Income (loss) from operations .................. 2,166 6,624 7,761 (4,583) (47,960)
Net income (loss) .............................. 1,472 4,094 4,683 (2,884) (51,996)
Earnings (loss) per share Basic ................ 0.18 0.43 0.49 (.29) (5.24)
Diluted .............. 0.17 0.38 0.43 (.29) (5.24)
Other Financial Data
EBITDA (loss)................................... $ 2,932 $ 7,295 $ 8,519 $(2,992) (42,760)
Capital expenditures ........................... 599 759 1,222 6,109 36,041
Net cash provided (used) 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>
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<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 30,967 68,337
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 11,580 (38,289)
</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.
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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 document.
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 telecommunications 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. ALEs are the total
number of voice circuits and equivalent data circuits we have in service. Voice
circuits are the actual number of voice circuits purchased by our customers. We
calculate our equivalent data circuits by dividing the data transmission
capacity purchased by our customers by 64 kilobits per second, the capacity
necessary to carry one voice circuit. 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 $14,038,000 for
fiscal year 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.
Selling, general and administrative expenses increased 73% to $51,935,000
in fiscal 1999 from $30,074,000 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
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contributing to the increase were approximately $9,301,000 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 261% to $5,122,000 in
fiscal 1999 from $1,418,000 in fiscal 1998. This increase was a result of the
investments 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 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 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 $14,038,000 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 30% to $30,074,000
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 our
transition to an integrated communications provider, increased payments of
commission and bonuses, increased corporate and administrative expenses,
expenses related to new branch openings and a $1,200,000 charge for estimated
costs attributable to our litigation with Bell Atlantic.
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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.
Liquidity and Capital Resources
Prior to March 1998, we had funded our working capital and operating
expenditures primarily from cash flow 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 expires
on June 30, 1999. 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
$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. 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 our common stock offering described below. If we raise at least
$30 million in that offering, this facility will terminate upon the closing of
the offering. Under this facility, $10.0 million is immediately available and
the remaining $20.0 million will become available if we raise an additional $5.0
million of proceeds from the issuance of equity. We currently intend, and are
able, to call the Spectrum commitment described above if before June 30, 1999,
we have not received a replacement equity commitment or a waiver of the $5.0
million equity requirements from Toronto Dominion.
We have filed a registration statement for a public offering of up to
3,725,000 shares of our common stock. There can be no assurance, however, that
this offering will be consummated.
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 the $5
million Spectrum option described above, the availability under our standby
facility with Toronto Dominion, together with cash on hand, the proceeds of our
bank, lease and vendor financing arrangements and the amounts we expect to be
available under our credit and vendor facilities will be sufficient to fund our
capital
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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 $6.5 million compared to a
working capital surplus of $11.3 million at March 31, 1998, a decrease of $17.8
million. This decrease is due primarily to the increase in 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.
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Quantitative and Qualitative Disclosures about Market Risk
Our exposure to financial risk, including changes in interest rates,
relates primarily to outstanding debt obligations. We utilize our senior
secured credit facility to fund a substantial portion of our capital
requirements. This facility bears interest at a variable interest rate, which
is subject to market changes. 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 that at March 31, 1999 a 10 percent decrease in
the levels of interest rates with all other variables held constant would result
in a decrease 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 an increase 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 $400,000 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 expect our non-
information systems to be Year 200 compliant in the third or fourth quarter of
1999.
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
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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 affirmative
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 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
quarter 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 alternate 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 of the Company
Overview
We are a rapidly growing integrated communications provider with 15 years
of telecommunications 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 163 sales people supported by 100 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. 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 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,
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
ATM services and frame relay services, which are also high speed, packet-based
data transmission services, will increase from $2.9 billion to $7.6 billion. 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 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:
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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,
which is a standardized digital service that combines voice and data
communications, 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.
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 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 have 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
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local exchange carriers to complete an electronic 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.
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 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
data 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, and 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
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our facilities with leased transmission capacity over fiber optic cable strands
from Level 3 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 the ability to automatically re-route data 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 technology center. We expect this to better position us to
adopt developing Cisco technology at an early stage.
We intend to access our 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 permits
high speed connections over existing telephone lines, leased high capacity
wireline circuits, or T-1s, 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 customer 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 17,
1999, there were 163 sales executives, 100 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
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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.
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 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.
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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 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, 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 telemanagement formats.
Financial. Data from our billing application is automatically exported to our
financial application. Our financial application tracks and prepares reports on
sales activity, commissions, branch operations, branch profitability and cash
flows. The financial application also compiles this data for our periodic
financial reports. In addition, this application provides internal controls for
revenue tracking and costing. The integrated nature of our information systems
allows us to operate each branch as a separate profit and loss center.
We are actively upgrading our information systems in order to support our
network. We have selected Oracle's relational database for our data repository
and warehouse. We will 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 systems 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 for 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 Wordcom (Brooks Fiber and MFS). Our
competitors for long distance services include all the major 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
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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.
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 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 communications 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 . 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 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.
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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, or 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 carrier 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, including
the portion dealing with unbundled network elements, 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 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.
We are otherwise party to suits and regulatory proceedings arising in the
normal course of business which we believe are not material individually or in
the aggregate.
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Employees
As of June 17, 1999, CTC employed 394 persons. None of our employees are
represented by a collective bargaining agreement.
Market Price Ranges
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 CTC Communications 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 (through June 25, 1999)........ $24.00 $12.19
The last sale price of the common stock on the Nasdaq National Market on
June 25, 1999 was $16.25.
</TABLE>
Management
Executive Officers, Directors and Significant Employees
Our executive officers and directors, and their ages as of June 17, 1999,
are as follows:
<TABLE>
<CAPTION>
Name Age Current Office Held
---- --- -------------------
<S> <C> <C>
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 PresidentCMarketing and Strategic Planning
Michael H. Donnellan....... 45 Vice PresidentCOperations
Thomas Fabbricatore........ 40 Vice PresidentCMarketing
Anthony D. Vermette........ 38 Vice PresidentCSales
Frederick Kunzi............ 47 Vice President and Chief Technology Officer
Jeffrey C. Lavin........... 43 Vice PresidentCCorporate Development
Katherine D. Courage....... 41 Director
Henry Hermann.............. 57 Director
Kevin J. Maroni............ 36 Director
J. Richard Murphy.......... 54 Director
</TABLE>
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<TABLE>
<S> <C> <C>
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 Communications 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 PresidentCMarketing.
Steven P. Milton has been employed by CTC Communications since 1984 and
has served as President and Chief Operating Officer since August 1995. Prior to
that, he held various positions within CTC Communications including Branch
Manager, District Manager, Regional Manager and Vice PresidentCSales and
Marketing.
John D. Pittenger has served as Chief Financial Officer since April 14,
1999, as Executive Vice PresidentCFinance and Administration since April 1998
and as Treasurer and Clerk of CTC Communications since August 1989. Mr.
Pittenger served as Vice PresidentCFinance from 1991 until April 1998, and as
Chief Financial Officer from 1989 to April 1998.
David E. Mahan joined CTC Communications in October 1995 as Vice
PresidentCMarketing and Strategic Planning. Prior to joining CTC Communications,
Mr. Mahan held a number of senior management level positions with NYNEX,
including Vice PresidentCSales Channel Management from 1993 to 1995.
Michael H. Donnellan has been employed by CTC Communications since 1988 in
a number of positions. He was named Vice PresidentCOperations in 1995.
Thomas Fabbricatore joined CTC Communications in 1982. He was named Vice
PresidentCRegulatory and Electronic Media in 1991, and was named Vice
PresidentCMarketing in November 1998. Thomas Fabbricatore is the brother of
Robert J. Fabbricatore.
Anthony D. Vermette has been employed by CTC Communications in a variety of
positions since 1987. Mr. Vermette was named Vice PresidentCSales in 1996.
Frederick Kunzi joined CTC Communications 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.
Jeffrey C. Lavin joined CTC Communications in June 1998 as Vice
PresidentCCorporate 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 Communications 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 our proposed offering of common stock. 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
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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 Communications 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 Communications 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 Communications 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 Communications 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 Communications 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 Communications in September
1991. He has been the President of Merrimack College in North Andover,
Massachusetts since 1994. From March 1992 to February 1994, 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 Communications 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 Communications 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.
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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
CTC Communications' 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
Communications, 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 Communications
or CTC Group are to be elected all of the shares of common stock held by them in
favor of two persons designated by a majority of the outstanding shares of
Series A preferred stock as nominees for directors, subject to certain
limitations based on the number of shares of Series A preferred stock
outstanding at any time. As of 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 Communications.
Executive Compensation
The following table provides summary information concerning compensation of
CTC Communications' 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:
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
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 and 1997 -- -- -- --
Director of Corporate Development(4)
Steven P. Milton,........................ 1999 150,000 54,500 100,000 5,625(3)
President and Chief 1998 100,000 40,000 150,000 4,200(3)
Operating Officer 1997 100,000 40,000 -- 4,075(3)
David E. Mahan,.......................... 1999 110,000 52,000 20,000 4,440(3)
Vice President-- 1998 100,000 40,000 260,000 4,075(3)
Marketing and Strategic Planning 1997 100,000 40,000 -- 4,075(3)
John D. Pittenger,....................... 1999 100,000 62,000 36,000 4,860(3)
Executive Vice President-- 1998 90,000 36,000 80,000 3,900(3)
Finance and Administration, 1997 86,100 34,000 -- 3,437(3)
Treasurer and Clerk
</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 Communications 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.
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.
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<PAGE>
<TABLE>
<CAPTION>
Percent of Potential Realizable
---------- --------------------
Number of Total Value at Assumed
--------- ----- ----------------
Securities Options Annual Rate of
---------- ------- --------------
Underlying Granted to Exercise Stock Price
---------- ---------- --------- -----------
Options Employees in Price Expiration Appreciation for
------- ------------ ----- ---------- ----------------
Granted (#) Fiscal Year $/Share) Date Option Term
----------- ---------- -------- ---- -----------
5% 10%
--------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Fabbricatore ........ 50,000 4.2% 20.00 2/17/2003 (353,882) (184,679)
50,000 4.2% 15.00 2/17/2003 (103,882) 65,321
50,000 4.2% 11.138 2/17/2003 89,243 258,446
Steven P. Milton .............. 33,000 3% 20.00 2/17/2003 (233,562) (122,996)
33,000 3% 15.00 2/17/2003 (68,562) 43,112
34,000 3% 10.125 2/17/2003 95,110 210,168
David E. Mahan ................ 20,000 2% 10.125 2/17/2003 55,947 123,628
John D. Pittenger ............. 36,000 3% 10.125 2/17/2003 100,705 222,531
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning the exercise of
options by the Named Executive Officers during the fiscal year ended March 31,
1999 and the March 31, 1999 aggregate value of unexercised options held by each
of the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
-------------------- --------------------
Underlying Unexercised in-the-Money Options
---------------------- --------------------
Options at Fiscal at Fiscal Year End ($)
----------------- ----------------------
Shares Year-End (#)(1) (1)(2)
------ --------------------- ---------------------
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>
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 part of our Waltham facility
at our cost to Comm-Tract Corp., a company in which Mr. Fabbricatore is a
principal stockholder. Sublease income totaled $306,125 for the last three
fiscal years. We also contract with Comm-Tract Corp. for the installation of
telephone lines and for the service and maintenance of equipment marketed by CTC
Communications. 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 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
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 expires on June 30, 1999.
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 our proposed
offering of common stock. Ms. Courage is also a director of NorthEast Optic
Network. We have commitments with NorthEast Optic Network for the provision of
leased transmission facilities.
Goldman Sachs Credit Partners, L.P., a beneficial owner of more than five
percent of our common stock, is a lender under our senior secured credit
facility. See "Description of Senior Secured 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 build out our network in our
existing markets. We have outstanding commitments to INS of approximately $1
million.
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
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<PAGE>
the facility bear interest at 1.75% over the prime rate. Advances under the
facility are secured by a first priority perfected security interest on all of
our assets, except that we have the ability to exclude assets we acquire through
purchase money financing. In addition, we are required to pay a commitment fee
of 0.5% per annum on any unused amounts under the facility. We are also required
to pay a monthly line fee of $150,000 per month. In connection with this credit
facility we issued to Goldman Sachs & Co. warrants to purchase 662,600 shares of
our common stock and to Fleet National Bank warrants to purchase 311,812 shares
of our common stock. We may borrow $15 million unconditionally and $60 million
based on trailing 120 days accounts receivable collections, reducing to the
trailing 90 days of collections by March 31, 2000. If we wish to prepay the loan
during the first 18 months we must pay a prepayment penalty of 2% of the
aggregate amount of the facility. As of March 31, 1999, we had borrowed
$36,145,000 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,
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<PAGE>
. 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 $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,
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<PAGE>
. any payment of indebtedness subordinated to the vendor facility, except
as expressly permitted, and
. the entrance of various judgments against us.
Toronto Dominion (Texas), Inc. Facility
In March 1999, we entered into a Loan Agreement with Toronto Dominion
(Texas), Inc., or TD, to provide an unsecured standby credit facility for up to
$30 million for capital expenditures and other general corporate purposes.
Under the terms of the this standby facility, $10 million is immediately
available and the remaining $20 million will become available if we raise an
additional $5 million in proceeds from the issuance of common or preferred
equity. We must pay a commitment fee of $450,000. Additional commitment fees
are payable if the standby facility is still outstanding on the dates six
months, nine months and one year after the closing. In addition, we pay a
quarterly availability fee on unfunded amounts and a funding fee if we draw on
the standby facility. Draws under the standby facility will initially bear
interest at 7.00% over the three-month US Dollar deposit LIBOR rate and increase
quarterly thereafter. We issued warrants to purchase 69,216 shares of CTC
Communication's common stock at $11.8125 per share to TD as part of the
transaction and we may issue contingent warrants to purchase up to 573,913
shares of common stock at $11.8125 per share to TD if advances under the
facility are outstanding six months after the closing. We must repay draws with
the proceeds from future issuances of equity or debt securities or from future
bank financings. To date, we have not utilized the facility.
Federal Income Tax Consequences
The following discussion summarizes the material United States federal
income tax consequences of the exchange of shares of CTC Communications common
stock for shares of CTC Group common stock and the exchange of shares of CTC
Communications Series A convertible preferred stock for shares of CTC Group
Series A convertible preferred stock pursuant to the plan of reorganization and
does not address the tax consequences of any related transactions. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended, or the "Code", currently applicable Treasury
Regulations, published administrative rulings, and court decisions, all of which
are subject to change. Any change, which may or may not be retroactive, could
alter these tax consequences.
You should be aware that this discussion does not address all United States
federal income tax considerations that may be relevant to you in light of your
particular circumstances, such as if you are a dealer in securities, bank,
insurance company, tax-exempt organization or a foreign person, subject to the
alternative minimum tax provisions of the Code or hold your shares as part of a
hedging, straddle, conversion or other risk reduction or constructive sale
transaction. This discussion does not deal with all United States federal
income tax considerations that may be relevant to you if you acquired shares in
connection with employee stock options or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of the reorganization under foreign, state or local
tax laws or the tax consequences of any other transactions effected concurrently
with, prior to, or after the reorganization (whether or not such transactions
are in connection with the reorganization). We urge you to consult with your
own tax advisors as to the specific consequences of the reorganization to you,
including the applicable federal, state, local and foreign tax consequences of
the reorganization to you in your particular circumstances. The following
discussion is based on an opinion of the Law Offices of Leonard R. Glass, P.A.
The proposed reorganization will constitute a reorganization within the
meaning of Section 368(a) of the Code. The following federal income tax
consequences result from the reorganization:
(a) You will not recognize gain or loss upon the receipt of CTC Group
common stock solely in exchange for CTC Communications common stock or the
receipt of CTC Group Series A convertible preferred stock solely in
exchange for CTC Communications Series A convertible
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<PAGE>
preferred stock in the reorganization.
(b) Your aggregate tax basis in your CTC Group common stock or CTC
Group Series A convertible preferred stock after the reorganization will be
the same as the aggregate tax basis of your CTC Communications common stock
or CTC Communications Series A convertible preferred stock.
(c) If you hold your CTC Communications common stock or CTC
Communications Series A convertible preferred stock as a capital asset at
the effective time of the reorganization, your holding period for your CTC
Group common stock or CTC Group Series A convertible preferred stock
received in the reorganization will include your holding period for
the CTC Communications common stock or CTC Communications Series A
convertible preferred stock surrendered in the reorganization.
(d) If you perfect your appraisal rights under law and receive
payment for your stock in cash and do not own any shares of CTC Group
stock, actually or constructively, following the receipt of the cash, you
will recognize capital gain or loss, measured by the difference between the
amount of your cash received and your basis in the stock.
Neither CTC Communications nor CTC Group has requested a ruling from the
Internal Revenue Service regarding any of the federal income tax consequences of
the reorganization.
Securities Act Consequences
All of the shares of common stock and preferred stock acquired in the
reorganization will be freely transferable except for any shares that may be
held by our "affiliates." The Securities Act of 1933, as amended, defines
"affiliates" to be stockholders of CTC Communications who control, are
controlled by or are under common control with CTC Communications or CTC Group.
Affiliates of CTC Communications may not sell their shares of CTC Group common
stock or preferred stock acquired in the reorganization except pursuant to
. an effective registration statement under the Securities Act covering such
shares,
. the resale provisions of Rule 145 under the Securities Act or
. another applicable exemption from the registration requirements of the
Securities Act.
Rules 144 and 145 restrict how affiliates may sell CTC Group common stock or
preferred stock and also restricts the number of shares of CTC Group common
stock or preferred stock that such affiliates may sell within any three-month
period.
Transfer Agent and Registrar
CTC Group's and CTC Communication's Transfer Agent and Registrar is Boston
EquiServe L.P.
Independent Auditors
The financial statements of CTC Communications Corp. at March 31, 1999 and
1998, and for each of the three years in the period ended March 31, 1999,
appearing in this document have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
We expect that a representative of Ernst & Young LLP will be present at the
meeting. The representative will have the opportunity to make a statement if he
or she desires to do so and will be available to respond to questions.
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<PAGE>
Legal Matters
The validity of the shares offered hereby will be passed upon for CTC Group
and certain tax matters will be passed upon for CTC Communications by the Law
Offices of Leonard R. Glass, P.A., Tenafly, New Jersey. Mr. Glass may be deemed
the beneficial owner of approximately 2% of our outstanding shares of common
stock.
Expense of Solicitation
CTC Communications will bear all costs connected with the solicitation of
proxies. We will reimburse brokers and other persons holding stock for the
benefit of others for their expenses in forwarding proxies and accompanying
material to the beneficial owners of such stock and obtaining their proxies. We
will solicit proxies by mail, telephone, telegraph or otherwise, and some of the
directors, officers and regular employees of the company may assist in the
solicitation without additional compensation. We do not expect to incur more
than $10,000 of solicitation expenses. We have not incurred any solicitation
expenses to date.
Stockholders' Proposals
If you wish to present a proposal to be voted on at the 1999 annual meeting
of stockholders, you must, at the time the proposal is submitted:
. be a record or beneficial owner of at least one (1%) percent or two
thousand ($2,000.00) dollars in market value of the class of securities
entitled to vote at the meeting;
. have held such securities for at least one (1) year; and
. continue to own such securities through the date on which the 1999 annual
meeting is held.
To be included in the management proxy statement, your proposal must be received
at our executive offices no later than June 25, 1999. Under our by-laws,
stockholders who wish to make a proposal at the 1999 annual meeting -other than
one that will be included in the management proxy statement - must notify us no
earlier than August 18, 1999 and no later than September 17, 1999. If you fail
to notify us of such a proposal by September 17, 1999, then the proxies that
management solicits for the 1999 annual meeting will include discretionary
authority to vote on any such proposal in the event it is properly brought
before the meeting. We suggest that you submit any proposal by certified mail,
return receipt requested, to remove any question as to the date on which a
proposal is received by the board of directors.
Other Matters That May Come Before the Meeting
The board of directors knows of no other matters which may be presented at
the special meeting, but if other matters do properly come before the special
meeting, the board intends that the persons named in the Proxy will vote
according to their best judgment.
We request you to date, sign and return the proxy in the enclosed postage-
paid envelope. If you attend the special meeting, you may revoke your proxy at
that time and vote in person if you so desire, otherwise your proxy will be
voted for you.
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CTC Communications Corp.
Index to Financial Statements
<TABLE>
<CAPTION>
Audited Financial Statements and Schedule
<S> <C>
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
Schedule II -- Valuation and Qualifying Accounts................................................. F-23
</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. Our audits also included the financial
statement schedule listed in the index to financial statements. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Ernst & Young LLP
May 19, 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............................................ 2,512,310 2,152,579
------------ -----------
Total current assets..................................................... 27,545,269 22,485,182
Property and equipment:
Property and equipment............................................. 49,417,689 13,376,970
Accumulated depreciation and amortization.......................... (11,959,766) (6,837,683)
------------ -----------
37,457,923 6,539,287
Deferred income taxes................................................... -- 1,834,000
Deferred financing costs, net of amortization........................... 3,229,865
Other assets............................................................ 104,085 108,885
------------ -----------
$ 68,337,142 $30,967,354
============ ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued expenses.............................. $ 27,439,488 $ 8,958,476
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 11,142,831
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)........................................ (46,535,492) 6,688,300
(38,257,561) 11,715,400
Amounts due from stockholders...................................... (31,025) (135,825)
------------ -----------
Total stockholders' equity (deficit).................................... (38,288,586) 11,579,575
------------ -----------
$ 68,337,142 $30,967,354
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
See accompanying notes.
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... 51,935,397 30,074,097 23,076,819
Depreciation and amortization.................. 5,122,083 1,417,866 742,895
------------ ------------ -----------
118,923,384 45,530,528 32,528,836
------------ ------------ -----------
Income (loss) from operations (47,959,692) (4,583,392) 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.................... (53,522,984) (4,370,450) 7,959,931
Income tax expense (benefit)......................... (1,527,000) (1,486,000) 3,277,000
------------ ------------ -----------
Net income (loss).................................... $(51,995,984) $(2,884,450) $ 4,682,931
============ ============ ===========
Net Income (Loss) per Common Share:
Basic..................................... $(5.24) $(0.29) $ 0.49
Diluted................................... $(5.24) $(0.29) $ 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>
Additional Retained
---------- --------
Common Stock Paid-In Deferred Earnings Treasury
------------------------ ------- -------- -------- --------
Shares Par Value Capital Compensation (Deficit) Stock
------ --------- ------- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996...... 9,584,122 $ 95,841 $4,644,988 $ -- $ 4,889,819 $ --
Issuance of stock pursuant
to employee stock
purchase plan.............. 8,714 87 70,088 -- -- --
Exercise of employee stock
options.................... 36,571 366 43,378 -- -- --
Net income................... 4,682,931
---------- -------- ---------- --------- ------------ ---------
Balance at March 31, 1997...... 9,629,407 96,294 4,758,454 -- 9,572,750 --
Issuance of stock pursuant
to employee stock
purchase plan.............. 9,844 98 71,662 -- -- --
Exercise of employee stock
options.................... 376,387 3,764 347,222 -- -- --
Acquisition of treasury
stock...................... -- -- -- -- -- (271,072)
Retirement of treasury stock. (34,977) (350) (270,722) -- -- 271,072
Deferred Compensation........ -- -- 339,088 (318,410) --
Net loss..................... -- -- -- -- (2,884,450) --
---------- -------- ---------- --------- ------------ ---------
Balance at March 31, 1998...... 9,980,661 99,806 5,245,704 (318,410) 6,688,300 --
Issuance of stock pursuant
to employee stock
purchase plan.............. 14,700 147 98,252 -- -- --
Exercise of employee stock
options.................... 366,482 3,665 235,806 -- -- --
Acquisitions of treasury
stock...................... -- -- -- -- -- (107,462)
Retirement of treasury stock. (9,330) (93) (107,369) -- -- 107,462
Deferred compensation........ -- -- -- 106,000 -- --
Receipt of amounts due from
stockholders................. -- -- -- -- -- --
Issuance of common stock
purchase warrants............ -- -- 2,914,423 -- -- --
Preferred stock dividend..... -- -- -- -- (1,079,364) --
Accretion of offering costs
related to redeemable
convertible preferred stock.. -- -- -- -- (28,000) --
Accretion of warrants related
to Series A Redeemable
Convertible Preferred Stock.. -- -- -- -- (120,444) --
Net loss..................... -- -- -- -- (51,995,984) --
---------- -------- ---------- --------- ------------ ---------
Balance at March 31, 1999...... 10,352,513 $103,525 $8,386,816 $(212,410) $(46,535,492) --
========== ======== ========== ========= ============ =========
See accompanying notes.
<CAPTION>
Amount
------
Due From
--------
Stockholders Total
------------- -----
<S> <C> <C>
Balance at March 31, 1996...... $(135,825) $ 9,494,823
Issuance of stock pursuant
to employee stock
purchase plan.............. -- 70,175
Exercise of employee stock
options.................... 43,744
Net income................... -- 4,682,931
--------- ------------
Balance at March 31, 1997...... (135,825) 14,291,673
Issuance of stock pursuant
to employee stock
purchase plan.............. -- 71,760
Exercise of employee stock
options.................... -- 350,986
Acquisition of treasury
stock...................... -- (271,072)
Retirement of treasury stock. -- --
Deferred Compensation........ -- 20,678
Net loss..................... -- (2,884,450)
--------- ------------
Balance at March 31, 1998...... (135,825) 11,579,575
Issuance of stock pursuant
to employee stock
purchase plan.............. -- 98,399
Exercise of employee stock
options.................... (31,025) 208,446
Acquisitions of treasury
stock...................... -- (107,462)
Retirement of treasury stock. -- --
Deferred compensation........ -- 106,000
Receipt of amounts due from
stockholders................. 135,825 135,825
Issuance of common stock
purchase warrants............ -- 2,914,423
Preferred stock dividend..... -- (1,079,364)
Accretion of offering costs
related to redeemable
convertible preferred stock.. -- (28,000)
Accretion of warrants related
to Series A Redeemable
Convertible Preferred Stock.. -- (120,444)
Net loss..................... -- (51,995,984)
--------- ------------
Balance at March 31, 1999...... $ (31,025) $(38,288,586
========= ============
</TABLE>
See accompanying notes.
<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).................................. $(51,995,984) $(2,884,450) $ 4,682,931
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation................................. 3,785,826 1,283,509 742,895
Amortization................................. 1,336,257 134,357 --
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........................ 1,834,000 (1,268,000) (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...................... (359,731) (2,152,579) 21,125
Other assets................................. (3,831,046) 4,800 4,800
Accounts payable and accrued expenses........ 18,481,013 4,052,394 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>
See accompanying notes.
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 the proceeds of the $5,000,000 preferred stock commitment
described in Note 10 and the availability 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 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
F-7
<PAGE>
equipment costs is subject to the risk of rapid technological change.
Accordingly, the Company's useful lives and depreciation policies reflect this
risk. Depreciation and amortization is provided using a combination of straight
- -line and accelerated methods over the following estimated useful lives:
Furniture, fixture, and equipment.................... 3-5 years
Network and related equipment......................... 3-5 years
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.
F-8
<PAGE>
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.
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
F-9
<PAGE>
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.
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........ 11,959,766 6,837,683
----------- -----------
$37,457,923 $ 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 addition, the
Company paid $1,200,000 of costs and fees previously accrued as of March 31,
1998 attributable to the collection effort to recover the Bell Atlantic
receivable and incurred approximately $7,800,000 of legal and other expenses
during fiscal year 1999 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.
F-10
<PAGE>
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.
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............ -- 1,200,000
Other........................................ 345,834 61,875
----------- ----------
$27,439,488 $8,958,476
=========== ==========
</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.
F-11
<PAGE>
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
$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 (the
"Credit Facility") with a bank. Under this Credit Facility, the Company may
borrow $10,000,000 which is not subject to specific restrictions, and another
$20,000,000 at such time that the Company raises an additional $5,000,000 of
equity. 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 then remaining term of
the Credit Facility as interest expense. In the event proceeds under the Credit
Facility are received, the relative fair value of the debt and contingent
warrants will be determined and the value of the warrants will be capitalized
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. In
order to satisfy the $5,000,000 equity requirement to borrow the full
$30,000,000 under the Credit Facility , the Company has the ability and intends
to call the $5,000,000 preferred stock commitment described in Note 10--
Preferred Stock if, by June 30, 1999, the Company has not received a replacement
equity commitment of $5,000,000 or received a waiver of the $5,000,000 equity
requirement included in the Credit Facility.
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
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <C>
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-13
<PAGE>
Long-term debt matures as follows:
Year ending March 31:
<TABLE>
<S> <C>
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 $1,470,614. Obligations under capital leases
mature as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
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-14
<PAGE>
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 respect to any junior class of stock. The
F-15
<PAGE>
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. 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, which option extends until 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.
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.
F-16
<PAGE>
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 1,175,500 options
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.
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:
F-17
<PAGE>
<TABLE>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net income (loss)................ $(56,761,004) $(4,973,128) $4,094,000
Pro forma income (loss) per common share
(Basic)................................... $ (5.60) $ (0.50) $ 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.
F-18
<PAGE>
<TABLE>
<CAPTION>
A summary of the Company's stock option activity, and related information
for the years ended March 31 follows:
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------------- -------------------------- -------------------------
Weighted Weighted Weight
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
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-19
<PAGE>
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)...................... $(51,995,984) $(2,884,450) $ 4,682,931
Less preferred stock dividends
and accretion to redemption
value of preferred stock........... (1,135,364) -- --
------------ ----------- -----------
Equals: numerator for Basic and
Diluted income (loss) per common
share.............................. $(53,131,348) $(2,884,450) $ 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.................................. $ (5.24) $ (.29) $ .49
============ =========== ===========
Diluted income (loss) per common
share.................................. $ (5.24) $ (.29) $ .43
============ =========== ===========
</TABLE>
F-20
<PAGE>
13. Income Taxes
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal........................................................... $(3,361,000) $ (218,000) $2,660,000
State............................................................. -- -- 906,000
----------- ----------- ----------
(3,361,000) (218,000) 3,566,000
Deferred tax provision (benefit).................................... 1,834,000 (1,268,000) (289,000)
----------- ----------- ----------
$(1,527,000) $(1,486,000) $3,277,000
=========== =========== ==========
</TABLE>
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.................................................... -- 486,000
Bad debt allowance................................................................ 695,000 960,000
Accruals and allowances, other.................................................... 40,000 305,000
Net operating loss carryforward................................................... 23,027,000 96,000
------------ ----------
Total deferred tax asset............................................................. 23,762,000 1,911,000
Deferred tax liability:
Prepaid expenses.................................................................. (8,000) (38,000)
Cash value of life insurance...................................................... (38,000) (39,000)
Depreciation...................................................................... (1,328,000) --
------------ ----------
Total deferred tax liability......................................................... (1,374,000) (77,000)
------------ ----------
Net deferred tax asset before valuation allowance.................................... 22,388,000 1,834,000
Valuation allowance.................................................................. (22,388,000) --
------------ ----------
Net deferred tax asset............................................................... $ -- $1,834,000
============ ==========
</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 $56,856,000, 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......... $(18,197,815) $(1,486,000) $2,706,000
State income taxes, net of federal benefit... -- -- 552,000
</TABLE>
F-21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Valuation allowance and other................ 16,670,815 -- 19,000
------------ ----------- ----------
$ (1,527,000) $(1,486,000) $3,277,000
============ =========== ==========
</TABLE>
14. Subsequent Event
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.
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
Year ended March 31,
1999
<S> <C> <C> <C> <C> <C>
Total revenues......... $12,835,685 $ 14,516,189 $ 19,024,531 $ 24,587,287 $ 70,963,692
Net loss............... (7,931,000) (10,983,624) (11,997,025) (21,084,335) (51,995,984)
Net loss per share--
Basic................ (.79) (1.13) (1.20) (2.08) (5.24)
Net loss per share--
Diluted.............. (.79) (1.13) (1.20) (2.08) (5.24)
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 (6,008,450) (2,884,450)
Income (loss) per
share--Basic.......... .13 .13 .05 (.60) (.29)
Income (loss) per
share--Diluted....... .14 .12 .05 (.60) (.29)
</TABLE>
The first two quarters of fiscal year 1998 net income per share amounts have
been restated to comply with SFAS No.128.
F-22
<PAGE>
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 $492,000 $4,988,698 $ -- $3,763,698 $1,717,000
accounts....
Year ended March 31, 1998:
Allowance for doubtful $377,000 $1,421,000 $ -- $1,306,000(a) $492,000
accounts....
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.
F-23
<PAGE>
- ------------------ COMPARISON OF HEADERS ------------------
- -HEADER 1-
- ------------------ COMPARISON OF FOOTERS ------------------
- -FOOTER 1-
F-1
- -FOOTER 2-
MHODMA.Active;8035238;1
F-24
<PAGE>
This redlined draft, generated by CompareRite - The Instant Redliner, shows the
differences between -
original document : C:\WINDOWS\TEMP\8034405.1
and revised document: C:\WINDOWS\TEMP\8035238.1
CompareRite found 459 change(s) in the text
CompareRite found 1 change(s) in the notes
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Additions appear as bold+dbl underlined text
F-25
<PAGE>
APPENDIX A
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;
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(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.
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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.
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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:
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APPENDIX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CTC COMMUNICATIONS GROUP, INC.
The undersigned, being of legal age, in order to form a corporation under
and pursuant to the laws of the State of Delaware, do hereby set forth as
follows:
FIRST: The name of the corporation is CTC COMMUNICATIONS GROUP,
INC.
SECOND: The address of the initial registered and principal office
of this corporation in this state is c/o United Corporate Services, Inc., 15
East North Street, in the City of Dover, County of Kent, State of Delaware 19901
and the name of the registered agent at said address is United Corporate
Services, Inc.
THIRD: The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized under the corporation
laws of the State of Delaware.
FOURTH: (a) The corporation shall be authorized to issue two
classes of stock to be designated respectively Common Stock and Preferred Stock.
The total number of shares of all classes of stock which the Corporation has
authority to issue is One-Hundred Ten Million (110,000,000), consisting of One-
Hundred Million (100,000,000) shares of Common Stock, $0.01 par value (the
"Common Stock"), and Ten Million (10,000,000) shares of Preferred Stock, $1.00
par value (the "Preferred Stock"). Of the authorized shares of Preferred
Stock, Six Thousand Six Hundred Sixty-Six (666,666) shares shall be designated
"Series A Convertible Preferred Stock."
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, subject to limitations
prescribed by law or set forth in this Certificate of Incorporation, to fix by
resolution or resolutions the designations, powers, preferences and rights, and
the qualifications, limitations or restrictions thereof, of each such series of
Preferred Stock, including without limitation authority to fix by resolution or
resolutions, the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation preferences of any wholly unissued
series of Preferred Stock, and the number of shares constituting any such series
and the designation thereof, or any of the foregoing.
Subject to the limitations set forth in this Certificate of
Incorporation, the Board of Directors is further authorized to increase (but not
above the total number of authorized shares of the class) or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any series, the number of which was fixed by it, subsequent to the
issue of shares of such series then outstanding, subject to the powers,
preferences and rights, and the qualifications, limitations and restrictions
thereof stated in the resolution of the Board of Directors originally fixing the
number of shares of such series. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
(b) The relative and other rights, preferences, privileges, and restrictions
of the Series A Convertible Preferred Stock and the holders thereof
(collectively, the "Stockholders") are as follows:
1. Designation. The number of shares of the series designated "Series A
-----------
Convertible Preferred Stock" (hereinafter referred to as the "Series A Preferred
Stock"), which number may be decreased (but not increased) by the Board of
Directors without a vote of stockholders; provided, however, that such number
-------- -------
may not be decreased below the
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number of then currently outstanding shares of Series A Preferred Stock. All
capitalized terms used in this Certificate of Incorporation and not otherwise
defined shall have the meaning given to such terms in Paragraph 14 of this
Section (b) of Article FOURTH.
2. Dividends. The holders of Series A Preferred Stock shall be entitled to
---------
participate in all dividends that are declared and paid on Common Stock on the
same basis as if all of the Series A Preferred Stock had been converted to
Common Stock in accordance with Paragraph 7 of this Section (b) of Article
FOURTH.
3. Liquidation Preference. (a) In the event of any liquidation, dissolution or
----------------------
winding up of the affairs of the Corporation, either voluntarily or
involuntarily, each holder of Series A Preferred Stock shall be entitled, after
provision for the payment of the Corporation's debts and other liabilities, to
be paid in cash in full, before any distribution is made on any Junior
Securities, an amount in cash (the "Liquidation Amount") equal to the greater of
(i) the Series A Preference Amount, or (ii) the Minimum Preference Amount,
provided, however, if the amount each such holder of Series A Preferred Stock
would have received had such holder converted all Series A Preferred Stock held
by such holder into Common Stock immediately prior to such liquidation,
dissolution or winding up of the Corporation would be equal to or greater than
the Liquidation Amount, the Series A Preferred Stock shall be automatically
converted into Common Stock in accordance with the terms herein, effective
immediately prior to such liquidation, dissolution or winding up of the
Corporation. If, upon any such liquidation, dissolution or other winding up of
the affairs of the Corporation, the net assets of the Corporation distributable
among the holders of all outstanding Senior Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount to which they are entitled with respect to their Senior Preferred Stock,
then the entire net assets of the Corporation remaining after the provision for
the payment of the Corporation's debts and other liabilities shall be
distributed among the holders of the Senior Preferred Stock ratably in
proportion to the full preferential amounts to which they would otherwise be
respectively entitled on account of their Senior Preferred Stock. Upon any such
liquidation, dissolution or winding up of the Corporation, after the holders of
Senior Preferred Stock shall have been paid in full the preferential amounts to
which they shall be entitled to receive on account of their Senior Preferred
Stock, the remaining net assets of the Corporation shall be distributed to the
other stockholders of the Corporation as their respective interests may appear.
(b) Consolidation, Merger, etc. A consolidation or merger of the Corporation
---------------------------
with or into any other corporation or corporations (a "merger") other than a
merger in which the holders of the Corporation's Common Stock own a majority of
the voting power of the surviving corporation, or a Sale of the Corporation, or
the effectuation by the Corporation or its stockholders of a transaction or a
series of related transactions in which more than fifty percent (50%) of the
voting power of the Corporation is disposed of (a "reorganization") shall be
deemed to constitute a liquidation, dissolution or winding up of the Corporation
within the meaning of this Paragraph 3, provided, however, the transfer of all
or substantially all of the Corporation's assets to one or more wholly owned
subsidiaries of the Corporation shall not be deemed a liquidation, dissolution
or winding up of the Corporation within the meaning of this Paragraph 3. Any
reorganization of the Corporation required by any court or administrative body
in order to comply with any provision of law shall be deemed to be an
involuntary liquidation, dissolution or winding up of the Corporation unless the
preferences, qualifications, limitations, restrictions and special or relative
rights granted to or imposed upon the holders of Series A Preferred Stock are
not adversely affected by such reorganization. Notwithstanding the foregoing, a
consolidation, merger, Sale of the Corporation or reorganization shall not be
deemed a liquidation, dissolution or winding up of the Corporation for the
purposes of this Paragraph 3 if (i) the holders of the Requisite Percentage of
the Series A Preferred Stock waive in writing the provisions of the preceding
two sentences, as applicable and (ii) the Board of Directors of the Corporation
consents to such waiver.
(c) Holders of Series A Preferred Stock shall not be entitled to any additional
distribution in the event of any liquidation, dissolution or winding up of the
affairs of the Corporation in excess of the amounts set forth in this Paragraph
3.
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4. Voting.
------
(a) Rights of Series A Preferred Stock. Except as otherwise required by law or
----------------------------------
as provided herein and subject to the rights of any class or series of capital
stock of the Corporation that hereafter may be issued in compliance with the
terms of these Articles of Incorporation, the shares of the Series A Preferred
Stock shall vote together with the shares of the Corporation's Common Stock and
any other shares of the Corporation's stock which, by its terms, is entitled to
vote together with the Series A Preferred Stock and the Common Stock as a single
class at any annual or special meeting of stockholders of the Corporation, or
may act by written consent in the same manner as the Corporation's Common Stock,
upon the following basis: each holder of shares of Series A Preferred Stock
shall be entitled to such number of votes for the Series A Preferred Stock held
by such holder on the record date fixed for such meeting, or on the effective
date of such written consent, as shall be equal to the lesser of (i) the whole
number of shares of the Corporation's Common Stock issuable upon conversion and
exercise of all shares of Series A Preferred Stock and Warrants held by such
holder immediately after the close of business on the record date fixed for such
meeting or the effective date of such written consent and (ii) the number of
shares of Series A Preferred Stock held by such holder multiplied by 2.476.
5. Special Approval Rights.
-----------------------
(a) Restricted Actions. So long as any shares of Series A Preferred Stock are
------------------
outstanding, the affirmative vote of the holders of the Requisite Percentage of
Series A Preferred Stock, acting by written consent or voting separately as a
single class in person or by proxy, at a special or annual meeting of holders of
Series A Preferred Stock called for the purpose, shall be necessary to authorize
the Corporation to take any of the following actions (herein, each a "Restricted
Action"):
(A) authorize, or increase or permit any Subsidiary to authorize or increase,
the authorized number of shares of, or issue additional shares of Series A
Preferred Stock or any class or series of the Corporation's or any
Subsidiary's capital stock or options, warrants or other rights to acquire
any such capital stock ranking with respect to liquidation preference,
dividends or voting rights, senior in right to, or on a parity with, the
Series A Preferred Stock or entitling the holders thereof to receive any
dividends or distributions (other than stock dividends) at any time when any
shares of Series A Preferred Stock are outstanding; provided however, that
nothing contained in this Paragraph 5 shall restrict the Company from
authorizing or issuing (i) Common Stock or warrants or options to acquire
Common Stock or (ii) Straight Preferred Stock;
(B) amend, repeal or change, directly or indirectly, any of the provisions of
the Certificate of Incorporation of the Corporation or the By-laws of the
Corporation in any manner that would alter or change the powers, preferences
or special rights of the shares of Series A Preferred Stock so as to affect
them adversely;
(C) at any time when the outstanding shares of Series A Preferred Stock and
Preferred Stock Derivatives represent at least four and 55/100 percent
(4.55%) of the Corporation's Common Stock Deemed Outstanding, authorize or
effect the declaration or payment of dividends or other distributions (other
than stock dividends) upon, or the redemption or repurchase of, any equity
securities of the Corporation other than repurchase of Common Stock from
departing employees that has been approved by the Compensation Committee and
the Board of Directors; or
(D) at any time when the outstanding shares of Series A Preferred Stock and
Preferred Stock Derivatives represent at least four and 55/100 percent
(4.55%) of the Corporation's Common Stock Deemed Outstanding, permit the
Board of Directors of the Corporation to consist of more than eleven (11)
members.
(b) Approval. The approval rights of the holders of shares of Series A
--------
Preferred Stock to authorize the Corporation to take any of the Restricted
Actions as provided in this Paragraph 5 may be exercised at any annual meeting
of stockholders, at a special meeting of the holders of Series A Preferred Stock
held for such purpose or by written consent. At each meeting of stockholders at
which the holders of shares of Series A Preferred Stock shall
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have the right, voting separately as a single class, to authorize the
Corporation to take any Restricted Action as provided in this Paragraph 5, the
presence in person or by proxy of the holders of the Requisite Percentage of
Series A Preferred Stock entitled to vote on the matter shall be necessary and
sufficient to constitute a quorum. At any such meeting or at any adjournment
thereof, in the absence of a quorum of the holders of shares of Series A
Preferred Stock, a majority of the holders of such shares present in person or
by proxy shall have the power to adjourn the meeting as to the actions to be
taken by the holders of shares of Series A Preferred Stock from time to time and
place to place without notice other than announcement at the meeting until a
quorum shall be present.
6. Compensation Committee. Unless otherwise consented to by the holders of the
----------------------
Requisite Percentage of outstanding Series A Preferred Stock, so long as any
shares of Series A Preferred Stock are outstanding and so long as the
outstanding shares of Series A Preferred Stock and Preferred Stock Derivatives
represent at least four and 55/100 percent (4.55%) of the Corporation's Common
Stock Deemed Outstanding, the Board of Directors shall elect a Compensation
Committee of the Board of Directors consisting of three (3) individuals, one of
whom shall be a director designated in writing by the holders of a majority of
the Series A Preferred Stock, and the other two of which shall consist of
independent directors who are not employed by the Corporation and are not
Affiliates of those stockholders who are Affiliates of the Corporation
("Independent Directors"), which Compensation Committee shall be increased by
one (1) member, which member shall be the member added pursuant to Section 7.6
of the Purchase Agreement or another member satisfactory to the holders of the
Requisite Percentage of outstanding Series A Preferred Stock and the
Corporation's chief executive officer. So long as any shares of Series A
Preferred Stock are outstanding and so long as the outstanding shares of Series
A Preferred Stock and Preferred Stock Derivatives represent at least four and
55/100 percent (4.55%) of the Corporation's Common Stock Deemed Outstanding,
decisions of the Compensation Committee must be made by the affirmative vote of
at least three (3) members. The Compensation Committee shall approve all
recommendations to the Board of Directors as to the following, and the Board of
Directors shall not have the power to approve any of the following without such
recommendation, so long as any shares of Series A Preferred Stock are
outstanding and so long as the outstanding shares of Series A Preferred Stock
and Preferred Stock Derivatives represent at least four and 55/100 percent
(4.55%) of the Corporation's Common Stock Deemed Outstanding, provided however,
that nothing contained herein shall restrict the Corporation from honoring its
contractual obligations existing on April 10, 1998 and disclosed in the Purchase
Agreement:
(i) the terms of employment, including compensation, of all new senior
management employees;
(ii) any increases in the compensation or benefits of any senior management
employee;
(iii) the terms of, and allocations of awards to senior management employees
under, any bonus, profit-sharing, or similar incentive plan arrangements;
(iv) the award of any other incentive or bonus compensation to senior
management employees;
(v) the issuance of capital stock or Convertible Securities to any employees
or directors of the Corporation or its Subsidiaries other than upon
exercise of options or conversion of Convertible Securities not issued in
violation of this Paragraph 6; and
(vi) the issuance of capital stock or Convertible Securities to consultants to
the Corporation or its Subsidiaries other than Common Stock, warrants and
options to purchase Common Stock representing more than 40,000 shares of
Common Stock in the aggregate on a fully diluted basis with respect to all
such issuances during any fiscal year Subsidiaries other than upon
exercise of options or conversion of Convertible Securities not issued in
violation of this Paragraph 6.
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7. Conversion Rights.
-----------------
(a) Conversion Procedure.
--------------------
(i) At any time and from time to time, any holder of Series A Preferred Stock
shall have the right, at its option, to convert all or any portion of each
share of Series A Preferred Stock (including any fraction of a share) held
by such holder into a number of shares of fully paid and nonassessable
Common Stock computed by dividing the Series A Preference Amount by the
Conversion Price in effect on the Conversion Date; provided, however, that
in the event of the conversion of Series A Preference Stock pursuant to
Paragraph 3(a) or Paragraph 7(g) of this Section (b) of Article FOURTH,
the number of shares of fully paid and nonassessable Common Stock into
which each Share of Series A Preferred Stock shall convert shall be
computed by dividing the greater of the Series A Preference Amount or
$21.39 by the Conversion Price in effect on the Conversion Date.
Notwithstanding any other provision hereof, if a conversion of Series A
Preferred Stock is to be made in connection with a Sale of the
Corporation, such conversion may, at the election of any holder tendering
Series A Preferred Stock for conversion, be conditioned upon the
consummation of the Sale of the Corporation, in which case such conversion
shall not be deemed to be effective until immediately prior to the
consummation of such Sale of the Corporation.
(ii) Subject to the provisions of Paragraph 7(a)(i), each conversion of Series
A Preferred Stock shall be deemed to have been effected as of the close of
business on the effective date of such conversion specified in a written
notice (the "Conversion Date"); provided, however, that the Conversion
Date shall not be a date earlier than the date such notice is so given,
and if such notice does not specify a conversion date, the Conversion Date
shall be deemed to be the date such notice is given to the Corporation. On
the Conversion Date, the rights of the holder of such Series A Preferred
Stock as such holder (including the right to receive dividends) shall
cease and the Person or Persons in whose name or names any certificate or
certificates for shares of Common Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record
of the shares of Common Stock represented thereby.
(iii) As soon as practicable after the Conversion Date, but in any event within
ten (10) business days after the holder has delivered the certificates (or
affidavits of loss in form and substance reasonably satisfactory to the
Company) evidencing the shares of Series A Preferred Stock converted into
shares of Common Stock in accordance herewith, the Corporation shall
deliver to the converting holder:
(x) a certificate or certificates representing, in the aggregate, the
number of shares of Common Stock issued upon such conversion, in the same
name or names as the certificates representing the converted shares and in
such denomination or denominations as the converting holder shall specify
and a check for cash with respect to any fractional interest in a share of
Common Stock as provided in clause (vii) of this Paragraph 7(a); and
(y) a certificate representing any shares that were represented by
the certificate or certificates delivered to the Corporation in connection
with such conversion but that were not converted.
(iv) The issuance of certificates for shares of Common Stock upon conversion of
Series A Preferred Stock shall be made without charge to the holders of
such Series A Preferred Stock for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion
and the related issuance of shares of Common Stock. Upon conversion of any
shares of Series A Preferred Stock, the Corporation shall take all such
actions as are necessary in order to insure that the Common Stock so
issued upon such conversion shall be validly issued, fully paid and
nonassessable.
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(v) The Corporation shall not close its books against the transfer of Series A
Preferred Stock or of Common Stock issued or issuable upon conversion of
Series A Preferred Stock in any manner that interferes with the timely
conversion of Series A Preferred Stock. The Corporation shall assist and
cooperate with any holder of shares of Series A Preferred Stock required
to make any governmental filings or obtain any governmental approval prior
to or in connection with any conversion of shares of Series A Preferred
Stock hereunder (including, without limitation, making any filings
required to be made by the Corporation).
(vi) The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of the Series A Preferred Stock, such number
of shares of Common Stock as are issuable upon the conversion of all
outstanding Series A Preferred Stock. All shares of Common Stock that are
so issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation
applicable to the Corporation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be listed
(except for official notice of issuance which shall be immediately
delivered by the Corporation upon each such issuance).
(vii) No fractional shares of Common Stock or script shall be issued upon
conversion of shares of the Series A Preferred Stock. If more than one
share of Series A Preferred Stock shall be surrendered for conversion at
any one time by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Series A Preferred Stock so surrendered.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional
interest equal to the fair market value of such fractional interest as
determined by the Corporation's Board of Directors.
(b) Conversion Price. The initial conversion price shall be nine dollars
----------------
($9.00), which may be adjusted from time to time hereafter (as so adjusted, the
"Conversion Price"). If and whenever on or after the original date of issuance
of the Series A Preferred Stock the Corporation issues or sells, or in
accordance with Paragraph 7(c) is deemed to have issued or sold, any shares of
its Common Stock or Convertible Securities for a consideration per share less
than the Conversion Price in effect immediately prior to the time of such issue
or sale, then upon such issue or sale, the Conversion Price shall be reduced to
an amount determined by dividing (a) the sum of (1) the product derived by
multiplying (i) the Conversion Price in effect immediately prior to such issue
or sale times (ii) the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (2) the consideration, if any,
received (or deemed received pursuant to Paragraph 7(c)(ii) below) by the
Corporation upon such issue or sale, by (b) the number of shares of Common Stock
Deemed Outstanding immediately after such issue or sale.
(c) Effect on Conversion Price of Certain Events. For purposes of determining
--------------------------------------------
the adjusted Conversion Price under Paragraph 7, the following shall be
applicable:
(i) Issuance of Convertible Securities. If the Corporation in any manner
----------------------------------
issues or sells any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or exchange is less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then the
maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding
and to have been issued and sold by the Corporation at the time of the
issuance or sale of such Convertible Securities for such price per share.
For the purposes of this paragraph, the "price per share for which Common
Stock is issuable" shall be determined by dividing (a) the total amount
received or receivable by the Corporation as consideration for the issue
or sale of such Convertible Securities, plus the cumulative minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the exercise, conversion or exchange thereof and, if
applicable, the exercise, conversion and exchange of any other Convertible
Securities that such Convertible Securities may be converted into or
exchanged for, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible
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<PAGE>
Securities. No further adjustment of the Conversion Price shall be made
when Common Stock and, if applicable, any other Convertible Securities,
are actually issued upon the exercise, conversion or exchange of such
Convertible Securities.
(ii) Change in Exercise Price or Conversion Rate. If the additional
-------------------------------------------
consideration payable to the Corporation upon the exercise, conversion or
exchange of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or exchangeable for Common
Stock should change at any time, the Conversion Price in effect at the
time of such change shall be readjusted to the Conversion Price that would
have been in effect at such time had such Convertible Securities that are
still outstanding provided for such changed additional consideration or
changed conversion rate, as the case may be, at the time such Convertible
Securities were initially granted, issued or sold; and on the termination
date of any right to exercise, convert or exchange such Convertible
Securities without such right having been duly exercised, the Conversion
Price then in effect hereunder shall be increased to the Conversion Price
that would have been in effect at the time of such termination had such
Convertible Securities, to the extent outstanding immediately prior to
such termination, never been issued.
(iii) Exceptions for Excluded Securities. Notwithstanding the foregoing, no
----------------------------------
adjustments shall be made under this Paragraph 7(c) with respect to the
issuance of any Excluded Securities.
(iv) Valuation of Non-Cash Consideration. In the event that Convertible
-----------------------------------
Securities are issued for consideration other than cash, the value of such
consideration shall be made by a good faith determination by the Board.
(d) Subdivision or Combination of Common Stock. If the Corporation at any time
------------------------------------------
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
its outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately reduced, and conversely, in the event the outstanding shares of
Common Stock shall be combined (by reverse stock split or otherwise) into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination shall be proportionately increased. In any such event all
numbers, percentages, computations and the like in this Section (b) of Article
FOURTH shall be deemed modified as necessary to give appropriate effect to such
subdivision or combination.
(e) Certain Events. If an event not specified in this Paragraph 7 occurs that
--------------
has substantially the same economic effect on the Series A Preferred Stock as
those specifically enumerated, then this Paragraph 7 shall be construed
liberally, mutatis mutandis, in order to give the Series A Preferred Stock the
------- --------
intended benefit of the protections provided under this Paragraph 7. In such
event, the Corporation's Board of Directors shall make an appropriate adjustment
in the Conversion Price so as to protect the rights of the holders of Series A
Preferred Stock; provided that no such adjustment shall increase the Conversion
--------
Price as otherwise determined pursuant to this Paragraph 7 or decrease the
number of shares of Common Stock issuable upon conversion of each share of
Series A Preferred Stock.
(f) Notices.
-------
(i) Immediately upon any adjustment of the Conversion Price, the Corporation
shall give written notice thereof to all holders of Series A Preferred
Stock, setting forth in reasonable detail and certifying the calculation
of such adjustment.
(ii) The Corporation shall give written notice to all holders of Series A
Preferred Stock at least twenty (20) days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any
dividend or distribution upon Common Stock, (b) with respect to any pro
rata subscription offer to holders of Common Stock or (c) for determining
rights to vote with respect to any dissolution or liquidation.
(g) Mandatory Conversion. Each share of Series A Preferred Stock shall
--------------------
automatically be converted into fully paid and nonassessable shares of Common
Stock of the Corporation on the basis set forth in Paragraph 7(a) upon not less
than 10 days prior written notice of conversion (the "Conversion Notice") from
the Corporation, which Conversion Notice
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and mandatory conversion shall not be effective unless (i) the average closing
bid price (or closing sales price, as applicable) per share for the
Corporation's Common Stock on the Nasdaq Stock Market (or such national stock
exchange upon which the Corporation's Common Stock is then listed), for the
period of thirty (30) consecutive trading days ending on the last trading day
prior to the giving of the Conversion Notice, is (aa) in the case of a
Conversion Notice given prior to April 10, 2002, at least three hundred percent
(300%) of the highest Conversion Price in effect during any portion of such
thirty (30) trading day period or (bb) in the case of a Conversion Notice given
on or after April 10, 2002, at least one hundred percent (100%) of the highest
Conversion Price in effect during any portion of such thirty (30) trading day
period, and (ii) a "Shelf Registration" pursuant to the Registration Rights
Agreement with respect to the "Registrable Securities" (including those issuable
upon such conversion) shall be effective as of the time the Series A Preferred
Stock converts into Common Stock. Holders of shares of Series A Preferred Stock
so converted may deliver to the Corporation at its principal office (or such
other office or agency of the Corporation as the Corporation may designate by
notice in writing to such holders) during its usual business hours, the
certificate or certificates for the shares so converted. At such time as at
least 500,000 shares of Series A Preferred Stock shall have been converted into
Common Stock pursuant to this Paragraph 7, all other then outstanding shares of
Series A Preferred Stock shall thereupon automatically be converted into fully
paid and nonassessable shares of Common Stock of the Corporation in the basis
set forth in Paragraph 7(a). As promptly as practicable after such conversion,
the Corporation shall issue and deliver to such holder a certificate or
certificates for the number of whole shares of Common Stock to which such holder
is entitled, together with any cash dividends and payment in lieu of fractional
shares to which such holder may be entitled pursuant to this Paragraph 7. Until
such time as a holder of shares of Series A Preferred Stock shall surrender its
certificate or certificates therefor as provided above, such certificates shall
be deemed to represent the shares of Common Stock to which such holder shall be
entitled upon the surrender thereof.
8. Redemption.
----------
(a) The Series A Preferred Stock may be redeemed (in whole or in part) at the
option of the holders of the Requisite Percentage of Series A Preferred Stock on
or after the Maturity Date (an "Optional Redemption"). In any such case, the
holders of the Requisite Percentage of Series A Preferred Stock shall notify the
Corporation in writing of its or their intent to exercise the rights afforded by
this Paragraph 8(a) and specify a date not less than 90 nor more than 180 days
from the date of such notice on which the Series A Preferred Stock shall be
redeemed (the "Optional Redemption Date"). Upon receipt of such notice, the
Corporation shall promptly notify the remaining holders of the Series A
Preferred Stock of the Optional Redemption Date. The remaining holders have the
right to participate in such redemption if they so elect by giving the
Corporation written notice to such effect within 20 days of having received such
notice. The Corporation shall redeem on the Optional Redemption Date all shares
of Series A Preferred Stock being redeemed in cash by wire transfer of
immediately available funds in an amount equal to the greater of the Series A
Preference Amount of such shares or the Minimum Preference Amount of such shares
to the extent funds are legally available for such redemption.
(b) If the funds of the Corporation legally available for redemption of shares
of Series A Preferred Stock on an Optional Redemption Date are insufficient to
redeem the total number of outstanding shares of Series A Preferred Stock
entitled to redemption, the holders of shares of Series A Preferred Stock
entitled to redemption shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts that would be
payable with respect to the full number of shares owned by them if all such
outstanding shares were redeemed in full. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
such shares of Series A Preferred Stock, such funds will be used at the earliest
permissible time, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available. From and after the Corporation's
receipt of an Optional Redemption notice pursuant to Paragraph 8(a), the
Corporation shall be obligated to use its best efforts to take such actions as
may be necessary (including, without limitation, the issuance of additional
equity securities, the revaluation or recapitalization of the Corporation or the
consummation of a merger or sale of assets) in order to permit the full and
timely redemption of the shares of Series A Preferred Stock entitled to
redemption.
(c) If, for any reason, the Corporation fails to redeem all shares of Series A
Preferred Stock entitled to redemption on an Optional Redemption Date (i) the
unredeemed shares shall remain outstanding and shall continue to have all rights
and preferences (including, without limitation, dividend and voting rights)
provided for herein, and (ii) the holders of
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<PAGE>
such unredeemed shares shall have the ongoing right to be redeemed in accordance
with this Paragraph 8, together with such rights and remedies as may be
available under applicable law.
(d) The notices provided for in this Paragraph 8 shall be sent, if by or on
behalf of the Corporation, to the holders of the Series A Preferred Stock at
their respective addresses as shall then appear on the records of the
Corporation, or if by any holder of Series A Preferred Stock to the Corporation
at its principal executive office as set forth in the Purchase Agreement, by
first class mail, postage prepaid, (i) notifying such recipient of the
redemption, the date of such redemption, the number of shares of Series A
Preferred Stock to be redeemed, and the redemption price therefor and (ii) in
the case of any notice by or on behalf of the Corporation, stating the place or
places at which the shares called for redemption shall, upon presentation and
surrender of such certificates representing such shares, be redeemed.
9. Status of Reacquired Shares. Any shares of Series A Preferred Stock
---------------------------
redeemed pursuant to Paragraph 8 or otherwise acquired by the Corporation in any
manner whatsoever shall be canceled and shall not under any circumstances be
reissued; and the Corporation may from time to time take such appropriate
corporate action as may be necessary to reduce accordingly the number of
authorized shares of Series A Preferred Stock.
10. Rank. The Series A Preferred Stock shall rank senior in right as to
----
dividends and upon liquidation, dissolution or winding up to all Junior
Securities, whenever issued.
11. Identical Rights. Each share of the Series A Preferred Stock shall have
----------------
the same relative rights and preferences as, and shall be identical in all
respects with, all other shares of the Series A Preferred Stock.
12. Certificates. So long as any shares of the Series A Preferred Stock are
------------
outstanding, there shall be set forth on the face or back of each stock
certificate issued by the Corporation a statement as required by Section 151(f)
of the General Corporation Law of the State of Delaware.
13. Amendments. Any provision of these terms of the Series A Preferred Stock
----------
may be amended, modified or waived if and only if the holder of the Requisite
Percentage of Series A Preferred Stock has consented in writing or by an
affirmative vote to such amendment, modification or waiver of any such provision
of this Section (b) of Article FOURTH.
14. Definitions.
-----------
"Affiliate or Affiliates" shall mean with respect to any Person, any other
Person that would be considered to be an affiliate of such Person under
Rule 144(a) under the Securities Act of 1933, as amended, as in effect on
April 10, 1998, if such Person were issuing securities.
"Certificate of Incorporation" shall mean this Certificate of Incorporation, as
amended from time to time.
"Common Stock" shall mean the Corporation's Common Stock, $.01 par value.
"Common Stock Deemed Outstanding" shall mean, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number
of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, plus the number of shares of Common Stock issuable upon
the exercise in full of all Convertible Securities whether or not the
Convertible Securities are convertible into, exercisable or exchangeable
for Common Stock at such time.
"Conversion Price" shall have the meaning set forth in Paragraph 7(b) hereof.
"Convertible Securities" shall mean securities or obligations that are
exercisable for, convertible into or exchangeable for shares of Common
Stock. The term includes options, warrants or other rights to subscribe
for or purchase Common Stock or to subscribe for or purchase other
securities that are convertible into or exchanged for Common Stock.
"Excluded Securities" shall mean any (a) Common Stock or Convertible Securities
issued in respect of Excluded Securities (for this purpose, only as such
term is defined in the Articles of Organization of CTC Communications
Corp., a Massachusetts corporation, as in effect immediately before the
Reorganization in connection with the Reorganization, (b) Common Stock
issuable upon the exercise, conversion or exchange of Convertible
Securities described in clause (a), or (c) Common Stock or warrants or
options to acquire Common
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<PAGE>
Stock issued after the consummation of the Reorganization to (i) employees,
directors or consultants to the Corporation or its subsidiaries with the
approval of the Compensation Committee to the extent such approval is
required under Paragraph 5(c) hereof, (ii) lenders who are not Affiliates
of the Corporation as partial consideration for senior debt financing to
the Corporation, (iii) equipment lessors who are not Affiliates of the
Corporation as partial consideration for equipment lease financing to the
Corporation, (iv) licensors who are not Affiliates of the Corporation as
partial consideration for license agreements with the Corporation, (v) bond
and Straight Preferred Stock purchasers as partial consideration for
issuances of debt securities or Straight Preferred Stock pursuant to
underwritten public offerings of such debt securities or Straight Preferred
Stock under the Securities Act of 1933, as amended, (vi) bond and Straight
Preferred Stock purchasers as partial consideration for issuance of such
debt securities or Straight Preferred Stock pursuant to offerings under
Rule 144A yielding the Corporation, with respect to each such offering,
proceeds of at least $75,000,000 (net of any interest or dividend escrows
or similar arrangements), (vii) bond and Straight Preferred Stock
purchasers as partial consideration for issuances of such debt securities
or Straight Preferred Stock pursuant to offerings under Rule 144A yielding
the Corporation with respect to each such offering, proceeds of at least
$40,000,000 (net of any interest or dividend escrows or similar
arrangements) sold to at least five purchasers, who are not Affiliates of
one another, (viii) any Persons (including the stockholders or owners of
Persons) as all or part of the consideration paid for the acquisition of
ownership interests in, or assets of, such Person unless (aa) such Person
is an Affiliate of the Corporation (other than a Subsidiary) or (bb)
Affiliates of the Corporation collectively own more than ten percent (10%)
of the ownership interests in such Person or (ix) to Comm-Tract Corp. and
Comm-Tract Corp. of New York or their owners in consideration for the
acquisition of said companies by the Corporation involving the issuance of
Common Stock at a price which is not less than $9.00 per share. For
purposes of clause (viii) above, the value of consideration other than cash
received by the Corporation in return for the issuance of Common Stock
shall be determined in good faith by the Board.
"Independent Directors" shall have the meaning set forth in Paragraph 6 hereof.
"Junior Securities" shall mean any of the Corporation's Common Stock and all
other equity securities of the Corporation other than (i) the Series A
Preferred Stock and (ii) any other shares of the Corporation's preferred
stock (a) which by their terms, state that they are not Junior Securities
or provide the holders thereof with rights pari passu with or senior to
---- -----
those of the holders of Series A Preferred Stock and (b) are issued in
compliance with this Section (b) of Article FOURTH.
"Maturity Date" shall mean April 9, 2003.
"Minimum Preference Amount" shall mean $25.41 per share of Series A Preferred
Stock.
"Person" shall mean an individual, partnership, corporation, association, trust,
joint venture, unincorporated organization and any government, governmental
department or agency or political subdivision thereof.
"Preferred Stock" shall mean the Series A Preferred Stock.
"Preferred Stock Derivatives" shall mean any Common Stock or Convertible
Securities issued to holders of Series A Preferred Stock in exchange
therefor, as a stock dividend thereon, in respect thereof in connection
with a stock split or recapitalization or in connection with the exercise
of preemptive rights pertaining thereto pursuant to the Purchase Agreement.
"Purchase Agreement" shall mean that certain Securities Purchase Agreement dated
as of April 10, 1998 among the Purchasers named therein and CTC
Communications Corp., as it may be amended from time to time.
"Purchase Price" of any share of Series A Preferred Stock shall be $18.00.
"Registration Rights Agreement" shall mean that certain Registration Rights
Agreement between CTC Communications Corp. and the holder(s) of the Series
A Preferred Stock, as it may be amended from time to time.
"Reorganization" shall mean the consummation of the transactions by which CTC
Communications Corp. becomes a subsidiary of this Corporation pursuant to
the Amended and Restated Agreement and Plan of Reorganization between CTC
Communications Group, Inc. A Delaware Corporation, CTC-Newco, Inc. a
Delaware corporation and CTC Communications Corp., a Massachusetts
corporation dated as of March 1, 1999.
"Required Consent" shall have the meaning set forth in Paragraph 5.
"Requisite Percentage" shall mean a majority.
"Restricted Action" shall have the meaning set forth in Paragraph 5.
"Sale of the Corporation" shall mean a single transaction or a series of
transactions pursuant to which a Person or Persons acquire (i) capital
stock of the Corporation possessing the voting power to elect a majority of
the
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<PAGE>
Corporation's board of directors (whether by merger, consolidation or sale
or transfer of the Corporation's capital stock); or (ii) all or
substantially all of the Corporation's assets determined on a consolidated
basis.
"Senior Preferred Stock" shall mean the Series A Preferred Stock and any other
preferred stock of the Corporation designated by the Corporation in
accordance with this Section (b) of Article FOURTH, the terms of which
preferred stock provide for it to be treated as Senior Preferred Stock for
purposes of the particular sections herein in which the term "Senior
Preferred Stock" is used.
"Series A Preference Amount" shall mean, as of any date, an amount per share of
Series A Preferred Stock equal to the Purchase Price increasing from April
10, 1998 through the date in question at a rate of nine percent (9%) per
annum, compounding semi-annually in arrears from April 10, 1998 and
prorated on a daily basis for partial periods.
"Series A Preferred Stock" shall mean the Corporation's Series A Preferred
Stock, $1.00 par value.
"Straight Preferred Stock" shall mean preferred stock of the Corporation which
(i) is neither a Convertible Security nor convertible into or exchangeable
for any other security other than preferred stock meeting the requirements
of this definition or debt securities, (ii) is issued solely for cash
payable upon issuance, (iii) accrues dividends only at a rate or rates
fixed in the certificate of designation or amendment to the Certificate of
Incorporation designating such preferred stock, (iv) has no voting rights
other than as required by law, (v) entitles the holders thereof to receive,
in the aggregate, not more than the purchase price therefor plus the amount
of any accrued unpaid dividends in respect thereof, and (vi) does not
otherwise directly or indirectly alter or change the powers, preferences or
special rights of the shares of Series A Preferred Stock so as to affect
them adversely.
"Subsidiary" shall mean, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
of the other Subsidiaries of that Person or a combination thereof, or (ii)
if a partnership, association or other business entity, a majority of the
partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes hereof,
a Person or Persons shall be deemed to have a majority ownership interest
in a partnership, association or other business entity if such Person or
Persons shall be allocated a majority of partnership, association or other
business entity gains or losses or shall be or control the managing general
partner of such partnership, association or other business entity.
"Warrants" shall mean the Warrants issued pursuant to the Purchase Agreement to
purchase 133,333 shares of Common Stock, as adjusted from time to time.
15. Severability of Provisions. If any right, preference or limitation of the
--------------------------
Series A Preferred Stock set forth in this Resolution (as such Resolution may be
amended from time to time) is invalid, unlawful or incapable of being enforced
by reason of any rule, law or public policy, all other rights preferences and
limitations set forth in this Resolution (as so amended) which can be given
effect without implicating the invalid, unlawful or unenforceable right
preference or limitation shall, nevertheless, remain in full force and effect,
and no right, preference or limitation herein set forth shall be deemed
dependent upon any other right, preference or limitation unless so expressed
herein.
16. Preemptive Rights. The Purchasers who are parties to the Purchase
-----------------
Agreement have certain preemptive rights set forth in the Purchase Agreement
entitling them, in certain circumstances, to acquire securities to be issued by
the Corporation.
FIFTH: The name and address of the incorporator are as follows:
NAME ADDRESS
---- -------
Michael Barr 10 Bank Street
White Plains, New York 10606
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<PAGE>
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and of
its directors and stockholders:
(1) Subject to the provisions of this Certificate of Incorporation,
the number of directors of the corporation shall be such as from time to
time shall be fixed by, or in the manner provided in the by-laws. Election
of directors need not be by ballot unless the by-laws so provide.
(2) Subject to the provisions of this Certificate of Incorporation,
the Board of Directors shall have power without the assent or vote of the
stockholders:
(a) To make, alter, amend, change, add to or repeal the By-Laws
of the corporation; to fix and vary the amount to be reserved for any
proper purpose; to authorize and cause to be executed mortgages and
liens upon all or any part of the property of the corporation; to
determine the use and disposition of any surplus or net profits; and
to fix the times for the declaration and payment of dividends.
(b) To determine from time to time whether, and to what times
and places, and under what conditions the accounts and books of the
corporation (other than the stock ledger) or any of them, shall be
open to the inspection of the stockholders.
(3) The directors in their discretion may submit any contract or act
for approval or ratification at any annual meeting of the stockholders or
at any meeting of the stockholders called for the purpose of considering
any such act or contract, and any contract or act that shall be approved or
be ratified by the vote of the holders of a majority of the stock of the
corporation which is represented in person or by proxy at such meeting and
entitled to vote thereat (provided that a lawful quorum of stockholders be
there represented in person or by proxy) shall be as valid and as binding
upon the corporation and upon all the stockholders as though it had been
approved or ratified by every stockholder of the corporation, whether or
not the contract or act would otherwise be open to legal attack because of
director's interest, or for any other reason.
(4) In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the corporation; subject, nevertheless, to the
provisions of the statutes of Delaware, of this certificate, and to any by-
laws from time to time made by the stockholders, provided, however, that no
by-laws so made shall invalidate any prior act of the directors which would
have been valid if such by-law had not been made.
SEVENTH: No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended from time to time. The corporation shall indemnify to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Sections
grant the corporation the power to indemnify.
EIGHTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them (Excluding Series A
Convertible Preferred Stock), any court or equitable jurisdiction within the
State of Delaware, may, on the
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<PAGE>
application in a summary way of this corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers appointed
for this corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this corporation under the provisions of
Section 279 Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths (3/4) in value of
the stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation as
consequence of any such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
this corporation, as the case may be, and also on this corporation.
NINTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by law and this Certificate of Incorporation,
and all rights and powers conferred herein on stockholders, directors and
officers are subject to this reserved power.
IN WITNESS WHEREOF, the undersigned hereby executes this document and
affirms that the facts set forth herein are true under the penalties of perjury
this _____________day of ___________, 1999.
__________________________________
Michael Barr, Incorporator
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<PAGE>
APPENDIX C
BY-LAWS
OF
CTC COMMUNICATIONS GROUP, INC.
ARTICLE I
Stockholders
Section 1. ANNUAL MEETING. The Annual Meeting of Stockholders shall be held
each year on a date and at a time designated by the Board of Directors. At the
Annual Meeting of Stockholders, only such business shall be conducted as shall
have been properly brought before the Meeting.
Section 2. SPECIAL MEETINGS. Special Meetings may be called at any time by the
Chairman of the Board of Directors, the Chief Executive Officer (or, if there is
not a Chief Executive Officer, the President) or the Corporation's Board of
Directors.
Section 3. PLACE OF MEETING. All meetings of stockholders shall be held at the
principal office of the Corporation unless a different place (within the United
States) is fixed by the Directors or the President and stated in the notice of
the meeting.
Section 4. NOTICE OF MEETINGS. Except as hereinafter provided, a written
notice of every meeting of stockholders, stating the place, date and hour
thereof, and the purposes for which the meeting is to be held, shall be given by
the Secretary or by the person calling the meeting at least ten (10) but not
more than (60) days before the meeting to each stockholder entitled to vote
thereat and to each stockholder, who, by law, by the Certificate of
Incorporation or by these By-Laws is entitled to such notice, by leaving such
notice with him or at his residence or usual place of business, or by mailing it
postage prepaid and addressed to such stockholder at his address as it appears
upon the books of the Corporation. No notice need be given to any stockholder
if a written waiver of notice, executed before or after the meeting by the
stockholder or his attorney thereunto authorized, is filed with the records of
the meeting.
Section 5. QUORUM. Except as otherwise provided by law or in the Certificate
of Incorporation or these By-Laws, the holders of a majority of the issued and
outstanding stock of the Corporation entitled to vote shall constitute a quorum
for the transaction of business.
Section 6. VOTING AND PROXIES. Each stockholder shall have one vote for each
share of stock entitled to vote held by him of record according to the records
of the Corporation, unless otherwise provided by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy dated
not more than three years before the meeting named therein, unless the proxy
provides for a longer period. Proxies shall be filed with the Secretary of the
meeting, or of any adjournment thereof, before being voted. Except as otherwise
limited therein, proxies shall entitle the persons named therein to vote at any
adjournment of such meeting. A proxy with respect to stock held in the name of
two or more persons shall be valid if executed by one of them unless at or prior
to exercise of the proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a stockholder shall be deemed valid unless challenged at or prior to
its exercise.
Section 7. ACTION AT MEETING. When a quorum is present, the holders of a
majority of the stock present or represented and voting on a matter, (or if
there are two or more classes of stock entitled to vote as separate classes,
then in the case of each such class, the holders of a majority of the stock of
that class present or represented
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and voting on a matter) except where a larger vote is required by law, the
Certificate of Incorporation or these By-Laws, shall decide any matter to be
voted on by the stockholders. Any election by stockholders shall be determined
by a plurality of the votes cast by the stockholders entitled to vote at the
election. No ballot shall be required for such election unless requested by a
stockholder present or represented at the meeting and entitled to vote in the
election. The Corporation shall not directly or indirectly vote any share of its
stock.
Section 8. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation, any action required or permitted to be taken by
stockholders at any annual or special meeting may be taken without a meeting and
without prior notice, if the stockholders having the number of votes that would
be necessary to take such action at a meeting at which all stockholders were
present and voted, consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. All such consents must,
in order to be effective, be signed and delivered to the Corporation within
sixty days after the earliest dated consent is delivered to the Corporation.
Such consent shall be treated for all purposes as a vote at a meeting.
Section 9. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATION OF DIRECTORS.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (x) pursuant to the
Corporation's notice of meeting, (y) by or at the direction of the Board of
Directors or (z) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this Section 9, is
entitled to vote at the meeting and has complied with the notice procedures set
forth in this Section 9.
(ii) For nomination or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (z) of paragraph (a)(i) of
this Section 9, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation at the principal executive office of the
Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of (x) the 60th day prior to such annual meeting and (y) the 10th day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth: (1) as to each person
whom the stockholder proposes to nominate for election or reelection as a
Director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of Directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
Director if elected); (2) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; (3) as to the
stockholder giving notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, (A) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (B) the
class and number of shares of the Corporation which are owned beneficially and
of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of paragraph (a)(ii)
of this Section 9 to the contrary, in the event that any person nominated by the
Board of Directors of the Corporation for election as a Director (other than a
person nominated to fill a vacancy created by the death of a Director) was not a
Director or nominee named (x) in the Corporation's proxy statement for the
preceding annual meeting or (y) in a public announcement made by this
Corporation at least 60 days prior to the first anniversary of the preceding
year's annual meeting (a "New Nominee"), a stockholder's notice required by this
Section 9 shall also be considered timely if it shall be delivered to the
Secretary of the Corporation at the principal executive offices of the
Corporation not later than the close of
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business on the 10th day following the date on which public announcement is
first made by the Corporation of the election or nomination of such New Nominee
to the Board of Directors.
(iv) The Corporation shall set forth in its proxy statement for each
annual meeting of stockholders the date by which notice of nominations by
stockholders of persons for election as a Director or for other business
proposed to be brought by stockholders at the next annual meeting of
stockholders must be received by the Corporation to be considered timely
pursuant to this Section 9. With respect to the first annual meeting of
stockholders after the adoption of this Section 9, the Corporation shall issue a
public announcement setting forth such information not less than 30 days prior
to the applicable date.
(b) Special Meetings of Stockholders. Only such business shall be conducted at
a special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors of the Corporation may be made at a special
meeting of stockholders at which Directors are to be elected pursuant to the
Corporation's notice of meeting (x) by or at the direction of the Board of
Directors or (y) by any stockholder of the Corporation who (1) is a stockholder
of record at the time of giving of notice provided for in this Section 9, (2) is
entitled to vote at the meeting and (3) complies with the notice procedures set
forth in this Section 9. Stockholders desiring to nominate persons for election
to the Board of Directors at such a special meeting of stockholders shall
deliver the stockholder's notice required by paragraph (a)(ii) of this Section 9
to the Secretary of the Corporation at the principal executive offices of the
Corporation not earlier than the 90th day prior to such special meeting and not
later than the close of business on the later of (A) the 60th day prior to such
special meeting and (B) the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(c) General.
(i) Only persons who are nominated in accordance with the procedures set
forth in this Section 9 shall be eligible to serve as Directors. Only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in
Section 9. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Section 9
and, if any proposed nomination or business is not in compliance with this
Section 9, to declare that such defective proposal shall be disregarded.
(ii) For purposes of this Section 9, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities Exchange Commission pursuant to Section 13, 14
or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 9, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 9. Nothing in this Section 9 shall be deemed to limit the
Corporation's obligation to include stockholder proposals in its proxy statement
if such inclusion is required by Rule 14a-8 under the Exchange Act or any
successor Rule.
ARTICLE II
Directors
Section 1. POWERS. The business of the Corporation shall be managed by a Board
of Directors who may exercise all the powers of the Corporation including, but
not limited to, the issuance of stock, except as otherwise provided by law, by
the Articles of Organization or by these By-Laws. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
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Section 2. NUMBER. The Board of Directors shall fix the number of Directors
at not less than three nor more than eleven Directors; provided, however, that
the number of Directors shall be fixed at not less than two whenever there shall
be only two stockholders and not less than one whenever there shall be only one
stockholder. The number of Directors may be increased or decreased at any time
or from time to time by the vote of a majority of the Directors then in office.
No Director need be a stockholder.
Section 3. CLASSIFICATION, ELECTION AND TENURE. The Directors, other than
those who may be elected by the holders of any class or series of Preferred
Stock voting separately by class or series, shall be classified, with respect to
the duration of the term for which they severally hold office, into three
classes, designated Class I, Class II, and Class III, which shall be as nearly
equal in number as possible and as provided by resolution of the Board of
Directors in connection with such election.
Each initial Director in Class I shall hold office for a term expiring at
the 1998 annual meeting of stockholders; each initial Director of Class II shall
hold office for a term expiring at the 1999 annual meeting of stockholders; and
each initial Director of Class III shall hold office for a term expiring at the
2000 annual meeting of stockholders. Each Director shall serve until his
successor is duly elected and qualified or until his earlier death, resignation,
removal or disqualification. At each annual meeting of stockholders following
the 1998 annual meeting, the stockholders shall elect the successors of the
class of Directors whose term expires at that meeting to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election and until their successors have been duly elected and
qualified or until their earlier death, resignation, removal or
disqualification.
The Board of Directors shall increase or decrease the number of Directors
in one or more classes as may be appropriate whenever it increases or decreases
the number of Directors pursuant to Section 2 of this Article II, in order to
ensure that the three classes shall be as nearly equal in number as possible.
Section 4. VACANCIES. Subject to the rights of the holders of shares of
any class or series of Preferred Stock, any vacancies on the Board of Directors
resulting from death, resignation or removal shall only be filled by the
affirmative vote of a majority of the remaining Directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
Director, and newly created Directorships resulting from any increase in the
number of Directors shall be filled by the Board of Directors, or if not so
filled, by the stockholders at the next annual meeting thereof or at a special
meeting called for that purpose in accordance with these By-laws. Any Director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of Directors in which the new
Directorship was created or the vacancy occurred and until such Director's
successor shall have been elected and qualified or until his earlier death,
resignation or removal. The Directors shall have and may exercise all their
powers notwithstanding the existence of one or more vacancies in their number,
subject to any requirement of law or of the number of Directors as required for
a quorum or for any vote or other actions.
Section 5. RESIGNATION. Any Director may resign by delivering his
written resignation to the Corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Section 6. REMOVAL. Except as otherwise provided in the Articles of
Organization or these By-laws relating to the rights of the holders of any class
or series of Preferred Stock voting separately by class or series, to elect
Directors under specified circumstances any Director or Directors may be removed
from office but only for cause and only by either the affirmative vote, at any
regular meeting or special meeting of the stockholders, of not less than a
majority of the total number of votes of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
Directors, voting together as a single class, but only if notice of such
proposal was contained in the notice of such meeting, or by the affirmative vote
of a majority of the Directors then in office. A Director may be removed for
cause only after reasonable notice and opportunity to be heard before the body
opposing him.
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Section 7. MEETINGS. Regular meetings of the Directors may be held
without call or notice at such places and at such times as the Directors may
from time to time determine, provided that any Director who is absent when such
determination is made shall be given notice of the determination. A regular
meeting of the Directors may be held without a call or notice at the same place
as the annual meeting of stockholders or the special meeting held in lieu
thereof, following such meetings of stockholders.
Special meetings of the Directors may be held at any time and place
designated in a call by the President, Treasurer or two or more Directors.
Section 8. NOTICE OF MEETINGS. Notice of all special meetings of the
Directors shall be given to each Director by the Secretary, or in case of the
death, absence, incapacity or refusal of the Secretary, by the officer or one of
the Directors calling the meeting. Notice shall be given to each Director in
person, by telephone, facsimile or email at least twenty-four hours in advance
of the meeting, or by written notice mailed to his business or home address at
least forty-eight hours in advance of the meeting. Notice need not be given to
any Director if a written waiver of notice, executed by him before or after the
meeting, is filed with the records of the meeting, or to any Director who
attends the meeting without protesting prior thereto or at its commencement the
lack of notice to him. A notice or waiver of notice of a Directors' meeting
need not specify the purposes of the meeting.
Section 9. QUORUM. At any meeting of the Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time without further notice.
Section 10. ACTION AT MEETING. At any meeting of the Directors at which a
quorum is present, the vote of a majority of those present, unless a different
vote is specified by law, by the Articles of Organization, or by these By-Laws,
shall be sufficient to decide such matter.
Section 11. ACTION BY CONSENT. Any action by the Directors may be taken
without a meeting if a written consent thereto is signed by all the Directors
and filed with the records of the Directors' Meetings. Such consent shall be
treated as a vote of the Directors for all purposes.
Section 12. COMMITTEE. The Directors may, by vote of a majority of the
Directors then in office, elect from their number an executive or other
committees and may by like vote delegate thereto some or all of their powers
except those which by law, the Articles of Organization or these By-Laws, they
are prohibited from delegating. Except as the Directors may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Directors, or in such rules, its business
shall be conducted as nearly as may be in the same manner as is provided by
these By-Laws for the Directors.
Section 13. MEETING BY TELECOMMUNICATIONS. Members of the Board of
Directors or any committee elected thereby may participate in a meeting of such
board or committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in a meeting can hear each
other at the same time and participation by such means shall constitute presence
in person at the meeting.
ARTICLE III
Officers
Section 1. ENUMERATION. The officers of the Corporation shall consist of
a President, a Treasurer, a Secretary, and such other officers, including a
Chairman of the Board of Directors, one or more Vice Presidents, Assistant
Treasurer, Assistant Secretary as the Directors may determine.
Section 2. ELECTION. The President, Treasurer and Secretary shall be
elected annually by the Directors at their first meeting following the annual
meeting of stockholders. Other officers may be chosen by the Directors at such
meeting or at any other meeting.
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Section 3. QUALIFICATION. The President may, but need not be, a
Director. No officer need be a stockholder. Any two or more officers may be
held by the same person provided that the President and Secretary shall not be
the same person. Any officer may be required by the Directors to give bond for
the faithful performance of his duties to the Corporation in such amount and
with such sureties as the Directors may determine.
Section 4. TENURE. Except as otherwise provided by law, the Certificate
of Incorporation or by these By-Laws, the President, Treasurer and Secretary
shall hold office until the first meeting of the Directors following the annual
meeting of stockholders and thereafter until his successor is chosen and
qualified; and all other officers shall hold office until the first meeting of
the Directors following the annual meeting of the stockholders, unless a shorter
term is specified in the vote choosing or appointing them. An officer may
resign by delivering his written resignation to the Corporation at its principal
office or to the President or Secretary, and such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.
Section 5. REMOVAL. The Directors may remove any officer with or without
cause by a vote of a majority of the entire number of Directors then in office,
provided, that an officer may be removed for cause only after reasonable notice
and opportunity to be heard by the Board of Directors prior to action thereon.
Section 6. CHAIRMAN, PRESIDENT AND VICE PRESIDENT. The Chairman of the
Board of Directors, if there be one, shall be the chief executive officer of the
Corporation and shall, when present, preside at all meetings of the stockholders
and at all meetings of the Board of Directors. The President shall have such
duties and powers as are prescribed by the Board of Directors. Any Vice
President shall have such powers as the Directors may from time to time
designate.
Section 7. TREASURER AND ASSISTANT TREASURER. The Treasurer shall,
subject to the direction of the Directors, have general charge of the financial
affairs of the Corporation and shall cause to be kept accurate books of account.
He shall have custody of all funds, securities, and valuable documents of the
Corporation, except as the Directors may otherwise provide.
Any Assistant Treasurer shall have such powers as the Directors may from
time to time designate.
Section 8. SECRETARY. The Secretary shall keep a record of the meetings
of stockholders and of the meetings of the Directors. Unless a Transfer Agent
is appointed, the Secretary shall keep or cause to be kept at the principal
office of the Corporation or at his office, the stock and transfer records of
the Corporation, in which are contained the names of all stockholders and the
record address, and the amount of stock held by each.
Any Assistant Secretary shall have such powers as the Directors may from
time to time designate.
Section 9. ASSISTANT SECRETARY. Any Assistant Secretary shall have such
powers as the Directors may from time to time designate. In the absence of the
Secretary from any meeting of stockholders, an Assistant Secretary, if one be
elected, otherwise a Temporary Secretary designated by the person presiding at
the meeting, shall perform the duties of the Secretary.
Section 10. OTHER POWERS AND DUTIES. Each officer shall, subject to these
By-Laws, have in addition to the duties and powers specifically set forth in
these By-Laws, such duties and powers as are customarily incident to his office,
and such duties and powers as the Directors may from time to time designate.
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ARTICLE IV
Indemnification of Directors and Officers
The Corporation shall to the extent legally permissible indemnify each of
its directors and officers and each person who shall serve or shall have served
at its request as a director or officer of another Corporation (and the heirs,
executors and administrators of such director, officer and other person) against
all expenses and liabilities which he has reasonably incurred in connection with
or arising out of any actual or threatened action, suit or proceeding in which
he may be involved by reason of his being or having been a director or officer
of the Corporation or by reason of his serving or having served at its request
as a director or officer of another Corporation (whether or not he continues to
be a director, or officer, at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements, provided no such indemnification shall be made in relation to
matters as to which such director or officer shall be finally adjudged in any
such action, suit or proceeding not to have acted in good faith in the
reasonable belief that his action was in the best interests of the Corporation.
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 Corporation to the effect
that such settlement or compromise is in the best interest of the Corporation
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
Corporation, and if the Board of Directors shall have adopted a resolution
approving such settlement or compromise.
The foregoing right of indemnification shall not be exclusive of other
rights to which any director, officer or other corporate personnel may be
entitled as a matter of law.
ARTICLE V
Capital Stock
Section 1. CERTIFICATE OF STOCK. Each stockholder shall be entitled to a
certificate of the capital stock of the Corporation in such form as may be
prescribed from time to time by the Directors. The certificate shall be signed
by the President or a Vice President, and by the Treasurer or an Assistant
Treasurer, but when a certificate is countersigned by a transfer agent or a
registrar, other than a Director, officer or employee of the Corporation, such
signatures may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the time of its
issue.
Every certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Articles of Organization, the By-Laws, or any
agreement to which the Corporation is a party, shall have the restriction noted
conspicuously on the certificate and shall also set forth on the face or back
either the full text of the restriction or a statement of the existence of such
restriction and a statement that the Corporation will furnish a copy to the
holder of such certificate upon written request and without charge.
Every certificate issued when the Corporation is authorized to issue more
than one class or series of stock shall set forth on its face or back either the
full text of the preferences, voting powers, qualifications and special and
relative rights of the shares of each class and series authorized to be issued
or a statement of the existence of such preferences, powers, qualifications and
right, and a statement that the Corporation will furnish a copy thereof to the
holder of such certificate upon written request and without charge.
Section 2. TRANSFERS. Subject to the restrictions, if any, stated or
noted on the stock certificates, shares of stock may be transferred on the books
of the Corporation by the surrender to the Corporation or its transfer agent of
the certificate therefor properly endorsed or accompanied by a written
assignment and power of attorney properly executed, with necessary transfer
stamps affixed, and with such proof of the authenticity of signature as the
Corporation or its transfer agent may reasonably require. Except as may be
otherwise required by law, the Articles of Organization or these By-Laws, the
Corporation shall be entitled to treat the record holder of stock as shown on
its
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books as the owner of such stock for all purposes, including the payment of
dividends and the right to vote with respect thereto, regardless of any
transfer, pledge or other disposition of such stock, until the shares have been
transferred on the books of the Corporation in accordance with the requirements
of the By-Laws.
It shall be the duty of each stockholder to notify the Corporation of his
post office address.
Section 3. RECORD DATE. The Directors may fix in advance a time of not
more than sixty days preceding the date of any meeting of stockholders, or the
date for the payment of any dividend or the making of any distribution to
stockholders, or the last day on which the consent or dissent of stockholders
may be effectively expressed for any purpose, as the record date for determining
the stockholders having the right to notice of and to vote at such meeting, and
any adjournment thereof, or the right to receive such dividend or distribution
or the right to give such consent or dissent. In such case only stockholders of
record on such record date shall have such right, notwithstanding any transfer
of stock on the books of the Corporation after the record date. Without fixing
such record date, the Directors may for any of such purposes close the transfer
books for all or any part of such period.
Section 4. REPLACEMENT OF CERTIFICATES. In case of the alleged loss or
destruction or the mutilation of a certificate of stock, a duplicate may be
issued in place thereof, upon such terms as the Directors may prescribe.
ARTICLE VI
Miscellaneous
Section 1. FISCAL YEAR. Except as from time to time otherwise determined
by the Directors, the fiscal year of the Corporation shall be the twelve months
ending March 31.
Section 2. SEAL. The seal of the Corporation shall, subject to
alterations by the Directors, bear its name, the word "Delaware" and the year of
its incorporation.
Section 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations authorized to be executed by an
officer of the Corporation in its behalf shall be signed by the President or the
Treasurer except as the Directors may generally or in particular cases otherwise
determine.
Section 4. VOTING OF SECURITIES. Except as the Directors may otherwise
designate, the President or Treasurer may waive notice of, and appoint any
person or persons to act as proxy or attorney in fact for this Corporation (with
or without power of substitution) at any meeting of stockholders or shareholders
of any other Corporation or organization, the securities of which may be held by
this Corporation. The President shall have the power to vote any such
securities held by this Corporation unless the Directors shall, by vote,
otherwise stipulate.
Section 5. CORPORATE RECORDS. The original, or attested copies, of the
Certificate of Incorporation, By-Laws and records of all meetings of the
incorporates and stockholders, and the stock and transfer records, which shall
contain the names of all stockholders and the record address and the amount of
stock held by each, shall be kept at the principal office of the Corporation, or
at an office of its transfer agent or of the Secretary. Said copies and records
need not all be kept in the same office. They shall be available at all
reasonable times to the inspection of any stockholder for any proper purpose but
not to secure a list of stockholders for the purpose of selling said list or
copies thereof or of using the same for a purpose other than in the interest of
the applicant, as a stockholder, relative to the affairs of the Corporation.
Section 6. CORPORATION MAY ACT AS PARTNER. The Corporation, in accordance
with the Certificate of Incorporation and the General Corporation Law of the
State of Delaware, is hereby empowered to be a partner in any business
enterprise which the Corporation would have power to conduct itself.
Section 7. CERTIFICATE OF INCORPORATION. All references in these By-
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Laws to the Certificate of Incorporation shall be deemed to refer to the
Certificate of Incorporation of the Corporation, as amended and in effect from
time to time.
Section 8. AMENDMENTS. Except as otherwise required by law, these
By-Laws may at any time be amended by vote of the stockholders, provided that
notice of the substance of the proposed amendment is stated in the notice of the
meeting, or may be amended by vote of a majority of the Directors then in
office, except that no amendment may be made by the Directors which alters the
provisions of these By-Laws with respect to removal of Directors or the election
of committees by Directors and delegation of powers thereto, or amendment of
these By-Laws. Not later than the time of giving notice of the meeting of
stockholders next following the making, amending or repealing by the Directors
of any By-Law, notice thereof stating the substance of such change shall be
given to all stockholders entitled to vote on amending the By-Laws.
ARTICLE VII
Repayment of Disallowed Expenses
Any payments made to an officer of the Corporation such as a salary,
commission, bonus, interest, or rent, or entertainment expense incurred by him,
which shall be disallowed in whole or in part as a deductible expense by the
Internal Revenue Service, shall be reimbursed by such officer to the Corporation
to the full extent of such disallowance. It shall be the duty of the Directors,
as a Board, to enforce payment of each amount disallowed. In lieu of payment by
the officer, subject to determination of the Directors, proportionate amounts
may be withheld from his future compensation payments until the amount owed to
the Corporation has been recovered.
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APPENDIX D
PROVISIONS OF THE GENERAL LAWS OF MASSACHUSETTS
RELATING TO THE RIGHTS OF DISSENTING SHAREHOLDERS
(SECTIONS 86 TO 98 OF CHAPTER 156B OF THE
GENERAL LAWS OF MASSACHUSETTS)
86. RIGHT OF APPRAISAL. If a corporation proposes to take a corporate
action as to which any section of this chapter provides that a stockholder who
objects to such action shall have the right to demand payment for his shares and
an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall
apply except as otherwise specifically provided in any section of this chapter.
Except as provided in sections eighty-two and eighty-three, no stockholder shall
have such right unless (1) he files with the corporation before the taking of
the vote of the shareholders on such corporate action, written objection to the
proposed action stating that he intends to demand payment for his shares if the
action is taken and (2) his shares are not voted in favor of the proposed
action.
87. NOTICE OF STOCKHOLDERS MEETING TO CONTAIN STATEMENT AS TO APPRAISAL
RIGHTS. The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of notice
shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not voted
in favor of such action has or may have the right to demand in writing from the
corporation (or, in the case of a consolidation or merger, the name of the
resulting or surviving corporation shall be inserted), within twenty days after
the date of mailing to him of notice in writing that the corporate action has
become effective, payment for his shares and an appraisal of the value thereof.
Such corporation and any such stockholder shall in such cases have the rights
and duties and shall follow the procedure set forth in section 88 to 98,
inclusive, of Chapter 156B of the General Laws of Massachusetts."
88. NOTICE TO OBJECTING STOCKHOLDER THAT CORPORATE ACTION HAS BECOME
EFFECTIVE. The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified mail,
addressed to the stockholder at his last known address as it appears in the
records of the corporation.
89. DEMAND FOR PAYMENT BY OBJECTING STOCKHOLDER. If within twenty days
after the date of mailing of a notice under subsection (e) of section eighty-
two, subsection (f) of section eighty-three, or section eighty-eight any
stockholder to whom the corporation was required to give such notice shall
demand in writing from the corporation taking such action, or in the case of a
consolidation or merger from the resulting or surviving corporation, payment for
his stock, the corporation upon which such demand is made shall pay
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to him the fair value of his stock within thirty days after the expiration of
the period during which such demand may be made.
90. DETERMINATION OF VALUE OF STOCK BY SUPERIOR COURT. If during the period
of thirty days provided for in section eighty-nine the corporation upon which
such demand is made and any such objecting stockholder fail to agree as to the
value of such stock, such corporation or any such stockholder may within four
months after the expiration of such thirty-day period demand a determination of
the value of the stock of all such objecting stockholders by a bill in equity
filed in the superior court in the county where the corporation in which such
objecting stockholder held stock had or has its principal office in the
commonwealth.
91. BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF ETC.; PARTIES TO BILL ETC.; SERVICE OF BILL IN
CORPORATION; NOTICE TO STOCKHOLDER PARTIES ETC. If the bill is filed by the
corporation, it shall name as parties respondent all stockholders who have
demanded payment for their shares and with whom the corporation has not reached
agreement as to the value thereof. If the bill is filed by a stockholder, he
shall bring the bill in his own behalf and in behalf of all other stockholders
who have demanded payment for their shares and with whom the corporation has not
reached agreement as to the value thereof, and service of the bill shall be made
upon the corporation by subpoena with a copy of the bill annexed. The
corporation shall file with its answer a duly verified list of all such other
stockholders, and such stockholders shall thereupon be deemed to have been added
as parties to the bill. The corporation shall give notice in such form and
returnable on such date as the court shall order to each stockholder party to
the bill by registered or certified mail, addressed to the last known address of
such stockholder as shown in the records of the corporation, and the court may
order such additional notice by publication or otherwise as it deems advisable.
Each stockholder who makes demand as provided in section eighty-nine shall be
deemed to have consented to the provisions of this section relating to notice,
and the giving of notice by the corporation to any such stockholder in
compliance with the order of the court shall be a sufficient service of process
on him. Failure to give notice to any stockholder making demand shall not
invalidate the proceedings as to other stockholders to whom notice was properly
given, and the court may at any time before the entry of a final decree make
supplementary orders of notice.
92. BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; ENTRY OF DECREE DETERMINING VALUE OF
STOCK; DATE ON WHICH VALUE IS TO BE DETERMINED. After hearing the court shall
enter a decree determining the fair value of the stock of those stockholders who
have become entitled to the valuation of and payment for their shares, and shall
order the corporation to make payment of such value, together with interest, if
any, as hereinafter provided, to the stockholders entitled thereto upon the
transfer by them to the corporation of the certificates representing such stock
if certificated or if uncertificated, upon receipt of an instruction
transferring such stock to the corporation. For this purpose, the value of the
shares shall be determined as of the day preceding the date of the vote
approving the proposed corporate action and shall be exclusive of any element of
value arising from the expectation, or accomplishments of the proposed corporate
action.
93. BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; COURT MAY REFER BILL, ETC., TO SPECIAL
MASTER TO HEAR PARTIES, ETC. The court in its discretion may refer the bill or
any question arising thereunder to a special master to hear the parties, make
findings and report the same to the court, all in accordance with the usual
practice in suits in equity in the superior court.
94. BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; STOCKHOLDER PARTIES MAY BE REQUIRED TO
SUBMIT THEIR STOCK CERTIFICATES FOR NOTATION THEREON OF PENDENCY OF BILL, ETC.
On motion the court may order stockholder parties to the bill to submit their
certificates of stock to the corporation for notation thereon of the pendency of
the bill, and may order the corporation to note such pendency in its records
with
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respect to any uncertificated shares held by such stockholder parties, and may
on motion dismiss the bill as to any stockholder who fails to comply with such
order.
95. BILL IN EQUITY TO DETERMINE VALUE OF STOCK OF OBJECTING STOCKHOLDERS ON
FAILURE TO AGREE ON VALUE THEREOF, ETC.; TAXATION OF COSTS, ETC.; INTEREST ON
AWARD, ETC. The costs of the bill including the reasonable compensation and
expenses of any master appointed by the court, but exclusive of fees of counsel
or of experts retained by any party, shall be determined by the court and taxed
upon the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided in
this chapter shall be paid by the corporation. Interest shall be paid upon any
award from the date of the vote approving the proposed corporate action, and the
court may on application of any interested party determine the amount of
interest to be paid in the case of any stockholder.
96. STOCKHOLDER DEMANDING PAYMENT FOR STOCK NOT ENTITLED TO NOTICE OF
STOCKHOLDERS' MEETINGS OR TO VOTE STOCK OR TO RECEIVE DIVIDENDS, ETC.;
EXCEPTIONS. Any stockholder who has demanded payment for his stock as provided
in this chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation, or
in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3) inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
97. CERTAIN SHARES PAID FOR BY CORPORATION TO HAVE STATUS OF TREASURY
STOCK, ETC. The shares of the corporation paid for by the corporation pursuant
to the provisions of this chapter shall have the status of treasury stock or in
the case of a consolidation or merger the shares or the securities of the
resulting or surviving corporation into which the shares of such objecting
stockholder would have been converted had he not objected to such consolidation
or merger shall have the status of treasury stock or securities.
98. ENFORCEMENT BY STOCKHOLDER OF RIGHT TO RECEIVE PAYMENT FOR HIS SHARES
TO BE EXCLUSIVE REMEDY; EXCEPTION. The enforcement by a stockholder of his right
to receive payment for his shares in the manner provided in this chapter shall
be an exclusive remedy except that this chapter shall not exclude the right of
such stockholder to bring or maintain an appropriate proceeding to obtain relief
on the ground that such corporate action will be or is illegal or fraudulent as
to him.
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PROXY
CTC COMMUNICATIONS CORP.
SPECIAL MEETING OF STOCKHOLDERS
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Leonard R. Glass and John D. Pittenger and each
of them, the true and lawful attorneys and agents for the undersigned, with full
power of substitution, for and in the name of the undersigned, to act for the
undersigned and vote all stock the undersigned is entitled to vote at the
Special Meeting of Stockholders of CTC Communications Corp. to be held on [
], 1999 at 9:30 a.m., local time, at the offices of the Company, 360 Second
Avenue, Waltham, Massachusetts, and at any and all adjournments thereof, on the
matters listed on the reverse side of this card.
The undersigned hereby acknowledges receipt of the Proxy Statement and Notice of
Special Meeting dated _____________, 1999.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE STOCKHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
REORGANIZATION PROPOSAL. PLEASE VOTE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY
IN ENCLOSED ENVELOPE. (Please sign exactly as your name appears on your stock
certificate. If stock is registered in more than one name, each holder should
sign. When signing as an attorney, administrator, executor, guardian or
trustee, please add your title as such. If executed by a corporation or
partnership, the Proxy should be signed in full corporate or partnership name by
a duly authorized officer or partner as applicable.)
Has your address changed? Do you have any comments?
__________________________ ___________________________________
__________________________ ___________________________________
__________________________ ___________________________________
<PAGE>
[X] PLEASE MARK VOTES CTC COMMUNICATIONS CORP.
AS IN THIS EXAMPLE
Proposal to reorganize CTC Communications Corp. into a holding company structure
in which CTC Communications Corp. would continue as a Massachusetts corporation
and become a wholly-owned subsidiary of CTC Communications Group, Inc., a newly
formed Delaware corporation.
FOR [_] AGAINST [_] ABSTAIN [_]
Mark the box at right if comments or address change have been noted on the
reverse side of this card. [ ]
Please be sure to sign and date this Proxy. Date________________
Stockholder sign here_____________________________
Co-owner sign here________________________________
