<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 1)
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>
May__, 1999
Dear Stockholder:
We are calling a Special Meeting of Stockholders of CTC Communications Corp. to
be held on _______, 1999 at 9:30 a.m., local time, at 220 Bear Hill Road,
Waltham, Massachusetts 02451-1104.
At the Meeting, we will ask you to approve the corporate reorganization of CTC.
After the reorganization, CTC Communications Group, Inc., a Delaware corporation
organized for the purpose, will own all of the common stock of CTC. CTC will
continue to conduct the day to day business it now conducts. CTC Communications
Group will be a holding company.
The proposed reorganization would result in your holding shares in CTC Group
rather than CTC Communications. The shares you now own in CTC would
automatically be converted into the same number of shares in CTC Group, the new
Delaware holding company.
This proxy statement/prospectus provides you with detailed information regarding
the reorganization. We encourage you to read the entire document carefully.
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.
On behalf of your board of directors, thank you for your continued support.
Sincerely,
Robert J. Fabbricatore
Chairman and Chief Executive Officer
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED ______________, 1999
CTC COMMUNICATIONS CORP.
PROXY STATEMENT/PROSPECTUS
CTC Communications Corp., or CTC Communications, and CTC Communications Group,
Inc. or CTC Group, are furnishing you this proxy statement/prospectus because
you are a holder of CTC Communications common stock or Series A convertible
preferred stock. The CTC Communications board of directors is soliciting
proxies for use at its special meeting of stockholders. The special meeting
will convene at 9:30 a.m. on ______, 1999 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 of a Plan of Merger and Reorganization which would have the
following effects:
. CTC Group, a Delaware corporation, will become the new parent
corporation and operate as a holding company.
. CTC Communications, the current parent corporation, will become a
wholly-owned subsidiary of CTC Group 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 common stock or Series A convertible preferred stock of CTC
Communications will automatically be converted into the same number of
shares of common stock or Series A convertible preferred stock of CTC
Group.
. CTC Group will become a publicly traded company.
This proxy statement/prospectus also constitutes the prospectus of CTC Group for
the offering to you of the CTC Group common stock and Series A convertible
preferred stock to be issued in the reorganization.
_____________
THE REORGANIZATION INVOLVES ELEMENTS OF RISK. SEE "RISK FACTORS" ON PAGES 13-
20.
_____________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
______________
The last sale price of CTC Communications common stock on the Nasdaq National
Market on May 3, 1999 was $19.50 per share.
CTC Group's will be listed on the Nasdaq National Market under the symbol "CPTL"
following the consummation of the reorganization.
_______________
The date of this Proxy Statement/Prospectus is ____________, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION........................................................................... 6
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS..................................................................... 7
SUMMARY
Questions and Answers.................................................................................... 8
The Proposed Reorganization.............................................................................. 8
Your Stockholder Vote.................................................................................... 9
Our Business............................................................................................. 10
Summary Financial and Operating Data..................................................................... 12
RISK FACTORS.................................................................................................. 13
Risks Relating to the Reorganization.......................................................................... 13
A holding company structure would restrict CTC Group's access to any assets and
cash flow of subsidiaries.............................................................................. 13
We may be required to pay material amounts of cash to stockholders who exercise
their appraisal rights................................................................................. 13
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......................................... 13
Risks Relating to an Investment in our Stock.................................................................. 14
Our prospects are difficult to evaluate because most of our historical revenues resulted from a business
strategy we are no longer pursuing..................................................................... 14
We expect to incur negative cash flows and operating losses for a significant period of time............. 14
We cannot assure you that we will successfully execute our facilities-based, ICP business plan........... 14
Implementing a facilities-based strategy is subject to technological and other uncertainties............. 14
We have limited experience deploying, operating and maintaining our own network.......................... 15
Our high leverage creates financial and operating risk that could limit the growth of our business....... 15
We will need to refinance our existing indebtedness and may not generate sufficient cash flow from
operations to pay future indebtedness.................................................................. 15
We may be unable to obtain the additional capital we will require to fund our operations and
finance our growth on terms acceptable to us or at all................................................. 16
Our market is highly competitive, and we may not be able to compete effectively; many of
our competitors have greater resources and more experience............................................. 16
The failure of our information systems to produce accurate and prompt billing and to process
customer orders could materially adversely affect our business......................................... 16
If we do not receive timely and accurate call data records from our suppliers, our billing and
collection activities could be adversely affected...................................................... 16
Our ability to serve our customers depends upon the reliability of the networks, services and
equipment of third party providers..................................................................... 17
Our operating results could be adversely affected by increases in customer attrition rates............... 17
If we fail to manage our growth, our business could be impaired.......................................... 17
Our success will depend on a limited number of key personnel who could be difficult to
replace as well as on our ability to hire other skilled personnel...................................... 17
Changes to the regulations applicable to our business could increase our costs and limit our operations.. 18
Rapid technological changes in the telecommunications industry could render our services
obsolete faster than we expect or could require us to spend more to develop our
network than we currently anticipate................................................................... 18
</TABLE>
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<TABLE>
<S> <C>
We may incur significant costs and our business could suffer if our systems and network,
or the systems of our suppliers and vendors, do not properly process date information after
December 31, 1999...................................................................................... 18
We may pursue acquisitions which would create risks to our business...................................... 18
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................................................................................... 19
Our stock price is likely to be volatile................................................................. 19
The market price of our common stock could be affected by the substantial number of shares
that are eligible for future sale...................................................................... 19
We have anti-takeover defenses that could delay or prevent an acquisition and could adversely
affect the price of our common stock................................................................... 20
Forward looking statements are inherently uncertain...................................................... 20
INFORMATION ABOUT SPECIAL MEETING............................................................................. 21
Time and Place of Meeting................................................................................ 21
Voting Rights and Vote Required.......................................................................... 21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................................................... 22
Common Stock............................................................................................. 22
Preferred Stock.......................................................................................... 23
APPRAISAL RIGHTS OF DISSENTING CTC COMMUNICATIONS STOCKHOLDERS................................................ 24
THE REORGANIZATION............................................................................................ 24
PROPOSED REORGANIZATION....................................................................................... 24
REASONS FOR THE REORGANIZATION................................................................................ 25
REORGANIZATION PROCEDURE...................................................................................... 26
CAPITALIZATION OF THE DELAWARE HOLDING COMPANY................................................................ 26
INTERESTS OF THE COMPANY'S DIRECTORS AND OFFICERS............................................................. 29
SIGNIFICANT CHANGES CAUSED BY THE REORGANIZATION.............................................................. 29
Special Meeting of Stockholders.......................................................................... 29
Voting Requirements and Quorums for Stockholder Meetings................................................. 30
Business Conducted at Stockholder Meetings............................................................... 30
Nomination and Election of Directors..................................................................... 31
Inspection Rights........................................................................................ 31
Action by Consent of Stockholders........................................................................ 32
Dividends and Stock Repurchases.......................................................................... 32
Classification, Number and Qualification of the Board of Directors....................................... 33
Removal of Directors..................................................................................... 33
Vacancies on the Board of Directors...................................................................... 34
Exculpation of Directors................................................................................. 34
Indemnification of Directors, Officers and Others........................................................ 34
Transactions with Interested Parties..................................................................... 35
Fundamental Transactions................................................................................. 36
</TABLE>
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<TABLE>
<S> <C>
Anti-Takeover Legislation............................................................... 37
Anti-Takeover Measures.................................................................. 37
Charter Amendments...................................................................... 38
Amendments to By-Laws................................................................... 39
Appraisal Rights........................................................................ 39
Disadvantages of Reincorporation in Delaware............................................ 40
SELECTED FINANCIAL DATA........................................................................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................................... 44
Overview................................................................................ 44
Results of Operations................................................................... 44
Liquidity and Capital Resources......................................................... 46
Year 2000 Compliance.................................................................... 48
BUSINESS OF THE COMPANY........................................................................... 49
Overview..................................................................................... 49
Our Market Opportunity....................................................................... 49
Our Competitive Strengths.................................................................... 49
Our Services................................................................................. 51
Our Integrated Communications Network........................................................ 51
Sales and Customer Care...................................................................... 52
Our Information Systems...................................................................... 53
Competition.................................................................................. 54
Government Regulation........................................................................ 56
Properties................................................................................... 60
Legal Proceedings............................................................................ 60
Employees.................................................................................... 60
Market Price Ranges.......................................................................... 60
MANAGEMENT........................................................................................ 60
Executive Officers, Directors and Significant Employees......................................... 60
Director Compensation........................................................................... 63
Committees of the Board of Directors............................................................ 63
Voting Agreement................................................................................ 63
Executive Compensation.......................................................................... 64
Summary Compensation Table...................................................................... 64
Option Grants in Last Fiscal Year............................................................... 65
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values................ 65
Certain Relationships And Related Transactions.................................................. 66
DESCRIPTION OF SENIOR SECURED FACILITIES.......................................................... 66
FEDERAL INCOME TAX CONSEQUENCES................................................................... 69
SECURITIES ACT CONSEQUENCES....................................................................... 70
TRANSFER AGENT AND REGISTRAR...................................................................... 70
INDEPENDENT AUDITORS.............................................................................. 70
LEGAL MATTERS..................................................................................... 70
</TABLE>
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<TABLE>
<S> <C>
EXPENSE OF SOLICITATION......................................................................... 70
STOCKHOLDERS' PROPOSALS......................................................................... 70
OTHER MATTERS THAT MAY COME BEFORE THE MEETING.................................................. 71
INDEX TO FINANCIAL STATEMENTS................................................................... F-1
REPORT OF INDEPENDENT AUDITORS.................................................................. F-2
</TABLE>
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<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 common
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. 360 Second Ave., 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. This proxy
statement/prospectus does not constitute an offer of securities in any
jurisdiction in which or to any person to whom, it is not permitted. You should
not assume that the information in this document or any supplement is accurate
as of any other date than the date on the front of those documents.
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<PAGE>
CTC COMMUNICATIONS CORP.
360 SECOND AVE.
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., 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.
The reorganization is described more fully in the attached proxy
statement/prospectus. Appendix A to the proxy statement/prospectus 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 will become a wholly-owned subsidiary of CTC Group, a
Delaware corporation.
WHY ARE YOU FORMING A DELAWARE HOLDING COMPANY?
We are forming a holding company for three reasons:
. 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 be converted into the
same number of shares of common stock and Series A convertible preferred stock
of CTC Group. The CTC Group common stock will continue to 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. You will not be required 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 is intended to 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.
YOUR STOCKHOLDER VOTE
WHEN AND WHERE WILL THE MEETING TAKE PLACE?
The special meeting of stockholders will be held at 9:30 a.m. on _____, 1999 at
our offices at 220 Bear Hill Road, Waltham, Massachusetts 02451.
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 VOTE IS REQUIRED TO APPROVE THE REORGANIZATION?
Approval of the reorganization will require:
. the affirmative vote of two-thirds of the voting power of the common stock
and the Series A convertible preferred stock entitled to vote at the
special meeting, voting together as a single class; and
. the affirmative vote of two-thirds of the Series A convertible preferred
stock entitled to vote at the special meeting, voting separately.
WHAT PERCENTAGE OF THE OUTSTANDING SHARES DO DIRECTORS AND EXECUTIVE OFFICERS
HOLD?
Directors, executive officers and their affiliates own:
. ___% of the combined voting power of the outstanding common stock and the
Series A convertible preferred stock; and
. __% of the outstanding Series A convertible preferred stock.
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.
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<PAGE>
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.
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., 360 Second Avenue, 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 proxy
statement/prospectus 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 integrated communications provider, or ICP, with
15 years of telecommunications marketing, sales and service experience. We offer
voice and data services to predominantly medium-sized business customers who
seek greater bandwidth, integrated telecommunications solutions and improved
levels of service. We have a large, experienced sales force consisting of 163
sales people supported by 95 network consultants. These personnel are located
close to our customers in 25 sales branches primarily in New England and New
York. We are currently moving to a facilities-based platform by deploying a
state-of-the-art, all packet-switched network based on advanced internet
protocol, or IP, and asynchronous transfer mode, or ATM, architecture. In May
1999, we will begin beta-testing of our network with some of our customers. By
late summer, we expect to begin providing commercial service and billing
customers on our network.
We became an ICP in January 1998. Prior to that, we were the largest
independent sales agent for NYNEX Corp. (now Bell Atlantic). At the end of 1997,
before leaving the Bell Atlantic agency program, we were managing relationships
for approximately 7,000 customers, representing over 280,000 local access lines
and over $200 million in annual local telecommunications spending. As of March
31, 1999, after only 15 months as an ICP, we were serving over 9,000 customers
and had over 142,000 access line equivalents, or ALEs, in service. For the
quarter ended March 31, 1999, we generated approximately $ million of
revenues representing over $ million on an annualized basis.
The first phase of our network includes 22 Cisco Systems, Inc. IP+ATM
switches and two fully redundant network operations centers. We are
interconnecting these facilities with leased fiber optic transmission capacity
from
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<PAGE>
Level 3 Communications, LLC and NorthEast Optic Network, Inc., or NEON to form
three self-healing SONET rings. Cisco has designated our network as a Cisco
Powered Network(TM), indicating that Cisco has reviewed and approved our network
design. We intend to access our customer locations through a variety of
broadband technologies, including digital subscriber line, or DSL, service,
leased T-1s, wireless technologies and fiber optic facilities, as available. We
will offer dedicated long distance and data services over our network. We
believe that these services represent approximately 70% of our target customers'
fixed line telecommunications spending. The remaining 30% represents local dial
tone services which we currently obtain from other carriers. We plan to
incorporate local dial tone service into our packet-switching architecture when
that technology matures.
FINANCIAL STATEMENTS
Complete pro forma and comparative financial information concerning the
company giving effect to the reorganization have not been included 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.
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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.
Gross profit is not meaningful, n/m, for the fiscal year end March 31, 1998
and prior periods because our revenues for these periods consisted primarily of
agency commissions, while costs associated with agency revenues were included
primarily in selling, general and administrative expenses. EBITDA consists of
income (loss) before interest, income taxes, depreciation and amortization and
other income and expense. We have provided EBITDA because it is a measure of
financial performance commonly used in the telecommunications industry. Other
companies may calculate it differently from us. EBITDA is not a measurement of
financial performance under generally accepted accounting principles. EBITDA
should not be considered an alternative to net income (loss) as a measure of
performance or to cash flow as a measure of liquidity.
<TABLE>
<CAPTION>
NINE MONTHS
------------------
FISCAL YEAR ENDED MARCH 31, ENDED DECEMBER 31,
--------------------------- ------------------
1996 1997 1998 1997 1998
-------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Agency revenues.......................................... $25,492 $29,195 $24,775 $24,582 $ --
Telecommunications revenues.............................. 5,383 11,095 16,172 10,078 46,376
------- ------- ------- ------- --------
Total revenues......................................... 30,875 40,290 40,947 34,660 46,376
Cost of telecommunications revenues...................... 4,242 8,709 14,038 8,095 40,426
------- ------- ------- ------- --------
Gross profit............................................. n/m n/m n/m n/m 5,950
Selling, general and administrative expenses............. 20,009 23,820 31,492 21,370 36,800
------- ------- ------- ------- --------
Income (loss) from operations............................ 6,624 7,761 (4,583) 5,195 (30,850)
Net income (loss)........................................ 4,094 4,683 (2,884) 3,124 (30,912)
OTHER FINANCIAL DATA
EBITDA (loss)............................................ $ 7,285 $ 8,504 $(3,165) $ 5,945 $(27,150)
Capital expenditures, including equipment under capital
leases.................................................. 759 1,222 4,765 4,556 22,262
Depreciation and amortization............................ 660 743 1,418 750 3,699
</TABLE>
<TABLE>
AS OF DECEMBER 31, 1988
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA
Cash and cash equivalents......................... $ 2,597
Total assets...................................... $ 67,529
Total long-term debt, including current portion... $ 41,942
Series A redeemable convertible preferred stock... $ 12,562
Stockholders' equity (deficit).................... $ (18,405)
</TABLE>
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<PAGE>
RISK FACTORS
You should carefully consider all information in this proxy
statement/prospectus, 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.
RISKS RELATING TO THE REORGANIZATION
A HOLDING COMPANY STRUCTURE WOULD RESTRICT CTC GROUP'S ACCESS TO ANY ASSETS AND
CASH FLOW OF SUBSIDIARIES.
CTC Group will have no operations of its own and will derive substantially
all of its revenue from subsidiaries. Because of this structure, CTC Group will
not have the same access to the assets that its subsidiaries will have.
Subsidiaries of CTC Group will generally pay their trade creditors and debt
service payments before any of their assets are distributed to CTC Group. In
addition, if a subsidiary were to declare bankruptcy, liquidate or reorganize,
the claims of the subsidiary's creditors will be prior to CTC Group's interest
in the subsidiary's assets.
Although the Company expects that the vast majority of its business will be
conducted through its subsidiaries, none of its subsidiaries will have any
obligation to make funds available to CTC Group to pay the principal of and the
interest on any of indebtedness CTC Group may incur. So, CTC Group's ability to
pay will depend on the earnings of its subsidiaries and whether the subsidiaries
make any distributions to CTC Group. In addition, CTC Communications' credit
facilities restrict its ability to pay cash dividends, make distributions or
otherwise transfer assets to CTC Group. These restrictions may make it more
difficult or expensive for CTC Group to obtain debt financing.
WE MAY BE REQUIRED TO PAY MATERIAL AMOUNTS OF CASH TO STOCKHOLDERS WHO EXERCISE
THEIR APPRAISAL RIGHTS.
All of the stockholders of CTC Communications have the appraisal rights
under Massachusetts law described in this document. Also, CTC Communications has
filed a registration statement for a public offering of up to 2,875,000 shares
of its common stock. If CTC Group consummates the sale of these shares prior to
the reorganization, the new CTC Group shareholders will also have dissenting
stockholder's appraisal rights. If any existing or new stockholders decide to
exercise their appraisal rights, CTC Group will have to pay them the appraised
value of their shares. These payments may result in a material amount of cash
being paid out of the company's capital if many shareholders exercise their
rights.
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.
Our credit facilities would prohibit us from making payments to
stockholders who exercise their appraisal rights to demand payment for their
stock. Also, our loan and security agreement with Goldman Sachs and Fleet
require us to consummate the reorganization. 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 or to permit us to make
any required payments to stockholders. We cannot predict if, and on what terms,
we could obtain any needed consents. If we default under our credit facilities,
our lenders could require us to repay their loans to us. If this happened, we
would need to refinance that indebtedness, sell assets, delay capital
expenditures or sell additional capital stock. If we sell additional capital
stock, your interest in us will be diluted. We cannot assure you that we will be
able to refinance any of our indebtedness on reasonable terms, or at all. We
also cannot assure you that we will be able to effect any other needed action on
satisfactory terms, or at all.
-13-
<PAGE>
RISKS RELATING TO AN INVESTMENT IN OUR STOCK
OUR PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE MOST OF OUR HISTORICAL REVENUES
RESULTED FROM A BUSINESS STRATEGY WE ARE NO LONGER PURSUING.
Although we have sold integrated telecommunications services for over 15
years, we only began offering local services as an ICP under our own brand name
in January 1998. We sold local telephone services as an agent for Bell Atlantic
until December 1997. Because we have terminated our agency relationship with
Bell Atlantic, we no longer receive agency revenues. Therefore, we can only
provide you limited historical operating and financial information about our
current business strategy for you to evaluate.
WE EXPECT TO INCUR NEGATIVE CASH FLOWS AND OPERATING LOSSES FOR A SIGNIFICANT
PERIOD OF TIME.
For the nine months ended December 31, 1998 we incurred operating losses of
approximately $30.8 million, net losses of approximately $30.9 million and
negative cash flow from operating and investing activities of approximately
$39.0 million. Our expenses have increased significantly, and we expect our
expenses to continue to increase as we deploy our network and implement our
business plan. Accordingly, we expect to incur significant operating losses, net
losses and negative cash flow during the next several years. We cannot assure
you that we will achieve and sustain profitability or positive net cash flow.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY EXECUTE OUR FACILITIES-BASED, ICP
BUSINESS PLAN.
If we fail to execute our strategy in a timely or effective manner we may
be unable to successfully compete in our markets. Our business strategy is
complex and requires that we successfully complete many tasks, a number of which
must be completed simultaneously, including:
. deploy, operate and maintain our network;
. attract and retain customers;
. attract and retain skilled employees;
. expand our sales presence in existing and new markets;
. develop and provide enhanced data services; and
. ultimately, incorporate local dial tone into our network.
If we are unable to effectively coordinate the implementation of these
multiple tasks effectively, our business is likely to suffer.
IMPLEMENTING A FACILITIES-BASED STRATEGY IS SUBJECT TO TECHNOLOGICAL AND OTHER
UNCERTAINTIES.
The packet-switched design of our network is novel and has not been widely
deployed. The network may not provide the functionality that we expect. We also
cannot be sure that we will be able to incorporate local dial tone capabilities
into our network, and without this capability we will not be able to provide on
our network all of our target customers' fixed line telecommunications services.
Our ability to provide enhanced connectivity to our network and to provide local
dial tone services will require the negotiation of interconnection agreements
with incumbent local exchange carriers, or ILECs. This can take considerable
time, effort and expense, and these agreements are subject to federal, state and
local regulation. We may not be able to effectively negotiate necessary
interconnection agreements. Also, we cannot be sure that our customers will
choose to purchase telecommunications services over our network.
-14-
<PAGE>
WE HAVE LIMITED EXPERIENCE DEPLOYING, OPERATING AND MAINTAINING OUR OWN NETWORK.
Currently we are not providing any services over our network to any
customers. We are still deploying the initial phase of our network and we have
limited experience operating and maintaining telecommunications networks. We
cannot assure you that we will effectively deploy, operate or maintain our
network. We may not be able to deploy our network within the time frame we
expect, and once the network is deployed we may encounter unanticipated
difficulties in operating and maintaining it.
OUR HIGH LEVERAGE CREATES FINANCIAL AND OPERATING RISK THAT COULD LIMIT THE
GROWTH OF OUR BUSINESS.
We have a significant amount of indebtedness. As of March 31, 1999, we had
approximately $ million of total indebtedness outstanding. We expect to
seek substantial additional debt financing to fund our business plan. Our high
leverage could have important consequences to us, including,
. limiting our ability to obtain necessary financing for future working
capital, capital expenditures, debt service requirements or other purposes;
. limiting our flexibility in planning for, or reacting to, changes in our
business;
. placing us at a competitive disadvantage to competitors with less
leverage;
. increasing our vulnerability in the event of a downturn in our business or
the economy generally;
. requiring that we use a substantial portion of our cash flow from
operations for the payment of principal and interest on our indebtedness
and not for other purposes.
WE WILL NEED TO REFINANCE OUR EXISTING INDEBTEDNESS AND MAY NOT GENERATE
SUFFICIENT CASH FLOW FROM OPERATIONS TO PAY FUTURE INDEBTEDNESS.
We expect we will not generate sufficient cash flow from operations to
repay our existing credit and vendor facilities, and it is likely that we will
need to refinance this indebtedness when it comes due. Also, we cannot assure
you that our business will generate sufficient cash flow from operations or that
alternative sources of cash flow will be available to us in amounts sufficient
to pay other future indebtedness or to fund our other needs. We will need to
generate cash in the future to make scheduled payments on and refinance our
indebtedness and to fund planned capital expenditures, operating losses and our
other needs. Our ability to generate cash will greatly depend on:
. our completing the buildout of our network timely and cost-effectively;
. the acceptance by the market of, and the demand for, our services; and
. our future operating performance.
Each of these elements may be affected by various factors that we cannot
control, including industry, general economic, financial, competitive,
legislative, regulatory and other factors. If we cannot generate sufficient cash
flow from operations, we may need to refinance all or some of our indebtedness,
sell assets, delay capital expenditures or sell additional capital stock. If we
sell additional capital stock, your interest in us will be diluted. We cannot
assure you that we will be able to refinance any of our indebtedness on
reasonable terms, or at all. We also cannot assure you that we will be able to
effect any other needed action on satisfactory terms, or at all.
-15-
<PAGE>
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL WE WILL REQUIRE TO FUND OUR
OPERATIONS AND FINANCE OUR GROWTH ON TERMS ACCEPTABLE TO US OR AT ALL.
We will need significant additional capital to fund our business plan. CTC
Communications has filed a registration statement for a public offering of up to
2,875,000 shares of its common stock. If the reorganization is completed, those
shares will be converted into shares of CTC Group common stock. We cannot
assure you we will successfully complete that offering. Even if we complete
that stock offering, we expect to seek additional financing to further fund our
business plan as soon as practicable. The timing of these efforts will depend on
market conditions. We cannot assure you that additional funding will be
available to us when we need it or at all. If we are unable to obtain financing
when we need it, we may delay or abandon our development and expansion plans.
That could have a material adverse effect on our business, results of operations
and financial condition. The actual timing and amount of our capital
requirements may be materially affected by various factors, including the timing
and actual cost of the network, the timing and cost of our expansion into new
markets, the extent of competition and pricing of telecommunications services by
others in our markets, the demand by customers for our services, technological
change and potential acquisitions.
OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY;
MANY OF OUR COMPETITORS HAVE GREATER RESOURCES AND MORE EXPERIENCE.
We operate in a highly competitive environment. We have no significant
market share in any market in which we operate. We will face substantial and
growing competition from a variety of data transport, data networking and
telephony service providers. We will face competition for the provision of
integrated telecommunications services as well for the individual service
components that comprise our integrated services. The number of competitors able
to provide integrated telecommunication services has increased as a result of
regulatory changes and industry consolidation. We expect that the incumbent
local exchange carriers ultimately will also be able to provide integrated
services. Many of our competitors are larger and better capitalized than we are.
Also, many of our competitors are incumbent providers with long standing
relationships with their customers and greater name recognition. See "Business--
Competition."
THE FAILURE OF OUR INFORMATION SYSTEMS TO PRODUCE ACCURATE AND PROMPT BILLING
AND TO PROCESS CUSTOMER ORDERS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
The accurate and prompt billing of our customers is essential to our
operations and future profitability. The deployment of our network will place
additional demands on our information systems. We cannot assure you that our
information systems will perform how we expect. Also, if our business grows as
we plan, we cannot assure you that our billing and management systems will be
sufficient to provide us with accurate and efficient billing and other necessary
processing capabilities. We may not identify all of our information and
processing needs (including issues related to the Year 2000) and may not upgrade
our information systems as needed. Either of these could materially adversely
affect our business, results of operations and financial condition.
IF WE DO NOT RECEIVE TIMELY AND ACCURATE CALL DATA RECORDS FROM OUR SUPPLIERS,
OUR BILLING AND COLLECTION ACTIVITIES COULD BE ADVERSELY AFFECTED.
Our billing and collection activities are dependent upon our suppliers
providing us accurate call data records. If we do not receive accurate call data
records in a timely manner, our business, results of operations and financial
condition could be materially adversely affected. In addition, we pay our
suppliers according to our calculation of the charges based upon invoices and
computer tape records provided by these suppliers. Disputes may arise between us
and our suppliers because these records may not always reflect current rates and
volumes. If we do not pay disputed amounts, a supplier may consider us to be in
arrears in our payments until the amount in dispute is resolved. We cannot
assure you that disputes with suppliers will not arise or that such disputes
will be resolved in our favor.
-16-
<PAGE>
OUR ABILITY TO SERVE OUR CUSTOMERS DEPENDS UPON THE RELIABILITY OF THE NETWORKS,
SERVICES AND EQUIPMENT OF THIRD PARTY PROVIDERS.
We do not currently provide any services over our network. We depend almost
entirely on facilities-based carriers for the switching and transmission of
customer traffic. After we complete deploying our network, we will still rely to
some extent on others for switching and transmission of customer traffic. We
will also rely on others for fiber optic backbone transmission facilities,
including Level 3 and NEON, for our network. We cannot be sure that any third
party switching or transmission facilities will be available when needed or on
acceptable terms.
Although we can exercise direct control of the customer care and support we
provide, most of the services we currently offer are provided by others. These
services are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security and other factors which may cause
interruptions in service or reduced capacity for our customers. These problems,
although not within our control, could adversely affect customer confidence and
damage our reputation. Either of these could have a material adverse effect on
our business, results of operations and financial condition.
We have engaged a network services integrator to design, engineer and
manage the buildout of our network in our existing markets. If the network
integrator is not able to perform these functions, we may experience delays or
additional costs in providing services and building the network. The failure of
our network equipment to operate as anticipated or the inability of equipment
suppliers, including Cisco, to timely supply such equipment could materially and
adversely affect our business, results of operations and financial condition.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY INCREASES IN CUSTOMER
ATTRITION RATES.
We cannot assure you that our customers will continue to purchase local,
long distance, data or other services from us. Because we have been operating as
an ICP for a short time, our customer attrition rate is difficult to evaluate.
We could lose customers as a result of national advertising campaigns,
telemarketing programs and customer incentives provided by major competitors as
well as for other reasons not in our control. Increases in customer attrition
rates could have a material adverse effect on our business, results of
operations and financial condition.
IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE IMPAIRED.
We are pursuing a business plan that will result in rapid growth and
expansion of our operations if we are successful. This rapid growth would place
significant additional demands upon our current management and other resources.
Our success will depend on our ability to manage our growth. To accomplish this
we will have to train, motivate and manage an increasing number of employees. We
will also need to continually enhance our information systems. Our failure to
manage growth effectively could have a material adverse effect on our business,
results of operations and financial condition.
OUR SUCCESS WILL DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO COULD BE
DIFFICULT TO REPLACE AS WELL AS ON OUR ABILITY TO HIRE OTHER SKILLED PERSONNEL.
We believe that our continued success will depend upon the abilities and
continued efforts of our management, particularly members of our senior
management team. The loss of the services of any of these individuals could have
a material adverse effect on our business, results of operations and financial
condition. Our success will also depend upon our ability to identify, hire and
retain additional highly skilled sales, service and technical personnel. Demand
for qualified personnel with telecommunications experience is high and
competition for their services is intense. We cannot be sure that we will be
able to attract and retain the additional employees we need to implement our
business strategy. Our inability to hire and retain such personnel could have a
material adverse effect on our business, results of operations and financial
condition.
-17-
<PAGE>
CHANGES TO THE REGULATIONS APPLICABLE TO OUR BUSINESS COULD INCREASE OUR COSTS
AND LIMIT OUR OPERATIONS.
We are subject to federal, state, and local regulation of our local, long
distance, and data services. See "Business-Government Regulation." With the
passage of the Telecommunications Act in 1996, the regulation of our services
has been subject to numerous administrative proceedings at the federal and state
level, litigation in federal and state courts, and legislation in federal and
state legislatures. We cannot predict the outcome of the various proceedings,
litigation, and legislation or whether and to what extent they may adversely
affect our business or operations. We believe the current trend toward relaxed
regulatory oversight and competition will benefit us. Our competitors, however,
may benefit from this trend to a greater extent than we will. If that occurs,
our business may be adversely affected.
RAPID TECHNOLOGICAL CHANGES IN THE TELECOMMUNICATIONS INDUSTRY COULD RENDER OUR
SERVICES OBSOLETE FASTER THAN WE EXPECT OR COULD REQUIRE US TO SPEND MORE TO
DEVELOP OUR NETWORK THAN WE CURRENTLY ANTICIPATE.
The telecommunications industry is subject to rapid and significant changes
in technology. We cannot predict the effect that changes in technology will have
on our business. Any changes could have a material adverse effect on our
business, operating results and financial condition. Advances in technology
could lead to more entities becoming facilities-based ICPs. We believe that our
long-term success will increasingly depend on our ability to offer advanced
services and to anticipate or adapt to evolving industry standards. We cannot be
sure that:
. we will be able to offer the services our customers require;
. our services will not be economically or technically outmoded by current
or future competitive technologies;
. our network or our information systems will not become obsolete;
. we will have sufficient resources to develop or acquire new technologies
or introduce new services that we need to effectively compete; or
. the cost of the network will decline as rapidly as the costs of our
competitors' infrastructures.
WE MAY INCUR SIGNIFICANT COSTS AND OUR BUSINESS COULD SUFFER IF OUR SYSTEMS AND
NETWORK, OR THE SYSTEMS OF OUR SUPPLIERS AND VENDORS, DO NOT PROPERLY PROCESS
DATE INFORMATION AFTER DECEMBER 31, 1999.
Currently, many computer systems and software products are coded to accept
only two digit, rather than four digit, entries in the date code field. Date-
sensitive software or hardware coded in this manner may not be able to
distinguish a year that begins with a "20" instead of a "19," and programs that
perform arithmetic operations, make comparisons or sort date fields may not
yield correct results with the input of a Year 2000 date. This Year 2000 problem
could cause miscalculations or system failures that could affect our operations.
We cannot assure you that we have successfully identified all Year 2000 problems
with our information systems and network. We also cannot assure you that we will
be able to implement any necessary corrective actions in a timely manner. Our
failure to successfully identify and remediate Year 2000 problems in critical
systems could have a material adverse effect on our business, results of
operations and financial condition. Also, if the systems of other companies that
provide us services or with whom our systems interconnect are not Year 2000
compliant, our business, operating results and financial condition could be
materially adversely affected. The Year 2000 issue is discussed at greater
length in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
WE MAY PURSUE ACQUISITIONS WHICH WOULD CREATE RISKS TO OUR BUSINESS.
We may pursue strategic acquisitions as we expand. We currently have no
definitive agreement with respect to any acquisition. Acquisitions may increase
our risks because we may:
-18-
<PAGE>
. experience difficulties integrating acquired operations and personnel into
our operations;
. disrupt our ongoing business;
. divert resources and management time;
. be unable to maintain uniform standards, controls, procedures and
policies; and
. enter markets or businesses in which we have little or no experience.
We cannot assure you that we will be able to obtain any additional
financing needed to finance potential acquisitions. If we do make any
acquisition, the acquired business might not perform as we expected.
OUR EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS CONTROL A
SUBSTANTIAL AMOUNT OF OUR VOTING SHARES AND WILL BE ABLE TO SIGNIFICANTLY
INFLUENCE ANY MATTER REQUIRING SHAREHOLDER APPROVAL.
After the offering, our officers and directors and parties related to them
will control approximately 42% of our outstanding voting stock. Robert J.
Fabbricatore, our Chairman and Chief Executive Officer, will control
approximately 21% of our outstanding voting capital stock. Therefore, the
officers and directors will be able to significantly influence any matter
requiring shareholder approval. In addition, Mr. Fabbricatore and some of his
affiliates have agreed to vote shares they control to elect to our board up to
two persons designated by the holders of a majority of our Series A preferred
stock.
OUR STOCK PRICE IS LIKELY TO BE VOLATILE.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and telecommunications
companies in particular, has experienced extreme volatility. This volatility has
often been unrelated to the operating performance of particular companies. Other
factors that could cause the market price of our common stock to fluctuate
substantially include:
. announcements of developments related to our business, or that of our
competitors, our industry group or our customers;
. fluctuations in our results of operations;
. hiring or departure of key personnel;
. a shortfall in our results compared to analysts' expectations and changes
in analysts' recommendations or projections;
. sales of substantial amounts of our equity securities into the
marketplace;
. regulatory developments affecting the telecommunications industry or data
services; and
. general conditions in the telecommunications industry or the economy as a
whole.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE.
If the reorganization is completed, all of CTC Communications Group, Inc.'s
shares will be freely tradeable, under the Securities Act, subject to compliance
with Rule 144 under the Securities Act. We cannot be sure what effect, if any,
future sales of shares or the availability of shares for future sale will have
on the market price of the common stock. The market price of our common stock
could drop due to sales of a large number of shares in the
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<PAGE>
market after the offering or the perception that sales of large numbers of
shares could occur. These factors could also make it more difficult to raise
funds through future offerings of common stock.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
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 the company even if a change in control would be beneficial
to our stockholders. These provisions may negatively affect the price of our
common stock and may discourage third parties from bidding for CTC. In addition,
our board of directors may issue, without stockholder approval, shares of
preferred stock with terms set by the board. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could depress the price of the common stock. See "Description of Capital
Stock--Preferred Stock."
FORWARD LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN.
Certain statements about us and our industry under the captions
"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 this document
that are not historical facts. When used in this document, the words "estimate,"
"project," "believe," "anticipate," "intend," "plan," "expect" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties,
including those described in this "Risk Factors" section, actual results could
differ materially from those expressed or implied by these forward-looking
statements. We caution you not to place undue reliance on these forward-looking
statements. These forward-looking statements speak only as of the date of this
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.
-20-
<PAGE>
INFORMATION ABOUT SPECIAL MEETING
TIME AND PLACE OF MEETING
We have furnished this proxy statement/prospectus 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.
The meeting will be held 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
360 Second Ave., 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 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 will be counted as shares that are
present and entitled to vote on the matter for purposes of determining the
presence of a quorum. "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 April 27, 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 27.1%
Spectrum Equity Investors II, L.P.(2) 1,629,292 13.6%
Kevin J. Maroni(2)(3) 1,634,292 13.6%
Robert A. Nicholson(2)(4) 1,635,291 13.6%
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) 480,848 4.6%
David E. Mahan(13) 187,100 1.8%
John D. Pittenger(14) 263,588 2.5%
Steven C. Jones(15) 237,500 2.3%
All directors and executive
officers as a group (17 persons)(16) 6,570,999 50.9%
</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 April 27, 1999. Mr. Fabbricatore's address is
c/o CTC Communications Corp., 360 Second Avenue, Waltham, Massachusetts
02451.
(2) Includes 187,066 shares issuable upon the exercise of warrants exercisable
within 60 days of April 27, 1999 and 1,442,226 shares issuable upon
conversion of Series A Preferred Stock as of April 27, 1999. As partners of
Spectrum Equity Investors II, L.P., Mr. Maroni, Mr. Nicholson, 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.
(3) Includes 5,000 shares issuable to Mr. Maroni upon the exercise of options
exercisable within 60 days of April 27, 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 April 27, 1999, and 998 shares issuable upon
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conversion of Series A Preferred Stock as of April 27, 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 April 27, 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 April
27, 1999.
(7) Includes 21,000 shares issuable to Mr. Santagati upon the exercise of
options exercisable within 60 days of April 27, 1999.
(8) Includes 10,000 shares issuable to Mr. Redfield upon the exercise of
options exercisable within 60 days of April 27, 1999.
(9) Includes 24,167 shares issuable to Mr. Murphy upon the exercise of options
exercisable within 60 days of April 27, 1999.
(10) Includes 5,834 shares issuable to Mr. Sillari upon the exercise of options
exercisable within 60 days of April 27, 1999.
(11) Includes 10,000 shares issuable to Ms. Courage upon the exercise of options
exercisable within 60 days of April 27, 1999.
(12) Includes 4,500 shares owned by Mr. Milton as trustee of a trust for his
children and 89,916 shares issuable upon the exercise of options
exercisable within 60 days of April 27, 1999.
(13) Includes 120,000 shares issuable to Mr. Mahan upon the exercise of options
exercisable within 60 days of April 27, 1999.
(14) Includes 65,000 shares issuable to Mr. Pittenger upon the exercise of
options exercisable within 60 days of April 27, 1999.
(15) Includes 187,500 shares issuable to Mr. Jones upon the exercise of options
exercisable within 60 days of April 27, 1999.
(16) Includes the shares described in footnotes (1) through (15) above.
PREFERRED STOCK
As of April 30, 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 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.
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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 June 30, 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 June 30, 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.
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.
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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. 10,352,498 shares of
common stock and 666,666 shares of Series A convertible preferred stock are
outstanding as of April 30, 1998. In addition, options to purchase 3,615,809
shares of our common stock and warrants to purchase 1,288,071 shares of common
stock were outstanding on April 30, 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.
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COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. After the payment of any
required preferential amounts to the holders of any outstanding preferred stock,
holders of common stock are entitled to receive dividends that may be declared
by the board of directors. In the event of the liquidation, dissolution or
winding up of CTC, holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and the payment of any required
preferential amounts to the holders of any outstanding preferred stock. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
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. 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, 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 the purchase price plus all accrued dividends plus an
acceleration of the dividend due through April 9, 2003. Prior to any
liquidation, dissolution or winding up of CTC, the Series A 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 into common
stock. In addition, we have the right to convert the Series A convertible
preferred stock under some circumstances. On the date of issuance, the 666,666
shares of Series A convertible preferred stock were convertible into 1,333,333
shares of our common stock. The number of shares of common stock into which the
Series A 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
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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 (1) 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 (2)
the number of shares of Series A convertible preferred stock they hold
multiplied by 2.476. 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.
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.
WARRANTS
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.
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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 preferred stock under the Securities
Act. Toronto Dominion, Relational Funding Corporation, GSCP 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 proxy
statement/prospectus 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."
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., 360 Second Ave., 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 by-laws of CTC
Communications, will, in effect, be superseded by the Delaware certificate of
incorporation and by-laws 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.
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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.
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 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 proxy
statement/prospectus 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
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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 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
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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
. 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.
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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.
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.
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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
. 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.
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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 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,
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. 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 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:
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. 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
. 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.
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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.
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:
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. 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 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
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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.
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, unlike Massachusetts 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
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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,
1998 are derived from our financial statements which have been audited by Ernst
& Young LLP, independent auditors. The financial data for the nine month periods
ended December 31, 1998 and 1997 are derived from our unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a fair
presentation of our financial position and the results of operations for these
periods.
Operating results for the nine months ended December 31, 1998 are not
necessarily indicative of the results that you may expect for the entire year
ending March 31, 1999. You should read the following financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes.
All earnings per share and weighted average share information included in
the accompanying financial statements have been restated to reflect the 25%
stock split effected in fiscal year ended March 31, 1995, and the three-for-two
stock split and the two-for-one stock split effected in fiscal year ended March
31, 1996.
Gross profit is not meaningful, n/m, for the fiscal year end March 31, 1998
and prior periods because our revenues for these periods consisted primarily of
agency commissions, while costs associated with agency revenues were included
primarily in selling, general and administrative expenses. EBITDA consists of
income (loss) before interest, income taxes, depreciation and amortization and
other income and expense. We have provided EBITDA because it is a measure of
financial performance commonly used in the telecommunications industry. Other
companies may calculate it differently from us. EBITDA is not a measurement of
financial performance under generally accepted accounting principles. EBITDA
should not be considered an alternative to net income (loss) as a measure of
performance or to cash flow as a measure of liquidity.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, NINE MONTHS,
----------------------------------------------------------
ENDED DECEMBER 31,
------------------------
1994 1995 1996 1997 1998 1997 1998
------------ ----------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Agency revenues................................. $14,483 $18,898 $25,492 $29,195 $24,775 $24,582 $ --
Telecommunications revenues..................... 462 3,038 5,383 11,095 16,172 10,078 46,376
------- ------- ------- ------- ------- ------- --------
Total revenues.............................. 14,945 21,936 30,875 40,290 40,947 34,660 46,376
Cost of telecommunications revenue.............. 369 2,451 4,242 8,709 14,038 8,095 40,426
------- ------- ------- ------- ------- ------- --------
Gross profit.................................... n/m n/m n/m n/m n/m n/m 5,950
Selling, general and administrative expenses.... 14,484 17,319 20,009 23,820 31,492 21,370 36,800
------- ------- ------- ------- ------- ------- --------
Income (loss) from operations................... 92 2,166 6,624 7,761 (4,583) 5,195 (30,850)
Net income (loss)............................... 75 1,472 4,094 4,683 (2,884) 3,124 (30,912)
Earnings (loss) per share
Basic......................................... 0.01 0.18 0.43 0.49 (.29) .32 (3.15)
Diluted....................................... 0.01 0.17 0.38 0.43 (.29) .29 (3.15)
OTHER FINANCIAL DATA
EBITDA (loss)................................... $ 853 $ 2,822 $ 7,285 $ 8,504 $(3,165) $ 5,945 $(27,150)
Capital expenditures, including equipment
under capital.................................. 234 599 759 1,222 4,765 4,556 22,262
leases
Depreciation and amortization................... 761 656 660 743 1,418 750 3,699
Net cash provided (used) by operating........... (378) 1,580 2,192 3,572 (7,951) (2,700) (21,555)
activities
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, DECEMBER 31,
------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998
------- ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents........................... $ 1,239 $ 2,391 $ 3,942 $ 6,406 $ 2,168 $ 2,597
Total assets........................................ 5,399 7,726 12,509 20,186 30,967 67,529
Total long-term debt, including current portion..... -- -- -- -- 9,673 41,942
Series A redeemable convertible preferred stock..... -- -- -- -- -- 12,562
Stockholders' equity (deficit)...................... 3,871 5,526 9,495 14,292 11,580 (18,405)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the financial statements and notes included
elsewhere in this proxy statement/prospectus.
OVERVIEW
Historically, we have generated agency revenues and telecommunications
revenues. Agency revenues consist of commissions we earned as an agent of Bell
Atlantic and other Regional Bell Operating Companies, or RBOCs, and long
distance providers. Telecommunications revenues are generated by our sale of
local, long distance, frame relay, internet access and other communications
services. For the fiscal year ended March 31, 1998, agency commissions accounted
for approximately 60% of our revenues, with telecommunications revenues
accounting for the other 40%. As a result of our transition to an ICP strategy
in December 1997, agency commissions earned after that date are not material.
Our financial information for periods ending on or before December 31, 1997
primarily reflects our operations as an agent for Bell Atlantic. Because of our
transition to an ICP strategy and our network buildout, most of the financial
information for these periods does not reflect our current business and is not
comparable to results for subsequent periods.
A common basis for measurement of an ICP's progress is the growth in access
line equivalents, or ALEs. ALEs represent the sum of the number of voice
circuits in service plus the data bandwidth purchased by our customers divided
by 64kbps, the capacity necessary to carry one voice channel.
RESULTS OF OPERATIONS
Results of Operations--Nine Months Ended December 31, 1998 Compared to the Nine
Months Ended December 31, 1997.
Total revenues for the nine months ended December 31, 1998 were
$46,376,000, an increase of 34% from $34,660,000 for the same period of the
preceding year. The results for the nine months ended December 31, 1998 reflect
our operations as an ICP. The results for the nine months ended December 31,
1997 primarily reflect our operations as an agent for Bell Atlantic. Because
substantially all revenues since January 1, 1998 have resulted from operations
as an ICP, comparisons between the two periods are not relevant.
During the quarter ended December 31, 1998, we provisioned 38,878 net ALEs.
That brought our total ALEs in service to 103,272 for our first year as an ICP.
Net ALEs provisioned during the quarter ended December 31, 1998 represented a
61% increase over net ALEs provisioned during the quarter ended September 30,
1998. We experienced the strongest growth in data ALEs. Data ALEs increased by
approximately 67% from the quarter ended September 1998 to 19,638, or 19% of
total ALEs as of December 31, 1998.
For the nine months ended December 31, 1998, costs of telecommunications
revenues were $40,426,000, compared to $8,095,000 for the same period of the
preceding fiscal year. As a percentage of telecommunications revenues, cost of
telecommunications revenues was 86% for the quarter ended December 1998,
compared to 85% for the quarter ended September 1998. The decrease in gross
margin is due primarily to our agency revenue declining as a percentage of total
revenue. Excluding the effects of the non-resale revenue, the gross margin due
to resale revenue remained unchanged from the quarter ended September 1998.
For the nine months ended December 31, 1998, selling, general and
administrative expenses were $36,800,000, as compared to $21,370,000 for the
same period of the preceding fiscal year, or an increase of 72%. This increase
was due to the opening of additional branch sales offices during the nine months
ended December 31, 1998 and the associated
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increased number of sales and service employees hired in connection with the
transition to our ICP strategy. As of December 31, 1998, we employed 389 people
including 172 account executives and 95 network consultants in 25 sales branches
throughout New England and New York. Selling, general and administrative
expenses also increased for the nine month period ended December 31, 1998 due to
operating expenses associated with the network buildout, as well as an
additional $2,600,000 of depreciation expense year-to-date associated with
investments in the network. The final significant component of this increase is
legal and regulatory expenses. Legal expenses in prosecuting an action against
Bell Atlantic in federal court and various state regulatory proceedings,
together with the expenses incurred in obtaining certification as a reseller in
additional states, were $3,444,000 for the nine months ended December 31, 1998.
See "Business-Legal Proceedings."
Interest and other expense increased to $2,389,000 for the nine months
ended December 31, 1998, as compared to interest and other income of $118,000
for the nine months ended December 31, 1997. The increase is due to increased
borrowings to fund our operating losses and to fund the deployment of our
network, the fees associated with our credit facility and vendor facility, and
the amortization of the interest expense associated with warrants issued to the
lenders under the credit facility.
The benefit for income taxes, which is limited to refunds available on a
loss carryback basis, has been recognized ratably as a percentage of our
estimated pre-tax loss over each of the four quarters of the fiscal year. The
effective rate of the benefit may vary with changes in management's estimates.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
The results for the fiscal year ended March 31, 1998 reflect our decision
to leave the Bell Atlantic agency program in December 1997 and our commencement
of operations as an ICP. This decision adversely affected revenues and expenses
to a certain extent in the third quarter as we prepared for this transition and
significantly affected revenues in the fourth quarter after the transition had
been effected. Total revenues of $40,947,000 for fiscal 1998 were essentially
flat as compared to $40,290,000 for the fiscal year ended March 31, 1997. Agency
revenues decreased 15% to $24,775,000 for fiscal 1998 from $29,195,000 in fiscal
1997, primarily as a result of fourth quarter revenues of only $194,000, as
compared to $8,354,000 for the same period of fiscal 1997. This decrease
reflects the fact that we left the Bell Atlantic agency program in December
1997, and thus no Bell Atlantic agency revenues were reported in the fourth
quarter of fiscal 1998. Telecommunications revenues increased 46% to $16,172,000
for fiscal 1998 from $11,095,000 for fiscal 1997. This increase reflects the
increased sales of long distance, internet access, and frame relay data services
as well as the commencement of our sale of local telecommunications services as
an ICP in the fourth quarter of fiscal 1998. Although local telecommunications
sales increased during the fourth quarter, they were significantly less than we
expected as a result of the imposition of the temporary restraining order in
connection with the Bell Atlantic litigation in February 1998, which required us
to sell these local services only to new customers, resulting in a longer sales
cycle. This temporary restraining order was dissolved in August 1998.
Costs of telecommunications revenues increased 61% to $14,039,000 for
fiscal 1998 from $8,709,000 for fiscal 1997. As a percentage of
telecommunications revenues, cost of telecommunications revenues was 87% for
fiscal 1998 as compared to 78% for fiscal 1997. This overall increase was due
primarily to increased sales of telecommunications services and increased costs
for those services sold. Due largely to the initiation of local
telecommunications sales in the fourth fiscal quarter, cost of
telecommunications revenues for this period increased 127% to $5,944,000 from
$2,615,000 for the same period in fiscal 1997. These increases as a percentage
of revenues were attributable to fixed costs associated with the sale of local
telecommunications services, lower long distance rates extended to customers in
advance of rate decreases from our long distance supplier, increased costs
associated with adding new customers and services, and costs associated with
phasing out our debit card program.
Selling, general and administrative expenses increased 32% to $31,492,000
in fiscal 1998 from $23,820,000 in fiscal 1997. This increase was a result of
the increased number of sales and service employees hired in connection with the
transition to our ICP strategy, increased payments of commission and bonuses,
increased corporate and administrative
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expenses, increased depreciation associated with greater capital expenditures,
expenses related to new branch openings and a $1,200,000 charge for estimated
costs to be incurred in connection with our litigation with Bell Atlantic.
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Total revenues for fiscal 1997 increased 30% to $40,290,000 as compared to
$30,876,000 for the fiscal year ended March 31, 1996. Agency revenues increased
15% to $29,195,000 in fiscal 1997 compared to $25,493,000 for fiscal 1996 due to
the addition of new customers, increased sales to existing customers and the
addition of new services to our portfolio. Effective January 1996, NYNEX (now
Bell Atlantic) reduced some fees and commissions payable under its 1996 agency
agreement with us. As a result, although unit sales of Centrex and Data
Products, two NYNEX products, increased 30% and 66%, respectively, revenues as
stated above, increased only 15%.
Telecommunications revenues increased 106% to $11,095,000 for fiscal 1997
from $5,383,000 for fiscal 1996. This increase can be attributed to the addition
of new customers to the service, as well as the introduction of new products,
primarily internet access.
Selling, general and administrative expenses increased 19% to $23,820,000
for fiscal 1997 from $20,009,000 for fiscal 1996. As a percentage of revenues,
these expenses were 59% for fiscal 1997, compared to 65% for fiscal 1996. The
increase in selling, general and administrative expenses is attributable to the
increase in variable sales commission and bonus expenses incurred in connection
with the substantial increase in revenues. In addition, we increased the number
of sales offices, particularly in the Northeast, hired additional sales
executives, expanded the facilities at several of our existing sales branches
and made additional investments in our information systems in fiscal 1997.
Net income increased to $4,683,000 in fiscal 1997 from $4,094,000 in fiscal
1996, as a result of revenue growth primarily in the Northeast, combined with a
continuing effort to control operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Until March 1998, we had funded our working capital and operating
expenditures primarily from cash flow from operations. Since April 1998, we have
funded our transition to an ICP strategy, expansion of our sales branches and
sales force, operating losses and the deployment of our network by raising
additional capital.
In April 1998, we completed a $12 million private placement of Series A
convertible preferred stock and warrants to Spectrum Equity Investors II, L.P.
Also, on June 30, 1998, we received a commitment from Spectrum to purchase, at
our option, an additional $5 million of preferred stock on the same terms and
conditions as the Series A convertible preferred stock, which option extends
until June 30, 1999. We do not expect to exercise this option if we consummate
the common stock offering described below.
On September 1, 1998, we entered into a senior secured credit facility with
Goldman Sachs Credit Partners and Fleet National Bank. Under the terms of this
senior secured credit facility, the lenders have provided a three-year credit
facility to us consisting of revolving loans in the aggregate amount of up to
$75 million. Under our senior secured credit facility we may borrow $15 million
unconditionally and an additional $60 million based on trailing 120 days
accounts receivable collections, reducing to the trailing 90 days accounts
receivable collections by March 31, 2000. As of December 31, 1998, we had
availability of $36 million and of which we had borrowed approximately $33
million under this senior secured credit facility.
On October 14, 1998, we entered into an agreement with Cisco Systems
Capital Corporation, or Cisco Capital, for up to $25 million of vendor
financing. Under the terms of the agreement, we have agreed to a three-year, $25
million volume purchase commitment of Cisco equipment and services and Cisco
Capital has agreed to advance funds as these purchases occur. Up to $10 million
of the vendor facility can be utilized for costs associated with the integration
of Cisco equipment and related peripherals. Under the terms of the vendor
facility, we are required to pay interest on funds
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advanced under the facility at an annual rate of 12.5%. As of December 31, 1998,
we had borrowed $2.7 million under the vendor facility.
Since September 30, 1998, we have entered into various lease and vendor
financing agreements which provide for the acquisition of up to $16.2 million of
equipment and software. As of December 31, 1998, the aggregate amount borrowed
under these agreements was approximately $4.6 million.
In order to provide liquidity, we entered into a loan agreement dated as of
March 15, 1999 with Toronto Dominion (Texas), Inc. to provide an unsecured
standby credit facility for up to $30 million for capital expenditures and other
general corporate purposes. 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.
CTC Communications has filed a registration statement for a public offering
of up to 2,875,000 shares of its common stock. The gross offering could raise
as much as $56,062,500 for the company. 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, estimated net proceeds of the offering, together
with cash on hand, the proceeds of our lease and vendor financing arrangements
and the amounts we expect to be available under our credit and vendor facilities
will be sufficient to fund our capital requirements for at least the next 12
months. During this period we will seek to raise additional capital through the
issuance of debt and possibly equity securities, the timing of which will depend
on market conditions, and which could occur in the near future. We may also seek
to raise additional capital through vendor financing, equipment lease financing
and bank loans.
We cannot assure you that additional financing will be available on terms
acceptable to us when we need it. The agreements governing our existing
indebtedness limit our ability to obtain debt financing. If we are unable to
obtain financing when we need it, we may delay or abandon our development and
expansion plans. That could have a material adverse effect on our business,
results of operations and financial condition. The actual timing and amount of
our capital requirements may be materially affected by various factors,
including the timing and actual cost of the network, the timing and cost of our
expansion into new markets, the extent of competition and pricing of
telecommunications services by others in our markets, the demand by customers
for our services, technological change and potential acquisitions.
On February 24, 1999, we settled our lawsuit against Bell Atlantic Corp.
Under the terms of the settlement agreement we received cash and will receive
other consideration to satisfy claims of commissions we earned while we were an
agent for Bell Atlantic. Both parties have agreed to keep the specific terms of
the settlement confidential.
Although we believe that the terms of the settlement will permit us to
actively expand our customer base and increase our revenues and improve our
margins from the sale of communications products and services, there is no
assurance that we will do so. We do not expect to incur any additional material
costs related to this matter subsequent to March 31, 1999.
Working capital at December 31, 1998 was $5,156,000 compared to $11,342,000
at March 31, 1998, a decrease of 55%, due to an increase in accounts payable
resulting from approximately $8,000,000 of fixed assets purchased during the
quarter that were not yet funded under our vendor facility. These assets were
funded during the fourth quarter of fiscal 1999, reducing accounts payable and
increasing notes payable by $8,000,000. This was partially offset by a
reclassification of $1,834,000 deferred income taxes from non-current assets to
current assets. Cash balances at December 31, 1998 and March 31, 1998 totaled
approximately $2,597,000 and $2,167,000, respectively.
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YEAR 2000 COMPLIANCE
Our State of Readiness
We have evaluated the effect of the Year 2000 problem on our information
systems. We are implementing plans to permit our systems and applications to
effectively process information in order to support ongoing operations in the
Year 2000 and beyond. We believe our information technology, or IT, and non-IT
systems will be Year 2000 compliant by the end of 1999.
In connection with the deployment of our new network, we have designed a
new database architecture for our computer systems which we expect will be Year
2000 compliant. We expect installation of the network and related software to be
completed in the summer of 1999 and testing of the system, including its Year
2000 compliance, commenced in May 1999. While we expect that all significant IT-
related systems will be Year 2000 compliant by mid-1999, we cannot assure you
that all Year 2000 problems in the new system will be identified or that the
necessary corrective actions will be completed in a timely manner.
We have requested certification from our significant vendors and suppliers
demonstrating their Year 2000 compliance. Approximately 60% of vendors and
suppliers have delivered these certifications. We anticipate that we will
receive additional certifications. We intend to continue to identify critical
vendors and suppliers and communicate with them about their plans and progress
in addressing Year 2000 problems. We cannot assure you that the systems of these
vendors and suppliers will be timely converted. We also cannot assure you that
any failure of their systems to be Year 2000 compliant will not adversely affect
our operations.
Our Costs of Year 2000 Remediation
We have not incurred material costs related specifically to Year 2000
issues and do not expect to in the future. However, we cannot assure you that
the costs associated with Year 2000 problems will not be greater than we
anticipate.
Our Year 2000 Risk
Based on the efforts described above, we currently believe that our systems
will be Year 2000 compliant in a timely manner. We have completed the process of
identifying Year 2000 issues in our IT and non-IT systems and expect to complete
any remediation efforts by the summer of 1999.
Our Contingency Plans
We plan by mid-year 1999 to develop contingency plans to be implemented in
the event planned solutions prove ineffective in solving Year 2000 compliance.
If it becomes necessary for us to implement a contingency plan, such plan may
not avoid a material Year 2000 issue.
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BUSINESS OF THE COMPANY
OVERVIEW
We are a rapidly growing ICP with 15 years of telecommunications marketing,
sales and service experience. We offer voice and data services to predominantly
medium-sized business customers who seek greater bandwidth, integrated
telecommunications solutions and improved levels of service. We have a large,
experienced sales force consisting of 163 sales people supported by 95 network
consultants. These personnel are located close to our customers in 25 sales
branches primarily in New England and New York. We are currently moving to a
facilities-based platform by deploying a state-of-the-art, all packet-switched
network based on advanced internet protocol, or IP, and asynchronous transfer
mode, or ATM, architecture. In May 1999, we will begin beta-testing of our
network with some of our customers. By late summer, we expect to begin providing
commercial service and billing customers on our network.
We became an ICP in January 1998. Prior to that, we were the largest
independent sales agent for NYNEX Corp. (now Bell Atlantic). At the end of 1997,
before leaving the Bell Atlantic agency program, we were managing relationships
for approximately 7,000 customers, representing over 280,000 local access lines
and over $200 million in annual local telecommunications spending. As of March
31, 1999, after only 15 months as an ICP, we were serving over 9,000 customers
and had over 142,000 ALEs in service. For the quarter ended March 31, 1999, we
generated approximately $ million of revenues representing over $
million on an annualized basis.
OUR MARKET OPPORTUNITY
The market potential for ICPs is large and growing. According to FCC data,
in 1997, the total market for U.S. retail telecommunications services was
approximately $187 billion. Data services, including internet, frame relay and
ATM services, represent one of the fastest growing segments of the
telecommunications market. Industry reports estimate that from 1997 to 2002,
internet services revenues will increase from $7.5 billion to $29.7 billion and
frame relay and ATM services revenue will increase from $2.9 billion to $7.6
billion.
We believe that our network will enable us to capitalize on the rapid
growth in demand for internet services, private networks and other broadband
data services. In particular, we will provide ATM and frame relay services on
our own network. These are two of the fastest growing data services. Market
studies estimate that from 1997 to 2001, ATM and frame relay service revenues in
the U.S. will increase at compound annual growth rates of 68% and 37%,
respectively.
Our target market, the Northeastern and Mid-Atlantic region, represents an
attractive opportunity for us because it has a high concentration of
telecommunications traffic. According to FCC data, New York and New England have
an estimated 7.3 million local business access lines, which generated retail
telecommunications revenues of approximately $24.4 billion. As we expand our
business in the remaining portions of the New York-Washington, D.C. corridor,
our addressable market will increase by an estimated 8.4 million business access
lines, which generated approximately $26.3 billion in retail telecommunications
revenues. We are currently targeting the medium-sized business segment of our
markets. We estimate this segment represents over 50% of the total business
access lines in our target markets.
OUR COMPETITIVE STRENGTHS
Our goal is to be the leading ICP for medium-sized business customers in
our target markets. We believe that the following competitive strengths position
us well to achieve this goal:
OVER 15 YEARS OF TELECOMMUNICATIONS MARKETING, SALES AND SERVICE EXPERIENCE.
We have sold local telecommunications services as agent since 1984 and have sold
long distance and data services under our own brand name since 1994. During this
period, we successfully introduced ISDN, frame relay, ATM and other new services
in
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response to technological change. Collectively, our nine-person senior
management team has over 200 years of telecommunications experience. Six members
of this team have worked together at CTC for more than 10 years.
OVER 250 EXPERIENCED SALES PEOPLE AND NETWORK CONSULTANTS PROVIDING PERSONALIZED
SALES AND CUSTOMER CARE. Our sales and service teams consist of a sales
executive and a network consultant assigned to each customer. This provides a
single, responsive point of contact for all of our customer's service and
billing inquiries. Our sales and service teams seek to develop a long-term
relationship with customers. We believe that our focus on customer care and our
integration of sales and service create higher levels of customer satisfaction.
We expect this will lead to better referral and retention rates.
A CAPITAL-EFFICIENT AND SCALABLE, ALL PACKET-SWITCHED NETWORK, CAPABLE OF
PROVIDING ADVANCED IP AND ATM SERVICES. We believe that our state-of-the-art
packet-switched network strategy is superior to a circuit-switched strategy for
several reasons:
. our network requires approximately 50-60% less capital and significantly
less time to deploy than a circuit-switched network;
. our network is based on open architecture standards and will allow us to
adapt to future technological developments and network innovations;
. we believe our network will enable us to provide a more advanced and
differentiated service offering than other local exchange carriers can
provide over their legacy voice switches; and
. we believe our network will be significantly more cost efficient for
ongoing operations and maintenance.
SIGNIFICANT EXPERIENCE DESIGNING AND SELLING SOPHISTICATED DATA SERVICES. We
have substantial expertise designing, selling and implementing sophisticated
data services including frame relay, point-to-point dedicated DS-3 and DS-1 data
links, ISDN, ATM and dedicated internet services. Over the last four years, we
have sold digital data services to more than 6,600 customer sites, designed and
implemented more than 600 wide area data networks and assisted customers in
transitioning from point-to-point networks to more advanced frame relay and ATM
networks.
A BROAD RANGE OF VOICE AND DATA SERVICES INCORPORATED ON A SINGLE BILL. As an
ICP, we provide our customers with the convenience of a single source and a
single bill for all of their telecommunications services. We believe that our
ability to deliver a single source solution to our target market is a key
element in building our customer base. We also believe this will allow us to
increase our share of customers' telecommunications billings and will promote
customer retention.
A COMPREHENSIVE, FULLY INTEGRATED BILLING AND OPERATIONAL SUPPORT SYSTEMS, OR
OSS. Over the past decade we have used our extensive experience with the
provisioning systems used by ILECs to develop our comprehensive information
systems. Our systems fully integrate and automate all aspects of our business,
including marketing, provisioning, trouble management, billing and customer
service. This integration facilitates accurate and timely customer care and
billing. The system also allows us to provide our customers with a single,
integrated bill for multiple services. Our customers can download information
about their accounts directly to their own systems through online, near real-
time access via the internet. Our information systems electronically interface
with most of our major suppliers. In late 1998, we became one of the first
competitive local exchange carriers to complete a full EDI interface with Bell
Atlantic. This allows our systems to connect directly with those of Bell
Atlantic. We believe that our information systems are a primary reason for our
success in provisioning a high volume of access lines during our first five
quarters as an ICP.
THE ABILITY TO EXPAND USING OUR PROVEN OPERATING MODEL FOR BRANCH OFFICES, SALES
PROCESS, CUSTOMER SERVICE AND PERSONNEL TRAINING. Over the last five years, we
have developed a successful and replicable approach to branch expansion. We
believe that our standardized approach to opening new branches, our uniform
approach to sales and service and our extensive training of new hires will
enable us to expand without compromising our solutions-oriented, customer-
centric culture. New branch offices are fully integrated with our information
systems from the outset. This
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allows our corporate headquarters to maintain control of quality and
productivity across our branch offices while enabling each branch office to
operate as an autonomous local sales and service organization.
OUR SERVICES
We offer the following services:
LOCAL TELEPHONE SERVICES. We offer connections between customers'
telecommunications equipment and the local telephone network, which we currently
lease from the ILECs. For large customers or customers with specific
requirements, we integrate customer-owned private branch exchange, or PBX,
systems with analog or digital trunks. We also provide all associated call
processing features as well as dedicated private lines for both voice and data
applications.
LONG DISTANCE TELEPHONE SERVICES. We offer a full range of domestic (interLATA
and intraLATA) and international long distance services, including "1+" outbound
calling, inbound toll free service, standard and customized calling plans. We
also offer related services such as calling cards, operator assistance and
conference calling.
HIGH SPEED DATA SERVICES. We offer a wide array of dedicated and switched high
speed digital data services. Dedicated services include digital data services,
DS-1 (T-1), Fiber Distributed Data Interface and DS-3 products. Switched or
virtual digital services include Integrated Services Digital Network, or ISDN,
frame relay and ATM products.
INTERNET SERVICES. We offer dedicated high speed internet access and services
via digital data services, frame relay, T-1 and T-3 connections. In addition, we
offer switched digital access to the internet via ISDN. We provide the necessary
communications hardware, configuration support and other support services on a
24-hour, 7-day a week basis.
WHOLESALE SERVICES TO INTERNET SERVICE PROVIDERS. We provide a full array of
local services to internet service providers, or ISPs, including telephone
numbers and switched and dedicated access to the internet.
FUTURE SERVICE OFFERINGS. Following deployment of the network, we may offer the
following additional services: systems integration, consulting and network
monitoring services, customized virtual private networks and other data and
voice network products.
OUR INTEGRATED COMMUNICATIONS NETWORK
We began deploying the first phase of our state-of-the-art, packet-switched
network in January 1999. We believe our network will enable us to improve
margins, enhance network and service quality and broaden our range of product
offerings. The network is an advanced IP and ATM-based network, using Cisco
BPX(R) and MGX/TM/ IP+ATM wide-area switches. Our network will deliver enhanced
access services such as traditional dedicated services, frame relay, IP, video
and circuit emulation transport services. We believe that our network will
ultimately enable us to deliver voice and data services across a single multi-
service dedicated connection. We also expect our network to lower customers'
overall telecommunications costs and stimulate demand for new bandwidth
intensive services.
The first phase of our network includes 22 Cisco IP+ATM switches and two
fully redundant network operation centers. We are interconnecting these
facilities with leased fiber optic transmission capacity from Level 3 and NEON.
The initial transmission infrastructure will consist of three self-healing
SONET-based, fiber optic rings covering the southern, western and eastern New
England regions. This advanced SONET technology permits full circuit redundancy
and route diversity. It will also allow us to take advantage of available
technology such as dense wave digital multiplexing, or DWDM, to meet increasing
customer demands for reliable, high bandwidth voice, data and video
connectivity. We have also arranged to co-locate our switching hubs in Level 3
and NEON buildings along selected fiber routes.
We intend to access our customer locations through a variety of broadband
technologies, including DSL service, leased T-1, wireless technologies and fiber
optic facilities, as available. Initially, we will offer dedicated long distance
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and data services over our network. We believe that these services represent
approximately 70% of our target customers' fixed line telecommunications
spending. The remaining 30% represents local dial tone services which we
currently obtain from other carriers. We plan to incorporate local dial tone
service into our packet-switching architecture when that technology matures.
Our network strategy to incorporate local dial tone functionality at a
later stage will allow us to simplify the transitioning of existing customers
on-net because a disconnection from the incumbent local exchange carrier and
reconnection to our network will not be required. To transition our customers
on-net, we will simply be required to reprogram our customer's PBX and/or wide
area network routers to direct long distance and data traffic to our network.
This strategy will also allow our customers to retain their existing phone
numbers as well as have the built-in redundancy of the separate physical
connection to the incumbent local exchange carrier. At a later stage, using
telephone number portability which we expect to be available throughout our
territory, we will be able to more easily transition our customers' local dial
tone service onto our network.
The network will include the following data services: point-to-point
private line, frame relay, ATM, internet access, virtual private network
services for on-net data traffic and network-to-network interface points to
other data carrier networks and internet service providers. The network will
initially include the following voice services: dedicated long distance and
corporate intranet services. We expect that the network will handle the full
range of voice services when we integrate local dial tone capabilities into our
network.
SALES AND CUSTOMER CARE
We market telecommunications services by developing long-term business
relationships with our customers and offering them comprehensive management of
their telecommunications requirements. Each of our customers is assigned a local
dedicated team consisting of a sales executive and a network consultant. This
team provides a single point of contact for our customer's needs. This team
works together with the customer to design, implement and maintain an integrated
telecommunications solution. This team also reviews and updates the customer's
services on a regular basis. We believe that providing localized, high quality
customer care promotes continued sales of new services and reduces customer
churn.
SALES AND SERVICE INFRASTRUCTURE. Our branches are currently staffed with over
300 individuals, representing approximately 80% of our employees. As of April
15, 1999, there were 163 sales executives, 95 network consultants, 26
branch/regional managers and 15 service managers located in 25 sales branches
serving markets in Connecticut, Maine, Maryland, Massachusetts, New Hampshire,
New York, Rhode Island and Vermont.
CUSTOMER SALES AND SERVICE MODEL. At their first meeting with a prospective
customer, our sales executives analyze the customer's current telecommunications
usage and costs. Sales executives then outline the range of services and
potential savings we offer and make recommendations to optimize the customer's
current network. Sales executives also discuss the benefits of our comprehensive
customer care program and develop account telemanagement plans designed to
balance network expense and utility. Sales executives and network consultants
continue to review the customer's telecommunications usage and requirements and
update the customer's suite of services and network design. We believe the
relationship-intensive approach of assigning sales executives and network
consultants to each customer account results in high customer satisfaction and
retention rates.
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
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comprehensive service program to our customers. This process ranges from long-
term consultative planning to day-to-day handling of service issues.
Our customer care program is designed to provide prompt action in response
to customer inquiries and complaints. The local sales branches are staffed 11
hours a day, 5 days a week. At other times, incoming calls automatically roll
over to a central customer care center which is staffed 24 hours a day, 7 days a
week. We believe that our network consultants are motivated to provide the
highest level of customer care because a significant portion of their
compensation is based on customer retention and satisfaction.
OUR INFORMATION SYSTEMS
Our information systems include five central applications which fully
integrate our sales and account management, customer care, provisioning, billing
and financial processes. Automation of each of these processes is designed for
high transaction volumes, accurate throughput, timely installation, accurate
billing feeds and quality customer service. Data entered in one application is
generally exported into all other applications. Each branch office is served by
a LAN connected via frame relay to the central processor. Our employees have
online access to our information systems from their branch desktops or docking
stations.
We also have an electronic interface to most of our major suppliers. When a
sales executive places an order for one of these suppliers, our information
systems electronically direct it to the appropriate supplier and monitors any
delays in provisioning the order. Once the order is provisioned, our information
systems automatically remove it from the in-process order file, update the
customer's service inventory and network configuration, initiate billing, post
the sales executive's commission and update our financial reports.
Our information systems include the following applications:
ACCOUNT AND SALES MANAGEMENT. Our account management application is the hub of
our information systems. It stores all of our customer-related information, such
as location detail, contact information, transaction history and account
profile. Our account management application also automatically exports data to
our customized sales application. Our sales application is a fully-integrated
database that provides sales personnel with access to information for pricing
services, customized sales proposals, customer correspondence, sales
performance, referencing methods and procedures, service descriptions,
competitive information and historical profiles of our current and prospective
customers. These historical profiles include details of installed services,
recent transactions and billing history. Our sales system can be used both on-
and off-line. All entries made while off-line are automatically updated to the
central processor and all relevant data is simultaneously exported to the other
central applications each time a salesperson connects to the network.
CUSTOMER CARE. Our network consultants use our account care application to
review installed services, make additions, changes and deletions to accounts,
initiate and track repair and service work and review past billing for any
customer. This closed loop application provides automatic follow up and records
all transactions in a customer history file. Service orders and repair requests
input in our account care application are automatically exported into our
provisioning application.
PROVISIONING. We generally direct customer orders through our provisioning
application electronically to our major suppliers. We track these orders through
our account care application from initiation through completion. If any delay in
provisioning occurs, the proactive nature of this application alerts the sales
executive or network consultants who can take corrective action and notify the
customer of the delay. Once the order has been filled the information is
automatically fed to our billing application.
BILLING AND CUSTOMER INTERFACE. Our billing application allows us to provide our
customers a single bill for all the services we provide. Our billing application
also allows the customer to review historic bill detail, perform customized
usage analyses and download information directly to their own accounting
applications. Using a secure Web-based application called ItelliVIEW, our
customers have near real-time online access to our billing application. Customer
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billing statements are also available on CD ROM, diskette or paper. Paper
statements generated by our billing application offer our customers different
telemanagement formats.
FINANCIAL. Data from our billing application is automatically exported to our
financial application. Our financial application tracks and prepares reports on
sales activity, commissions, branch operations, branch profitability and cash
flows. The financial application also compiles this data for our periodic
financial reports. In addition, this application provides internal controls for
revenue tracking and costing. The integrated nature of our information systems
allows us to operate each branch as a separate profit and loss center.
We are actively upgrading our information systems to a three-tiered
client/server architecture in order to support our network. We have selected
Oracle's relational database for the first tier, which is our data repository
and warehouse. We will vertically integrate our second tier business
applications described above with the data repository using a messaging product
from TIBCO Corporation. Third tier users, such as customers, vendors, partners
and internal users, will access the second tier business applications using
either UNIX, Windows 95 or standard browsers. We expect that this three-tiered
architecture will allow us to grow and expand our business, replace and upgrade
business applications without impacting other applications and provide us with
reliable data.
COMPETITION
We operate in a highly competitive environment. We have no significant
market share in any market in which we operate. We will face substantial and
growing competition from a variety of data transport, data networking and
telephony service providers. We will face competition for the provision of
integrated telecommunications services as well for the individual service
components that comprise our integrated services. Many of these competitors are
larger and better capitalized than we are. Also, many of our competitors are
incumbent providers, with long standing relationships with their customers and
greater name recognition.
In addition, the continuing trend toward business combinations and
alliances in the telecommunications industry may create significant new
competitors. Examples of some of these alliances include: Bell Atlantic's
proposed acquisition of GTE, SBC's proposed merger with Ameritech, AT&T's
acquisition of TCI and proposed acquisition of Media One, Global Crossing's
proposed acquisition of Frontier Corp. and SBC's acquisition of SNET. Many of
these combined entities have or will have resources far greater than ours. These
combined entities may provide a bundled package of telecommunications products
that is in direct competition with our products. These combined entities may be
capable of offering these products sooner and at more competitive rates than we
can.
COMPETITION FOR PROVISION OF INTEGRATED TELECOMMUNICATIONS SERVICES. The number
of competitors able to provide integrated telecommunications services has
increased because of the current regulatory trend toward fostering competition
and the continued consolidation of telecommunications service providers. Many
facilities-based ICPs and long distance carriers have committed substantial
resources to building their own networks or to purchasing carriers with
complementary facilities. Through these strategies, a facilities-based provider
can offer single source local, long distance and data services similar to those
that we will offer. The alternative strategies available to these competitors
may provide them with greater flexibility and a lower cost structure.
Once the RBOCs are allowed to offer in-region long distance services under
the terms of Section 271 of the Telecommunications Act, they will be in a
position to offer local and long distance services similar to the services we
offer. No RBOC is currently permitted to provide inter-LATA services for calls
originating in their region. We cannot assure you that this will continue to be
the case. The FCC must approve RBOC provision of in-region interLATA long
distance services and can only do so upon finding that the RBOC has complied
with the 14-point checklist outlined in Section 271 of the Telecommunications
Act. This 14-point checklist is designed to ensure that RBOC competitors have
the ability to provide local telephone services in competition with the RBOC.
The FCC has not yet found that any RBOC has complied with the 14-point
checklist.
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Although the Telecommunications Act and other federal and state regulatory
initiatives will provide us with new business opportunities, as competition
increases regulators are likely to provide the ILECs with more pricing
flexibility. Our revenues may be adversely affected if the ILECs elect to lower
their rates and sustain these lower rates over time. We believe that we may be
able to offset the effect of lower rates by offering new services to our target
customers, but we cannot assure you that this will occur. In addition, if future
regulatory decisions give ILECs increased pricing flexibility or other
regulatory relief, such decisions could have a material adverse effect on our
business.
COMPETITION FOR PROVISION OF LOCAL EXCHANGE SERVICES. In the local exchange
market, ILECs, including RBOCs, continue to hold near-monopoly positions. We
also face competition or prospective competition from one or more ICPs, and from
other competitive providers, including non-facilities-based providers. Many of
these competitors are larger and better capitalized than we are. Some carriers
have entered into interconnection agreements with ILECs and either have begun,
or in the near future likely will begin, offering local exchange service in each
of our markets. Further, as of February 8, 1999, the largest long distance
carriers were permitted to bundle local and long distance services. This removes
one of our competitive advantages. Other entities that currently offer or are
potentially capable of offering switched services include cable television
companies, electric utilities, other long distance carriers, microwave carriers,
and large customers who build private networks.
Wireless telephone system operators are also competitors in the provision
of local services. Cellular, personal communications service, and other
commercial mobile radio services providers may offer wireless services to fixed
locations, rather than just to mobile customers. This ability to provide fixed
as well as mobile services will enable wireless providers to offer wireless
local loop service and other services to fixed locations (e.g., office and
apartment buildings) in direct competition with us and other providers of
traditional fixed telephone service. In addition, the FCC recently auctioned
substantial blocks of spectrum for fixed use including local exchange services.
We expect exploitation of this spectrum to increase competition in the local
market.
The World Trade Organization recently concluded an agreement that could
result in additional competitors entering the U.S. local and long-distance
markets. Under the WTO agreement, the United States committed to open
telecommunications markets to foreign-owned carriers. The FCC has adopted
streamlined procedures for processing market entry applications from foreign
carriers, making it easier for such carriers to compete in the U.S. We cannot
predict whether foreign-owned carriers will enter our markets as a result of the
WTO agreement.
COMPETITION FOR PROVISION OF LONG DISTANCE SERVICES. The long distance market is
significantly more competitive than the local exchange market. In the long
distance market numerous entities compete for the same customers. In addition,
customers frequently change long distance providers in response to lower rates
or promotional incentives by competitors. This results in a high average rate of
customer loss, or churn, in the long distance market. Prices in the long
distance market have declined significantly in recent years and are expected to
continue to decline. Competition in this market will further increase once RBOCs
are permitted to offer interLATA long distance services.
DATA AND INTERNET SERVICES. The market for high speed data services and access
to the internet is highly competitive. We expect competition in this market to
continue to intensify. Our competitors in this market will include ISPs and
other telecommunications companies, including large IXCs and RBOCs. Many of
these competitors have greater financial, technological and marketing resources
than those available to us. Recently, various RBOCs have filed petitions with
the FCC requesting regulatory relief in connection with the provision of their
own data services, including DSL services. In response to these petitions, the
FCC issued a decision that data services generally are telecommunications
services that, when provided by ILECs, are subject to the unbundling, resale,
and other independent local exchange carrier obligations prescribed in Section
251 of the Telecommunications Act. Petitions have been filed with the FCC asking
them to reconsider this decision. The FCC also has initiated a proceeding to
determine whether independent local exchange carriers will be able to escape
their Section 251 obligations by providing data services through "truly"
separate affiliates, whether the FCC will require ILECs to unbundle their DSL
equipment and resell DSL services, and whether the FCC will grant RBOCs
interLATA relief for the provision of data services. We cannot predict the
effect that this proceeding will have on our ability to obtain facilities and
services from ILECs and on the competition that we will face from ILECs in the
data services market.
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GOVERNMENT REGULATION
The local and long distance telephony services and, to a lesser extent, the
data services we provide are regulated by federal, state, and, to some extent,
local government authorities. The FCC has jurisdiction over all
telecommunications common carriers to the extent they provide interstate or
international communications services. Each state regulatory commission has
jurisdiction over the same carriers with respect to the provision of intrastate
communications services. Local governments sometimes impose franchise or
licensing requirements on telecommunications carriers and regulate construction
activities involving public rights-of-way. Changes to the regulations imposed by
any of these regulators could have a material adverse effect on our business,
operating results and financial condition.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and state utility commissions have adopted many new rules to
implement this legislation and encourage competition. These changes, which are
still incomplete, have created new opportunities and challenges for us and our
competitors. The following summary of regulatory developments and legislation is
not intended to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Some of
these and other existing federal and state regulations are the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degree, the manner in which this industry operates. We
cannot predict the outcome of these proceedings, or their impact on the
telecommunications industry at this time.
FEDERAL REGULATION
We are currently not subject to price cap or rate of return regulation at
the federal level and are not currently required to obtain FCC authorization for
the installation, acquisition or operation of our domestic interexchange network
facilities. However, we must comply with the requirements of common carriage
under the Communications Act. We are subject to the general requirement that our
charges and terms for our telecommunications services be "just and reasonable"
and that we not make any "unjust or unreasonable discrimination" in our
charges or terms. The FCC has jurisdiction to act upon complaints against any
common carrier for failure to comply with its statutory obligations.
Comprehensive amendments to the Communications Act were made by the
Telecommunications Act, which was signed into law on February 8, 1996. The
Telecommunications Act effected changes in regulation at both the federal and
state levels that affect virtually every segment of the telecommunications
industry. The stated purpose of the Telecommunications Act is to promote
competition in all areas of telecommunications. While it may take years for the
industry to feel the full impact of the Telecommunications Act, it is already
clear that the legislation provides us with new opportunities and challenges.
The Telecommunications Act greatly expands the interconnection requirements
on the incumbent local exchange carriers, or ILECs. The Telecommunications Act
requires the ILECs to:
. provide physical collocation, which allows companies such as us and other
competitive local exchange carriers, or CLECs, to install and maintain
their own network termination equipment in ILEC central offices, and
virtual collocation only if requested or if physical collocation is
demonstrated to be technically infeasible;
. unbundle components of their local service networks so that other providers
of local service can compete for a wide range of local services customers;
and
. establish "wholesale" rates for their services to promote resale by CLECs.
In addition, all local exchange carriers, or LECs, must:
. establish number portability, which will allow a customer to retain its
existing phone number if it switches from the LEC to a competitive local
service provider;
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. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way.
. compensate other LECs on a reciprocal basis for traffic originated on one
LEC and terminated on the other LEC.
The FCC is charged with establishing national guidelines to implement
certain portions of the Telecommunications Act. The FCC issued its
interconnection order on August 8, 1996. On July 18, 1997, however, the United
States Court of Appeals for the Eighth Circuit issued a decision vacating the
FCC's pricing rules, as well as certain other portions of the FCC's
interconnection rules, on the grounds that the FCC had improperly intruded into
matters reserved for state jurisdiction. On January 25, 1999, the Supreme Court
largely reversed the Eighth Circuit's order, holding that the FCC has general
jurisdiction to implement the local competition provisions of the
Telecommunications Act. In so doing, the Supreme Court stated that the FCC has
authority to set pricing guidelines for unbundled network elements, to prevent
ILECs from disaggregating existing combinations of network elements, and to
establish "pick and choose" rules regarding interconnection agreements. "Pick
and choose" rules would permit a carrier seeking interconnection to "pick and
choose" among the terms of service from other interconnection agreements between
the ILECs and other CLECs. This action reestablishes the validity of many of the
FCC rules vacated by the Eighth Circuit. Although the Supreme Court affirmed the
FCC's authority to develop pricing guidelines, the Supreme Court did not
evaluate the specific pricing methodology adopted by the FCC and has remanded
the case to the Eighth Circuit for further consideration. Thus, while the
Supreme Court resolved many issues, including the FCC's jurisdictional
authority, other issues remain subject to further consideration by the courts
and the FCC. We cannot predict the ultimate disposition of those matters. We
also cannot predict the possible impact of this decision, including the portion
dealing with unbundled network elements, on existing interconnection agreements
between ILECs and CLECs or on agreements that may be negotiated in the future.
Although most of the FCC rules that the Supreme Court was considering were
upheld, the Court vacated the FCC's rule that identifies the unbundled network
elements that ILECs must provide to CLECs. The FCC recently initiated a new
proceeding to reexamine whether it will identify which unbundled network
elements ILECs must provide, and, if so, how to identify those elements. It is
unclear how the FCC will decide this issue or the effect that the FCC's decision
will have on our business or operations.
The FCC recently adopted new rules designed to make it easier and less
expensive for CLECs to obtain collocation at ILEC central offices by, among
other things, restricting the ILECs' ability to prevent certain types of
equipment from being collocated and requiring ILECs to offer alternative
collocation arrangements to CLECs. The FCC also initiated a new proceeding to
address line sharing, which, if implemented, would allow CLECs to offer data
services over the same line that a consumer uses for voice services without the
CLEC having to provide the voice service. While we expect that the FCC's new
collocation rules will be beneficial to us, we cannot be certain that these new
rules will be implemented in a favorable manner. Moreover, ILECs or other
parties may ask the FCC to reconsider some or all of its new collocation rules,
or may appeal these rules in federal court. We cannot predict the outcome of
these actions or the effect they may have on our business.
Under the Communications Act, ILECs have an obligation to negotiate with us
in good faith to enter into interconnection agreements. We will need
interconnection agreements to provide enhanced connectivity to our network and
to provide local dial tone services. If we cannot reach agreement, either side
may petition the applicable state commission to arbitrate remaining
disagreements. These arbitration proceedings can last up to 9 months. Moreover,
state commission approval of any interconnection agreement resulting from
negotiation or arbitration is required, and any party may appeal an adverse
decision by the state commission to federal district court. The potential cost
in resources and delay from this process could harm our ability to compete in
certain markets, and there is no guarantee that a state commission would resolve
disputes, including pricing disputes in our favor. Moreover, as explained above,
the FCC rules governing pricing standards for access to the networks of the
traditional telephone companies are currently being challenged in federal court.
If the courts overturn the FCC's pricing rules, the FCC may adopt a new pricing
methodology
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that would require us to pay a higher price to traditional telephone companies
for interconnection. This could have a detrimental effect on our business.
The Telecommunications Act permits RBOCs to provide long distance services
outside their local service regions immediately, and will permit them to provide
in-region long distance service upon demonstrating to the FCC and state
regulatory agencies that they have adhered to the Telecommunication Act's 14-
point competitive checklist. Some RBOCs have filed applications with various
state public utility commissions and the FCC seeking approval to offer in-region
interLATA service. Some states have denied these applications while others have
approved them. However, to date, the FCC has denied each of the RBOC's
applications brought before it because it found that the RBOC had not
sufficiently made its local network available to competitors. We anticipate that
a number of RBOCs will file additional applications in 1999.
In May 1997, the FCC released an order establishing a significantly
expanded universal service regime to subsidize the cost of telecommunications
service to high cost areas, as well as to low-income customers and qualifying
schools, libraries, and rural health care providers. Providers of interstate
telecommunications services, like us, as well as certain other entities, must
pay for these programs. We are also eligible to receive funding from these
programs if we meet certain requirements, but we are not currently planning to
do so. Our share of the payments into these subsidy funds will be based on our
share of certain defined telecommunications end-user revenues. Currently, the
FCC is assessing such payments on the basis of a provider's revenue for the
previous year. Various states are also in the process of implementing their own
universal service programs. We are currently unable to quantify the amount of
subsidy payments that we will be required to make and the effect that these
required payments will have on our financial condition. Moreover, the FCC's
universal service rules remain subject to judicial appeal and further FCC
review. Additional changes to the universal service program could increase our
costs.
On November 1, 1996, the FCC issued an order that required nondominant
interexchange carriers, like us, to cease filing tariffs for our domestic
interexchange services. The order required mandatory detariffing and gave
carriers nine months to withdraw federal tariffs and move to contractual
relationships with their customers. This order subsequently was stayed by a
federal appeals court, and it is unclear at this time whether the detariffing
order will be implemented. In June 1997, the FCC issued another order stating
that non-dominant LECs, like us, could withdraw their tariffs for interstate
access services provided to long distance carriers. The FCC continues to require
that carriers obtain authority to provide service between the United States and
foreign points and file tariffs for international service. If the FCC's orders
become effective, nondominant interstate services providers will no longer be
able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms and conditions under which they offer their
interstate services. If we cancel our FCC tariffs as a result of the FCC's
orders, we will need to implement replacement contracts which could result in
substantial administrative expenses.
In March 1999, the FCC adopted further rules that, while still maintaining
mandatory detariffing, nonetheless require long distance carriers to make
specific public disclosures on the carriers' Internet websites of their rates,
terms and conditions for domestic interstate services. The effective date for
these rules is also delayed until a court decision on the appeal of the FCC's
detariffing order.
Recently, the FCC has determined that both dedicated access and dial-up
calls from a customer to an internet service provider , or ISP, are interstate,
not local, calls, and, therefore, are subject to the FCC's jurisdiction. The FCC
has initiated a proceeding to determine the effect that this regulatory
classification will have on the obligation of a LEC to pay reciprocal
compensation for dial-up calls to ISPs that originate on one LEC network and
terminate on another LEC network. In addition, one RBOC has petitioned the FCC
for a ruling that telephone-to-telephone calls made over the internet are
subject to regulation as a telecommunications service under the Communications
Act. Although the FCC has suggested that such internet-based telephone-to-
telephone calls may be considered a telecommunications service, it has not
reached a final decision on that issue. We cannot predict the effect that the
FCC's resolution of these issues will have on our business.
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In August 1997, the FCC issued rules transferring responsibility for
administering and assigning local telephone numbers from the RBOCs and a few
other LECs to a neutral entity in each geographic region in the United States.
In August 1996, the FCC issued new numbering regulations that prohibit states
from creating new area codes that could unfairly hinder local exchange carriers
by requiring their customers to use 10 digit dialing while existing independent
local exchange carrier customers use 7 digit dialing. These regulations also
prohibit ILECs which are still administering central office numbers pending
selection of the neutral administrator from charging "code opening" fees to
competitors unless they charge the same fee to all carriers including
themselves. In addition, each carrier is required to contribute to the cost of
numbering administration through a formula based on net telecommunications
revenues. In July 1996, the FCC released rules requiring all LECs to have the
capability to permit both residential and business consumers to retain their
telephone numbers when switching from one local service provider to another,
known as "number portability."
A customer's choice of local or long distance telecommunications company is
encoded in a customer record, which is used to route the customer's calls so
that the customer is served and billed by the desired company. A user may change
service providers at any time, but the FCC and some states regulate this process
and require that specific procedures be followed. When these procedures are not
followed, particularly if the change is unauthorized or fraudulent, the process
is known as "slamming." Slamming is such a significant problem that it was
addressed in detail by Congress in the Telecommunications Act, by some state
legislatures, and by the FCC in recent orders. The FCC has levied substantial
fines for slamming. The risk of financial damage and business reputation from
slamming is significant. Even one slamming complaint could cause extensive
litigation expenses for us. The FCC recently decided to apply its slamming rules
(which originally covered only long distance) to local service as well.
STATE REGULATION
To the extent that we provide telecommunications services which originate
and terminate in the same state, we are subject to the jurisdiction of that
state's public service commission. As our local service business and product
lines expand, we will offer more intrastate service and become increasingly
subject to state regulation. The Telecommunications Act maintains the authority
of individual state utility commissions to preside over rate and other
proceedings, as discussed above, and impose their own regulation of local
exchange and interexchange services so long as such regulation is not
inconsistent with the requirements of the Telecommunications Act. For instance,
states may impose tariff and filing requirements, consumer protection measures
and obligations to contribute to universal service, and other funds.
We are subject to requirements in some states to obtain prior approval for,
or notify the state commission of, any transfers of control, sales of assets,
corporate reorganizations, issuances of stock or debt instruments and related
transactions. Although we believe such authorizations could be obtained in due
course, there can be no assurance that the FCC or state commissions would grant
CTC authority to complete any of these transactions.
We have state regulatory authority to provide competitive local exchange
services and interexchange services in nine states. We also have state
regulatory authority to provide interexchange services in approximately 31
additional states. In some states, in which we have or have had de minimis
intrastate interexchange revenues, we have not obtained authorization to provide
such interexchange services or have allowed such authorization to lapse. We have
either subsequently obtained, or are in the process of applying to obtain, the
appropriate authorization in these states.
The Telecommunications Act generally preempts state statutes and
regulations that restrict the provision of competitive local services. States,
however, may still restrict competition in some rural areas. As a result of this
preemption, we will be free to provide the full range of local, long distance,
and data services in any state. While this action greatly increases our
potential for growth, it also increases the amount of competition to which we
may be subject.
LOCAL GOVERNMENT REGULATION
We may be required to obtain from municipal authorities street opening and
construction permits to install our facilities in some cities. In some of the
areas where we provide service, we are subject to municipal franchise
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requirements requiring us to pay license or franchise fees either on a
percentage of gross revenue, flat fee or other basis. The Telecommunications Act
requires municipalities to charge nondiscriminatory fees to all
telecommunications providers, but it is uncertain how quickly this requirement
will be implemented by particular municipalities in which we operate or plan to
operate or whether it will be implemented without a legal challenge.
PROPERTIES
We are headquartered in leased space in Waltham, Massachusetts. We intend
to relocate our headquarters in the spring of 1999 and have entered into a new
lease for space at 220 Bear Hill Road in Waltham, Massachusetts. We will
continue to occupy the leased space at 360 Second Avenue for other purposes. We
also lease one office in California, two in Connecticut, eight in Massachusetts,
two in Maine, one in New Hampshire, nine in New York, one in Maryland and one in
Vermont. Although we believe that our leased facilities are adequate at this
time, we expect to lease a significant number of additional sales facilities in
connection with our planned expansion in existing markets and into new markets.
LEGAL PROCEEDINGS
We are party to suits and regulatory proceedings arising in the normal
course of business which we believe are not material individually or in the
aggregate.
EMPLOYEES
As of April 30, 1999, CTC employed 385 persons. None of our employees are
represented by a collective bargaining agreement.
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 May 3, 1999) . $24.00 $12.19
</TABLE>
The last sale price of the common stock on the Nasdaq National Market on
May 3, 1999 was $19.50.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
Our executive officers and directors, and their ages as of May 3, 1999, are
as follows:
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<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 President--Marketing and Strategic Planning
Michael H. Donnellan........... 45 Vice President--Operations
Thomas Fabbricatore............ 40 Vice President--Marketing
Anthony D. Vermette............ 38 Vice President--Sales
Frederick Kunzi................ 47 Vice President and Chief Technology Officer
Jeffrey C. Lavin............... 43 Vice President--Corporate Development
Katherine D. Courage........... 41 Director
Henry Hermann.................. 57 Director
Kevin J. Maroni................ 36 Director
J. Richard Murphy.............. 54 Director
Robert A. Nicholson............ 31 Director
Carl Redfield.................. 51 Director
Richard J. Santagati........... 55 Director
Ralph C. Sillari............... 44 Director
</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 President--Marketing.
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 President--Sales and
Marketing.
John D. Pittenger has served as Chief Financial Officer since April 14,
1999, as Executive Vice President--Finance and Administration since April 1998
and as Treasurer and Clerk of CTC Communications since August 1989. Mr.
Pittenger served as Vice President--Finance from 1991 until April 1998, and as
Chief Financial Officer from 1989 to April 1998.
David E. Mahan joined CTC Communications in October 1995 as Vice President-
- -Marketing and Strategic Planning. Prior to joining CTC Communications, Mr.
Mahan held a number of senior management level positions with NYNEX, including
Vice President--Sales Channel Management from 1993 to 1995.
Michael H. Donnellan has been employed by CTC Communications since 1988 in
a number of positions. He was named Vice President--Operations in 1995.
Thomas Fabbricatore joined CTC Communications in 1982. He was named Vice
President--Regulatory and Electronic Media in 1991, and was named Vice
President--Marketing in November 1998. Thomas Fabbricatore is the brother of
Robert J. Fabbricatore.
Anthony D. Vermette has been employed by CTC Communications in a variety of
positions since 1987. Mr. Vermette was named Vice President--Sales 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
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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 President--
Corporate Development. Mr. Lavin has 19 years of sales and operational
management experience in the telecommunications industry. From December 1996 to
May 1998, Mr. Lavin was Vice President of Sales, Americas/Asia Pacific for
NovaSoft Systems, Inc., a software development corporation. From 1979 to 1996,
Mr. Lavin was employed by Comlink Incorporated, a communication network
integrator, most recently as Senior Vice President. Following the acquisition of
Comlink in 1996 by Williams Communications, Mr. Lavin served as Vice President
and General Manager of Network Systems Integration.
Katherine D. Courage became a director of CTC 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 the offering. Prior to joining Credit Suisse First Boston in
September 1996, Ms. Courage worked at Salomon Brothers Inc for ten years where
she was a managing director in the Global Telecommunications Group. Ms. Courage
also worked at Merrill Lynch & Co. in the corporate finance department. Ms.
Courage currently serves as a director of NorthEast Optic Network, Inc. and
Lightpath Technologies, Inc.
Henry Hermann became a director of CTC 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.
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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.
We currently have nine members on our board of directors: three Class I
Directors (Messrs. Hermann, Sillari and Redfield), three Class II Directors
(Messrs. Murphy and Santagati and Ms. Courage) and three Class III Directors
(Messrs. Fabbricatore, Maroni and Nicholson). The terms of the Class I, Class II
and Class III directors expire upon the election and qualification of their
successors at the annual meetings of stockholders held following the end of
fiscal years 2001, 1999 and 2000, respectively.
DIRECTOR COMPENSATION
Non-employee directors receive an annual retainer of $10,000. On February
17, 1999, we granted Messrs. Sillari, Murphy and Hermann options to purchase
10,000 shares of our common stock. We also granted Messrs. Nicholson, Maroni and
Santagati options to purchase 20,000 shares of our common stock. All of the
above options were at a purchase price of $10.125 per share. At the same time we
granted Robert Fabbricatore options to purchase 50,000 shares of our common
stock at a purchase price of $11.1375, 50,000 shares at a purchase price of
$15.00 per share and 50,000 shares at a purchase price of $20.00 per share. On
January 19, 1999, we granted Mr. Redfield an option to purchase 40,000 shares of
our common stock at a purchase price of $11.25 per share. On April 5, 1999, we
granted Ms. Courage an option to purchase 40,000 shares of our common stock at a
purchase price of $12.375 per share.
COMMITTEES OF THE BOARD OF DIRECTORS
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 certain
of his affiliates and Spectrum, Mr. Fabbricatore and certain of his affiliates
agreed to vote at each annual or special meeting at which directors of CTC
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 April 27, 1999, Spectrum owned 657,555 of the
666,666 shares, or 98.6%, of the Series A preferred stock outstanding. Kevin J.
Maroni
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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:
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.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the aggregate number of stock options
granted to each of the Named Executive Officers during the fiscal year ended
March 31, 1999. Options are exercisable for our common stock, par value $.01 per
share. No options were granted to Mr. Jones in the last fiscal year.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
---------- --------------------
NUMBER OF TOTAL VALUE AT ASSUMED
--------- ----- ----------------
SECURITIES OPTIONS ANNUAL RATE OF
---------- ------- --------------
UNDERLYING GRANTED TO EXERCISE STOCK PRICE
---------- ---------- -------- -----------
OPTIONS EMPLOYEES IN PRICE EXPIRATION APPRECIATION FOR
------- ------------ ----- ---------- ----------------
GRANTED (#) FISCAL YEAR ($/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 from a trust, of which Robert J. Fabbricatore, our Chairman and
Chief Executive Officer, is a beneficiary, office space in Springfield,
Massachusetts. Until March 1, 1999 we also leased from another trust, of which
Robert J. Fabbricatore is a beneficiary, office space in southern New Hampshire.
Rental payments under the leases totaled approximately $392,000 for the last
three fiscal years. We sublease part of our Waltham facility at our cost to
Comm-Tract Corp., a company in which Mr. Fabbricatore is a principal
stockholder. Sublease income totaled $306,125 for the last three fiscal years.
We also contract with Comm-Tract Corp. for the installation of telephone lines
and for the service and maintenance of equipment marketed by CTC Communications.
During the last three fiscal years, Comm-Tract Corp. provided us with services,
inventory and equipment totaling $829,481. We believe that the payments to the
trusts and Comm-Tract Corp. are comparable to the costs for such services,
inventory and equipment, and for rentals of similar facilities, which we would
be required to pay to unaffiliated individuals in arms-length transactions.
Carl Redfield, one of our directors, is an executive officer of Cisco. We
have purchased, and expect to continue purchasing, most of our network equipment
from Cisco. Also, we have entered into a vendor facility with Cisco Capital, an
affiliate of Cisco. See "Description of Senior Secured Facilities".
Ralph Sillari, one of our directors, is an Executive Vice President of
Fleet National Bank. We have entered into a senior secured credit facility with
Fleet National Bank. See "Description of Senior Secured Facilities."
Katherine D. Courage, one of our directors, is a Managing Director of
Credit Suisse First Boston, one of the underwriters of the offering. Ms. Courage
is also a director of NEON. We have commitments with NEON for the provision of
leased transmission facilities.
DESCRIPTION OF SENIOR SECURED FACILITIES
FLEET/GOLDMAN CREDIT FACILITY
As of September 1, 1998, we entered into a senior secured credit facility
with Goldman Sachs Credit Partners, L.P., or GSCP, and Fleet National Bank, or
Fleet. GSCP and Fleet provided us with a three-year senior secured credit
facility consisting of revolving loans in the aggregate amount of up to $75
million. Advances under the facility bear interest at 1.75% over the prime rate.
Advances under the facility are secured by a first priority perfected security
interest on all of our assets, except that we have the ability to exclude assets
we acquire through purchase money financing. In addition, we are required to pay
a commitment fee of 0.5% per annum on any unused amounts under the facility. We
are also required to pay a monthly line fee of $150,000 per month. In connection
with this credit facility we issued to Goldman Sachs & Co. warrants to purchase
662,600 shares of our common stock and to Fleet National Bank warrants to
purchase 311,812 shares of our common stock. We may borrow $15 million
unconditionally and $60 million based on trailing 120 days accounts receivable
collections, reducing to the trailing 90 days of collections by March 31, 2000.
If we wish to prepay the loan during the first 18 months we must pay a
prepayment penalty of 2% of the aggregate amount of the facility. As of March
31, 1999, we had borrowed $36,100,000 under this credit facility.
Under this credit facility, we have agreed, among other things, to maintain
minimum quarterly net revenues, to achieve minimum EBITDA targets for rolling
six-month periods measured at the end of each fiscal quarter and to achieve a
minimum quarterly target of provisioned ALEs.
We have also agreed that we will not, without the prior written consent of
the lenders, with various exceptions:
. create, incur or assume any secured indebtedness,
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. create, incur or assume any liens,
. enter into any merger, consolidation, reorganization, recapitalization or
reclassification of our stock,
. sell, lease, assign, transfer or otherwise dispose of any of our assets,
. declare or pay any cash dividends or purchase, acquire or redeem any of
our stock,
. make, acquire or incur any liabilities in connection with the acquisition
of any entity or the acquisition of all or substantially all of the assets
of any entity,
. make capital expenditures in excess of $32 million for the period from
September 1, 1998 to March 31, 2000 and $87 million for the period from
April 1, 2000 through September 1, 2001.
Events of default under this credit facility include:
. failure to make payments on the loan,
. failure to observe various covenants,
. insolvency proceedings,
. the filing of any governmental liens in an amount exceeding $2 million,
. the filing of any judgment liens in an amount exceeding $2 million,
. default on a material agreement with obligations exceeding $2 million,
. payment of any subordinated indebtedness, except as specifically
permitted,
. any material misrepresentation or misstatement in any warranty or
representation,
. the limitation or termination of any guaranty, or
. the occurrence of a change of control, except in connection with the
reorganization.
CISCO CAPITAL VENDOR FACILITY
On October 14, 1998, we entered into a three-year vendor facility for up to
$25 million with Cisco Capital. We have agreed to a three year, $25 million
total volume purchase commitment of Cisco equipment and services. Cisco Capital
has agreed to advance funds as these purchases occur. We can also use the
facility for working capital costs associated with the integration and operation
of Cisco solutions and related peripherals.
Under the terms of the vendor facility and an intercreditor agreement
between Cisco Capital and GSCP, we have agreed to give Cisco Capital a senior
security interest in all products Cisco provides to us or other products
purchased with the proceeds of the first $15 million advanced under the facility
and a subordinate security interest in all of our other assets. We are required
to repay 5% of the outstanding amount of the first $15 million of indebtedness
advanced under the facility at the end of each of the ninth, tenth and eleventh
quarterly periods during the term of the facility. We are required to pay
interest on funds advanced under the facility at an annual rate of
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12.5%. In addition to other amounts, we are also required to pay a commitment
fee of .50% per annum on any unused amounts under the facility.
This vendor facility limits or restricts, except as permitted under our
senior secured credit facility and other than other various exceptions, our
ability to: merge with or acquire all of the assets of any entity; sell or
dispose of assets; purchase or otherwise acquire the capital stock or assets of
any person, or extend any credit to any person; declare or pay any cash
dividends; or redeem or purchase any capital stock.
This vendor facility also limits or restricts, among other things, our
ability to: incur additional indebtedness; amend, modify or waive some
provisions of our senior secured facility; voluntarily repay any subordinated
debt; or amend or modify any document or instrument governing subordinated debt.
Events of default under the vendor facility include:
. failure to make payments on the loan,
. any representation or warranty is incorrect when made or deemed made,
. failure to perform or observe our covenants,
. insolvency proceedings,
. failure to pay any amounts due or observe any covenants under our senior
secured facility or other indebtedness in an amount over $2 million which
failure results in the acceleration of such indebtedness,
. failure to pay under, or be in breach of, any other agreement with Cisco,
Cisco Capital, or their subsidiaries,
. failure of any guarantor to perform or observe any covenant contained in
any guaranty,
. any event of default in any other loan documents as defined therein,
. revocation of any consent, authorization or other approval necessary to
enable us to borrow under the vendor facility,
. the occurrence of a change of control, as defined therein,
. any payment of indebtedness subordinated to the vendor facility, except as
expressly permitted,
. the entrance of various judgments against us.
TORONTO DOMINION (TEXAS), INC. FACILITY
In March 1999, CTC Communications 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
the Company's Common Stock at $11,8125 per share to TD as part of the
transaction and we may issue contingent warrants to
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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, the Company has 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.
We intend that the proposed reorganization constitute a reorganization
within the meaning of Section 368(a) of the Code. The following federal income
tax consequences should 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 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 the period for which you held
or the IRS would consider you to have held for tax purposes, the CTC
Communications common stock or CTC Communications Series A convertible
preferred stock.
(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,
-69-
<PAGE>
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. Neither CTC Communications nor CTC Group has requested an
opinion of counsel 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, the
"Securities Act," 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.
Rule 145 restricts 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 State
Street Bank and Trust Company, Boston, Massachusetts.
INDEPENDENT AUDITORS
The financial statements of CTC Communications Corp. at March 31, 1998 and
1997, and for each of the three years in the period ended March 31, 1998,
appearing in this proxy statement/prospectus 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.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for CTC Group
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 the outstanding shares of
common stock of CTC Group.
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.
-70-
<PAGE>
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.
-71-
<PAGE>
CTC COMMUNICATIONS CORP.
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................................. F-2
Balance Sheets as of March 31, 1998 and 1997............................................... F-3
Statements of Operations for the years ended March 31, 1998, 1997 and 1996................. F-4
Statements of Stockholders' Equity for the years ended March 31, 1998, 1997 and 1996....... F-5
Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996................. F-6
Notes to Financial Statements.............................................................. F-7
UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1998 and March 31, 1998........................ F-22
Condensed Statements of Operations for the nine months ended December 31, 1998 and 1997.... F-23
Condensed Statements of Cash Flows for the nine months ended December 31, 1998 and 1997.... F-24
Notes to Condensed Financial Statements.................................................... F-25
</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, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CTC Communications Corp. at
March 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1998, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
May 28, 1998, except for
Note 1, as to which the
date is July 15, 1998
F-2
<PAGE>
CTC COMMUNICATIONS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 2,167,930 $ 6,405,670
Accounts receivable, less allowance for doubtful accounts of $492,000 in
1998 and $377,000 in 1997.............................................. 17,288,183 10,904,820
Prepaid expenses and other current assets................................ 791,736 447,441
Amounts due from officers and employees.................................. 84,754 46,112
Income tax receivable.................................................... 2,152,579
----------- -----------
Total current assets.................................................. 22,485,182 17,804,043
EQUIPMENT:
Equipment................................................................ 13,376,970 7,268,372
Accumulated depreciation................................................. (6,837,683) (5,565,650)
----------- -----------
6,539,287 1,702,722
Deferred income taxes...................................................... 1,834,000 566,000
Other assets............................................................... 108,885 113,685
----------- -----------
$30,967,354 $20,186,450
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................................... $ 8,958,476 $ 3,238,416
Accrued income taxes..................................................... 225,948
Accrued salaries and related taxes....................................... 756,159 2,423,825
Deferred revenue......................................................... 6,588
Current portion of obligations under capital leases...................... 231,796
Current portion of note payable to bank.................................. 1,196,400
----------- -----------
Total current liabilities............................................. 11,142,831 5,894,777
Obligations under capital leases, net of current portion................... 1,114,277
Note payable to bank, net of current portion............................... 7,130,671
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Series Preferred Stock--par value $1.00 per share; authorized 1,000,000
shares, none outstanding...
Common Stock, par value $.01 per share; authorized 25,000,000 shares,
issued 9,980,661 and 9,629,407 shares in 1998 and 1997, respectively... 99,806 96,294
Additional paid-in capital............................................... 5,245,704 4,758,454
Deferred compensation.................................................... (318,410)
Retained earnings........................................................ 6,688,300 9,572,750
----------- -----------
11,715,400 14,427,498
Amounts due from stockholders............................................ (135,825) (135,825)
----------- -----------
11,579,575 14,291,673
----------- -----------
$30,967,354 $20,186,450
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CTC COMMUNICATIONS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
REVENUES:
Agency......................................... $24,775,420 $29,195,261 $25,492,511
Telecommunications............................. 16,171,716 11,094,838 5,383,414
----------- ----------- -----------
40,947,136 40,290,099 30,875,925
COSTS AND EXPENSES:
Cost of telecommunications revenues............ 14,038,565 8,709,122 4,241,575
Selling, general and administrative expenses... 31,491,963 23,819,714 20,009,432
----------- ----------- -----------
45,530,528 32,528,836 24,251,007
----------- ----------- -----------
Income (loss) from operations.................... (4,583,392) 7,761,263 6,624,918
OTHER:
Interest income................................ 145,012 201,369 195,979
Interest expense............................... (106,465) (17,753) (604)
Other.......................................... 174,395 15,052 9,631
----------- ----------- -----------
212,942 198,668 205,006
----------- ----------- -----------
Earnings (loss) before income taxes.............. (4,370,450) 7,959,931 6,829,924
Provision (benefit) for income taxes............. (1,486,000) 3,277,000 2,736,000
----------- ----------- -----------
Net income (loss)................................ $(2,884,450) $ 4,682,931 $ 4,093,924
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic.......................................... $ (0.29) $ 0.49 $ 0.43
=========== =========== ===========
Diluted........................................ $ (0.29) $ 0.43 $ 0.38
=========== =========== ===========
SHARES USED IN COMPUTING EARNINGS (LOSS) PER
COMMON SHARE:
Basic.......................................... 9,886,000 9,600,000 9,446,000
=========== =========== ===========
Diluted........................................ 9,886,000 10,773,000 10,712,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CTC COMMUNICATIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL AMOUNTS
------------ -------------
PAID-IN DEFERRED RETAINED TREASURY DUE FROM
------------ ------------- ------------ ---------- -------------
COMMON STOCK CAPITAL COMPENSATION EARNINGS STOCK STOCKHOLDERS
---------------------- ------------ ------------- ------------ ---------- -------------
SHARES PAR VALUE
---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1995.................... 3,124,437 $31,244 $4,871,302 $ 796,734 $ (13,860) $(159,825)
Issuance of stock
pursuant to
employee stock
purchase plan.......... 9,082 91 58,153
Exercise of employee
stock options.......... 197,143 1,971 121,053
Acquisition of treasury
stock.................. (329,125)
Retirement of treasury
stock.................. (25,454) (254) (342,731) 342,985
Settlement of amounts
due from
stockholders........... 24,000
Issuance of stock upon
3 for 2 stock split.... 1,560,742 15,607 (15,607) (839)
Issuance of stock upon
2 for 1 stock split.... 4,718,172 47,182 (47,182)
Net income.............. 4,093,924
--------- ------- ---------- ------------ ----------- --------- ---------
Balance at March 31,
1996.................... 9,584,122 95,841 4,644,988 4,889,819 0 (135,825)
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 0 (135,825)
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 0 $(135,825)
========= ======= ========== ============ =========== ========= =========
<CAPTION>
TOTAL
-------
<S> <C>
Balance at March 31,
1995.................... $ 5,525,595
Issuance of stock
pursuant to
employee stock
purchase plan.......... 58,244
Exercise of employee
stock options.......... 123,024
Acquisition of treasury
stock.................. (329,125)
Retirement of treasury
stock..................
Settlement of amounts
due from
stockholders........... 24,000
Issuance of stock upon
3 for 2 stock split.... (839)
Issuance of stock upon
2 for 1 stock split....
Net income.............. 4,093,924
-----------
Balance at March 31,
1996.................... 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.................... 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.................... $11,579,575
===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CTC COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................... $(2,884,450) $ 4,682,931 $ 4,093,924
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization....................................... 1,417,866 742,895 660,338
Provision for doubtful accounts..................................... 1,421,000 316,669 61,763
Deferred income taxes............................................... (1,268,000) (289,000) (124,000)
Stock compensation expense.......................................... 20,678
Gain on sale of fixed asset......................................... (143,333)
Changes in operating assets and liabilities:
Accounts receivable.............................................. (7,804,363) (4,664,260) (2,979,772)
Other current assets............................................. (382,937) (123,789) (231,642)
Income tax receivable............................................ (2,152,579) 21,125 (21,125)
Other assets..................................................... 4,800 4,800 (90,200)
Accounts payable, accrued expenses, accrued salaries
and related taxes............................................... 4,052,394 2,657,149 1,103,061
Accrued income taxes............................................. (225,948) 225,948 (281,569)
Deferred revenue and other....................................... (6,588) (2,714) 1,128
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................................... (7,951,460) 3,571,754 2,191,906
INVESTING ACTIVITY
Additions to equipment, net............................................ (4,765,025) (1,221,879) (759,204)
----------- ----------- -----------
Net cash used in investing activity.................................... (4,765,025) (1,221,879) (759,204)
FINANCING ACTIVITIES
Proceeds from issuance of common stock................................... 151,674 113,919 119,467
Borrowings under note payable to bank, net of repayments................. 8,327,071
Cash paid for fractional shares in connection with stock splits.......... (839)
----------- ----------- -----------
Net cash provided by financing activities................................ 8,478,745 113,919 118,628
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents......................... (4,237,740) 2,463,794 1,551,330
Cash and cash equivalents at beginning of year........................... 6,405,670 3,941,876 2,390,546
----------- ----------- -----------
Cash and cash equivalents at end of year................................. $ 2,167,930 $ 6,405,670 $ 3,941,876
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
CTC Communications Corp. (the Company) is an integrated communications
provider (ICP), which offers local, long distance, Internet access, Frame Relay
and other data services under its own brand name on a single integrated bill.
The Company serves small to medium-sized business customers in seven
Northeastern states. Prior to becoming an ICP in January 1998, the Company was a
sales agent for Bell Atlantic Corp. (Bell Atlantic) and other telecommunications
providers selling local telecommunications services as an agent since 1984. The
Company has also offered long distance and data services under its own brand
name since 1994. In late 1998, the Company plans to begin deploying a data-
centric network in its existing markets.
The Company has obtained a commitment for an interim credit facility (the
Interim Facility) from its current lender. The Interim Facility, which would
mature on June 30, 1999, would provide secured revolving loans of up to $20
million to refinance the Company's existing credit facility (the Credit
Facility), to fund capital expenditures and significant operating losses
expected to be incurred in connection with the Company's transition to an ICP
strategy and for general corporate purposes. The commitment, which is subject to
certain conditions, extends to September 30, 1998. To satisfy one of those
conditions, the Company has received a commitment from Spectrum Equity
Investors, II, L.P. (''Spectrum'') to purchase $5 million of Preferred Stock
which extends until June 30, 1999 (the Interim Spectrum Financing). The Company
believes that the Interim Facility and the Interim Spectrum Financing, if
required, together with cash on hand would be sufficient to refinance the Credit
Facility and to fund the Company's existing operations for at least the next 12
months. However, CTC would be required to delay its proposed geographic
expansion and deployment of facilities or to obtain additional financing within
the next 6 months.
The implementation of the Company's business plan to further penetrate its
existing markets as an ICP, deploy the ICN in its existing markets, expand its
sales presence into six additional states in the Boston-Washington DC corridor
and enhance the CTC Information System and the repayment of the Credit Facility
will require the Company to raise significant capital. The Company has been
seeking and is actively engaged in the negotiation of commitments with
alternative sources of long-term financing to fund its business plans. Although
the Company is highly optimistic that it will be successful in obtaining such
financing based upon its negotiations, there can be no assurance that the
Company will be able to consummate financing in the amount, on the terms and on
the schedule required to implement the Company's business plan, if at all.
Agency revenues derived from commissions received from Bell Atlantic
represented 48%, 63% and 69% of the Company's total revenues in 1998, 1997 and
1996, respectively. Accounts receivable from Bell Atlantic amounted to 63% and
70% of total accounts receivable at March 31, 1998 and 1997, respectively. See
Note 2.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of less
than three months at the date of acquisition as cash equivalents.
Equipment
Equipment is stated on the basis of cost. Depreciation, including
amortization of capitalized leases, is computed using the straight-line method.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.
Revenue Recognition
Telecommunications revenues are recognized as the usage accrues on the
network. Agency revenues are recognized when ordered and, if commissions are
based on usage, revenues are recognized as earned. Provisions for cancellations
F-7
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
are made at the time revenue is recognized and actual experience, prior to the
developments described in Note 2, has consistently been within management's
estimates.
Income Taxes
The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards (SFAS) No. 109, ''Accounting for
Income Taxes.'' Under this method, deferred income taxes are recognized for the
future tax consequences of differences between the tax and financial accounting
bases of assets and liabilities at each year end. Deferred income taxes are
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Accounting Pronouncements
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. Both SFAS 130 and SFAS 131 are
effective for fiscal years beginning after December 15, 1997. The Company
believes that the adoption of these new accounting standards will not have a
material impact on the Company's financial statements.
Earnings Per Share
In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the SFAS No. 128 requirements.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and trade receivables. The carrying amount of cash and cash equivalents
approximates fair value due to the short maturity of these instruments.
Significant Estimates and Assumptions
The financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make significant estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions made
by management affect the Company's provision for doubtful accounts, cancellation
of orders and certain accrued expenses. Actual results could differ from those
estimates.
Accounting for Stock Issued to Employees
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair market value of the shares at the date
of the grant (110% of the fair market value for owners of 20% or more of the
Company's Common Stock). The Company has elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, Accounting for Stock-Based Compensation, requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
F-8
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. BELL ATLANTIC LITIGATION
In December 1997, the Company terminated its agency contract and filed suit
against Bell Atlantic for breaches of contract, including the failure of Bell
Atlantic's retail division to pay $14 million in agency commissions
(approximately $12 million at March 31, 1998) owed to the Company. The Company
also asserted violations by Bell Atlantic of antitrust laws and the
Telecommunications Act. The Company intends to pursue this suit vigorously.
Although the Company believes the collection of the agency commissions sought in
the suit is probable, there can be no assurance that the Company will be
successful in collecting those commissions. If the Company fails to collect any
of the agency commissions sought or if their collection becomes less than
probable, the Company would be required to write off the amounts reflected in
its financial statements that it is unable to collect or for which collection
becomes less than probable. Delay in collection of, or the write-off of, the
agency commissions sought may adversely affect the Company.
3. RELATED-PARTY TRANSACTIONS
The installation of telephone systems is generally subcontracted to a
company controlled by the Chairman of the Company. Amounts paid to this
subcontractor which are based on fair market value amounted to $1,723, $28,217
and $1,089 in 1998, 1997 and 1996, respectively. Additionally, inventory and
equipment purchased from this subcontractor at fair market value amounted to
$231,052, $68,973 and $39,791 in 1998, 1997 and 1996, respectively.
The Company leases office space from trusts in which the Chairman is a
beneficiary. Rent expense for these facilities aggregated $132,656, $132,656 and
$133,949 in 1998, 1997 and 1996, respectively. These office space leases expire
in fiscal 1998.
The Company subleases a part of its corporate facility to a company
controlled by the Chairman of the Company. Terms of the sublease are identical
with those included in the Company's lease. Sublease income totaled $119,416,
$80,416 and $73,417 in 1998, 1997 and 1996, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Trade accounts payable.............................. $5,778,048 $2,015,409
Accrued cost of telecommunications revenue....... 888,031 790,039
Bell Atlantic litigation......................... 1,200,000
Other............................................ 1,092,397 432,968
---------- ----------
$8,958,476 $3,238,416
========== ==========
</TABLE>
5. NOTE PAYABLE TO BANK
In November 1997, the Company replaced its existing $5,000,000 revolving
line of credit agreement with a bank credit facility consisting of $15,000,000
revolving line of credit, a $5,000,000 equipment line of credit, and a
$5,000,000 working capital line of credit. The revolving line of credit bears
interest at Libor plus 1.5% to 3.00%, or prime rate plus up to 0.5%, depending
on certain coverage ratios of the Company and expires in September, 2000. The
equipment and working capital lines of credit bear interest at Libor plus 1.75%
to 3.25%, or prime rate plus up to 1%, depending on certain leverage ratios of
the Company and expire in September 2000. At March 31, 1998, $1,339,000 and
$4,018,000 was available for borrowing under the revolving line of credit, and
the equipment line of credit, respectively, and no amounts were available for
borrowing under the working capital line of credit.
As of March 31, 1998, the Company was not in compliance with certain
covenants under its bank credit facility as a result of the Company's fourth
quarter net loss of approximately $6 million. The bank has waived such covenant
noncompliance under the Facility until September 30, 1998. See Note 1.
F-9
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Note payable to bank consisted of the following at March 31, 1998:
Revolving line of credit due September 1, 2000.
<TABLE>
<S> <C>
$ 2,345,071
Equipment line of credit due in annual principal installments of $196,400 through
January 2003 (7.44% at March 31, 1998)........................................... 982,000
Working capital line of credit due in annual principal payments of $1,000,000
through March 2003 (7.44% at March 31, 1998)..................................... 5,000,000
-----------
8,327,071
Less: current portion............................................................... (1,196,400)
-----------
$ 7,130,671
===========
</TABLE>
Maturities of long-term debt are the following at March 31:
<TABLE>
<S> <C>
1999................................................................................ $1,196,400
2000................................................................................ 1,196,400
2001................................................................................ 3,541,471
2002................................................................................ 1,196,400
2003................................................................................ 1,196,400
</TABLE>
The bank has a security interest in and lien on all of the tangible and
intangible personal property and fixtures of the Company, including all accounts
receivable and equipment.
6. LEASES
The Company leases office facilities under long-term lease agreements
classified as operating leases. The following is a schedule of future minimum
lease payments, net of sublease income, for operating leases as of March 31,
1998:
<TABLE>
<CAPTION>
OPERATING SUBLEASE
LEASES INCOME NET
---------- ---------- ----------
<S> <C> <C> <C>
Year ending March 31:
1999........................................ $1,399,383 $(107,766) $1,291,617
2000........................................ 1,098,624 (109,898) 988,726
2001........................................ 1,010,819 (111,420) 899,399
2002........................................ 937,665 (111,420) 826,245
2003........................................ 671,930 (111,420) 560,510
---------- --------- ----------
Net future minimum lease payments............. $5,118,421 $(551,924) $4,566,497
========== ========= ==========
</TABLE>
Rental expense for operating leases amounted to $1,121,916, $1,001,919 and
$673,321 in 1998, 1997 and 1996, respectively. Sublease income amounted to
$119,416, $90,016 and $82,217 in 1998, 1997 and 1996, respectively.
The Company leases equipment under capital leases. At March 31, 1998, the
Company has capitalized leased equipment totaling $1,346,073 with related
accumulated amortization of $134,607. The following is a schedule by year of
future minimum lease payments due under capital leases, together with the
present value of the minimum lease payments as of March 31, 1998:
<TABLE>
<S> <C>
Year ending March 31:
1999................................................................................... $ 300,308
2000................................................................................... 300,308
2001................................................................................... 300,308
</TABLE>
F-10
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C>
2002................................................................................... 300,308
2003................................................................................... 300,308
Thereafter............................................................................. 25,026
----------
1,526,566
Less amount representing interest...................................................... (180,493)
----------
Present value of minimum lease payments..................................................... 1,346,073
Less current portion of obligations under capital leases.................................... (231,796)
----------
Obligations under capital leases............................................................ $1,114,277
==========
</TABLE>
7. TELECOMMUNICATIONS AGREEMENTS
On January 15, 1996, the Company entered into a four-year nonexclusive
agreement with a long-distance service provider for the right to provide long
distance service to its customers at prices affected by volume attainment levels
during the term of the agreement. The Company is not obligated to purchase any
minimum levels of usage over the term of the agreement, but rates may be
adjusted due to the failure of achieving certain volume commitments. These
provisions had no effect on the financial statements for the years ended March
31, 1998, 1997 and 1996.
On October 20, 1994, the Company entered into a three-year non-exclusive
agreement with a long-distance service provider for the right to provide long
distance service to its customers at fixed prices by service during the term of
the agreement. On October 11, 1996, the Company entered into an amendment to the
agreement which extended the term of the agreement by five years from the date
of the amendment. Over such extension period, the Company shall be liable for a
minimum aggregate usage commitment of $25 million. Furthermore, the rates set
forth under the aforementioned amendment may be adjusted due to the failure of
meeting certain periodic volume commitments. Due to existing and expected usage,
these provisions had no effect on the financial statements for the years ended
March 31, 1998 and 1997.
Prior to the execution of the agreements described above, and through March
31, 1998, the Company also provided long distance service to customers under an
informal non-exclusive arrangement with another long distance service provider.
The Company is not obligated to purchase any minimum level of usage on the
network, and there are no other performance obligations.
8. STOCKHOLDERS' EQUITY
Common Stock
On July 13, 1995, the Board of Directors declared a 3 for 2 stock split in
the form of a dividend payable to shareholders of record on July 25, 1995. A
total of 1,560,742 shares of common stock were issued and $839 in cash was paid
for fractional share amounts.
On October 10, 1995, the Board of Directors declared a 2 for 1 stock split
in the form of a dividend payable to shareholders of record on October 23, 1995.
A total of 4,718,172 shares of common stock were issued.
Preferred Stock
The dividends, liquidation preference, voting rights and other rights of
each series of preferred stock, when issued, are to be designated by the Board
of Directors prior to issuance.
9. BENEFIT PLANS
Defined Contribution Plan
The Company maintains a defined contribution plan (401(k) plan) covering
all employees who meet certain eligibility requirements. Participants may make
contributions to the plan up to 15% of their compensation (as defined) up to the
maximum established by law. The Company may make a matching contribution of an
amount to be determined by the Board of Directors, but subject to a maximum of
6% of compensation contributed by each participant. Company contributions vest
ratably over three years. Company
F-11
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
contributions to the plan were $310,788, $230,079 and $210,063 in 1998, 1997 and
1996, respectively. Administrative costs paid by the Company were $5,960, $1,275
and $7,982 in 1998, 1997 and 1996, respectively.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (the ESPP) which enables
participating employees to purchase Company shares at 85% of the lower of the
market prices prevailing on the valuation dates as defined in the ESPP.
Individuals can contribute up to 5% of their base salary. The Company made no
contributions to the ESPP during the three years in the period ended March 31,
1998. Indicated below is a summary of shares of common stock purchased by the
ESPP. All share and per share amounts indicated below have been presented to
reflect the stock dividend and stock splits described above.
In July 1997 and February 1998, the ESPP purchased 5,438 shares at $6.48
per share and 4,406 shares at $8.29 per share, respectively.
In July 1996 and February 1997, the ESPP purchased 2,998 shares at $11.05
per share and 5,716 shares at $6.48 per share, respectively.
In July 1995 and January 1996, the ESPP purchased 7,011 shares at $3.26 per
share and 2,345 shares at $11.05 per share, respectively.
Stock Option Plans
Under the terms of its 1993 Stock Option Plan and 1996 Stock Option Plan
(collectively, the Plans), the Company may grant stock options for the purchase
of Common Stock to all employees, directors and consultants. The Plans generally
provide that the exercise price for an incentive stock option (which may only be
granted to employees) will be fixed by a committee of the Board of Directors but
will not be less than 100% (110% for 10% stockholders) of the fair market value
per share on the date of grant. Nonqualified options may also be granted under
the Plans to directors, employees and consultants. Nonqualified options under
the 1993 Plan may be granted at an exercise price of no less than 85% (110% for
10% stockholders) of the fair market value per share on the date of grant and
under the 1996 Plan may be granted with an exercise price less than, equal to or
greater than the fair market value per share on the date of the grant. No
options have a term of more than ten years and options to 10% stockholders may
not have a term of more than five years.
In the event of termination of employment, other than by reason of death,
disability or with the written consent of the Company, all options granted to
employees are terminated. Vesting is determined by the Board of Directors.
On March 20, 1998, the Board of Directors approved the repricing of
1,175,500 options with a new exercise price of $7.19 ($7.91 for 10%
stockholders).
Stock-Based Compensation
Pro forma information regarding net income (loss) and earnings (loss) per
common share is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options and shares issued pursuant
to the ESPP under the fair value method of that Statement. The fair value for
these options and shares issued pursuant to the ESPP were estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
--------------------- ---------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)..... 2.96 3.98 3.49 0.50 0.50 0.50
Interest rate............. 5.93% 6.28% 6.12% 5.43% 5.4% 6.48%
Volatility................ 85.14 87.88 87.88 64.67 93.03 80.93
Dividend yield............ 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
F-12
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income (loss) and earnings (loss) per common share are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)............................ $(4,973,000) $4,094,000 $3,550,000
Pro forma earnings (loss) per common share............. $ (0.50) $ 0.39 $ 0.34
</TABLE>
The effects on 1996, 1997 and 1998 pro forma net income (loss) and earnings
(loss) per common share of expensing the estimated fair value of stock options
and shares issued pursuant to the ESPP are not necessarily representative of the
effects on reporting the results of operations for future years as the periods
presented include only one, two and three years of option grants under the
Company's plans.
A summary of the Company's stock option activity, and related information
for the years ended March 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
-------- -------- --------
AVERAGE AVERAGE AVERAGE
------- ------- --------
EXERCISE EXERCISE EXERCISE
-------- -------- --------
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 1,953,112 $4.3651 1,995,878 $4.01 1,526,850 $1.45
Options granted............. 2,791,000 7.1249 280,539 9.67 1,000,250 8.06
Options terminated.......... (1,402,718) 8.3647 (286,734) 7.54 (290,689) 2.37
Options exercised........... (376,387) .9326 (36,571) 1.20 (240,533) 0.51
----------- ---------- ----------
Outstanding at end of year..... 2,965,007 $5.5037 1,953,112 $4.36 1,995,878 $4.01
=========== ========== ==========
Exercisable at end of year..... 698,250 772,282 613,824
=========== ========== ==========
Weighted-average fair value
of options granted during
the year...................... $ 4.01 $6.43 $5.09
=========== ========== ==========
</TABLE>
F-13
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table presents weighted-average price and life information
about significant option groups outstanding at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED
--------
AVERAGE WEIGHTED WEIGHTED
------- -------- --------
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
-------- ------ --------- ------- ------ -------
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.25 187,500 0.1 years $ 0.25 187,500 $ 0.25
0.53 - 86,397 0.6 years 0.534 86,397 0.534
0.90 -1.10 207,854 1.5 years 1.10 147,261 1.10
2.70 -2.98 257,056 2.0 years 2.7444 189,792 2.7449
6.00 -7.06 1,041,700 6.4 years 6.4411 10,500 6.1607
7.19 1,100,500 4.2 years 7.188 76,800 7.1880
7.91 75,000 4.1 years 7.9068 0 0
$8.69 9,000 2.7 years 8.688 0 0
--------- -------
2,965,007 698,250
========= =======
</TABLE>
10. EARNINGS (LOSS) PER COMMON SHARE
The following sets forth the computations of basic and diluted earnings
(loss) per common share.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
NUMERATOR:
<S> <C> <C> <C>
Net income (loss) (numerator for basic and diluted
earnings (loss) per common share).................. $(2,884,450) $ 4,682,931 $ 4,093,924
DENOMINATOR:
Denominator for basic earnings (loss) per common
share-weighted average shares...................... 9,886,000 9,600,000 9,446,000
Effect of employee stock options..................... 1,173,000 1,266,000
----------- ----------- -----------
Denominator for diluted earnings (loss) per common
share.............................................. 9,886,000 10,773,000 10,712,000
=========== =========== ===========
Basic earnings (loss) per common share.................. $ (0.29) $ 0.49 $ 0.43
=========== =========== ===========
Diluted earnings (loss) per common share................ $ (0.29) $ 0.43 $ 0.38
=========== =========== ===========
</TABLE>
11. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT:
Federal .......................................... $ (218,000) $ 2,660,000 $ 2,135,000
State ............................................ 906,000 725,000
----------- ----------- -----------
(218,000) 3,566,000 2,860,000
Deferred tax benefit ............................... (1,268,000) (289,000) (124,000)
----------- ----------- -----------
$(1,486,000) $ 3,277,000 $ 2,736,000
=========== =========== ===========
</TABLE>
F-14
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax liabilities and assets as
of March 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
DEFERRED TAX ASSETS:
<S> <C> <C>
Depreciation...................................... $ 64,000 $191,000
Accruals and allowances........................... 1,751,000 445,000
Net operating state loss carryforward............. 96,000
---------- --------
Total deferred tax asset............................. 1,911,000 636,000
DEFERRED TAX LIABILITY:
Prepaid expenses.................................. (38,000) (31,000)
Cash surrender value of life insurance policy..... (39,000) (39,000)
---------- --------
Total deferred tax liability......................... (77,000) (70,000)
---------- --------
Net deferred tax asset............................... $1,834,000 $566,000
========== ========
</TABLE>
The income tax expense is different from that which would be obtained by
applying the statutory federal income tax rate to income before income taxes.
The items causing this difference are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- -----------
<S> <C> <C> <C>
Tax at U.S. statutory rate..................... $(1,486,000) $2,706,000 $2,322,000
State income taxes, net of federal benefit..... 552,000 466,000
Other.......................................... 19,000 (52,000)
----------- ---------- ----------
$(1,486,000) $3,277,000 $2,736,000
=========== ========== ==========
</TABLE>
Income taxes paid in 1998, 1997 and 1996 amounted to $2,160,527, $3,319,000
and $3,163,000, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
In March 1996, the Company received shares of common stock with an aggregate
fair market value of $251,771 in lieu of cash for settlement of amounts due from
an officer. These shares and the related amount were accounted for as treasury
stock and were subsequently retired.
In September 1995, the Company received shares of common stock with an
aggregate fair market value of $25,039 in lieu of cash for settlement of amount
due from a non-employee of $24,000 plus accrued interest of $1,039. These shares
and the related amount were accounted for as treasury stock and were
subsequently retired.
During fiscal 1998 and 1996, and in connection with the exercise of employee
stock options, the Company received shares of common stock with an aggregate
fair market value of $271,072 and $52,315 in lieu of cash upon the exercise of
these options. These shares and the related amount were accounted for as
treasury stock and were subsequently retired.
These noncash transactions have been excluded from the statements of cash
flows for the years ended March 31, 1998 and 1996.
13. SUBSEQUENT EVENTS
In April 1998, the Company privately placed $12 million of Series A
convertible preferred stock (Series A Preferred Stock) and warrants to purchase
Common Stock with Spectrum Equity Investors II, L.P. and other private
investors. The Series A Preferred Stock may be redeemed at the option of the
holders of a majority of the Series A Preferred Stock at any time on or after
the earlier of (i) April 9, 2010 and (ii) the date 180 days after the maturity
date of any debt financing consummated on or before October 9, 1998 yielding
proceeds of at least $75 million. The Series A Preferred Stock is convertible
into shares of Common Stock. On the date of issuance, the shares of Series A
Preferred Stock were convertible into 1,333,333 shares of the Company's Common
Stock, which conversion ratio is subject to certain adjustments. The warrants
entitle the holder thereof to purchase one share of Common Stock at an exercise
price of $9.00 per share. The warrants expire on April 10, 2003. See also Note
1.
F-15
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED)
A summary of operating results for the quarterly periods in the two years
ended March 31, 1998 is set forth below:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 TOTAL
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
Total revenues................. $11,658,954 $11,845,097 $11,155,646 $ 6,287,439 $40,947,136
Gross profit................... 9,216,118 9,132,848 8,215,645 343,960 26,908,571
Earnings (loss)................ 1,374,000 1,244,000 506,000 (6,008,450) (2,884,450)
Earnings (loss) per common
share--basic................. $ 0.14 $ 0.13 $ 0.05 $ (0.60) $ (0.29)
Earnings (loss) per common
share--diluted............... $ 0.13 $ 0.12 $ 0.05 $ (0.60) $ (0.29)
Year ended March 31, 1997
Total revenues................. $ 9,007,461 $ 9,617,068 $10,193,787 $11,471,783 $40,290,099
Gross profit................... 7,325,606 7,463,843 7,932,162 8,859,366 31,580,977
Earnings....................... 1,194,186 1,048,828 1,159,000 1,280,917 4,682,931
Earnings per common share--
basic........................ $ 0.12 $ 0.11 $ 0.12 $ 0.13 $ 0.49
Earnings per common share--
diluted...................... $ 0.11 $ 0.10 $ 0.11 $ 0.12 $ 0.43
</TABLE>
Fiscal year 1997 and the first two quarters of fiscal year 1998 earnings per
common share amounts have been restated to comply with Statement of Financial
Accounting Standards No. 128, Earnings per Share.
F-16
<PAGE>
CTC COMMUNICATIONS CORP.
CONDENSED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents................................. $ 2,597,116 $ 2,167,930
Accounts receivable, net.................................. 26,462,861 17,288,183
Prepaid expenses and other current assets................. 8,839,184 3,029,069
------------ -----------
Total Current Assets................................... 37,899,161 22,485,182
Furniture, Fixtures and Equipment........................... 35,638,801 13,376,970
Less accumulated depreciation............................... (10,197,683) (6,837,683)
------------ -----------
Total Equipment........................................ 25,441,118 6,539,287
Deferred income taxes....................................... 0 1,834,000
Other assets, principally at December 31, 1998.............. 4,188,531 108,885
------------ -----------
Total Assets........................................... $ 67,528,810 $30,967,354
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 29,088,014 $ 8,958,476
Accrued salaries and related taxes........................ 2,342,299 756,159
Current portion of obligations under capital leases....... 1,312,621 231,796
Current portion of note payable to bank................... 0 1,196,400
------------ -----------
Total Current Liabilities.............................. 32,742,934 11,142,831
Obligations under capital leases, net of current portion.... 4,671,226 1,114,277
Notes payable, net of current portion....................... 35,958,287 7,130,671
Series A redeemable convertible preferred stock............. 12,561,573 0
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock.............................................. 102,911 99,806
Additional paid in capital................................ 6,960,212 5,245,704
Deferred Compensation..................................... (238,910) (318,410)
Retained-earnings (deficit)............................... (25,063,598) 6,688,300
------------ -----------
(18,239,385) 11,715,400
Amounts due from stockholders............................... (165,825) (135,825)
------------ -----------
Total Stockholders' Equity (Deficit)...................... (18,405,210) 11,579,575
------------ -----------
Total Liabilities and Stockholders' Equity (Deficit)...... $ 67,528,810 $30,967,354
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Telecommunications revenues......................... $ 46,376,407 $10,078,325
Commission revenues................................. 0 24,581,370
------------ -----------
Total revenues...................................... 46,376,407 34,659,695
Costs and expenses:
Cost of telecommunications revenues............... 40,425,994 8,095,086
Selling, general and administrative expenses...... 36,799,882 21,370,033
------------ -----------
77,225,876 29,465,119
------------ -----------
Income (loss) from operations....................... (30,849,469) 5,194,576
Other:
Interest income................................... 183,237 126,212
Interest expense.................................. (2,608,890) (22,135)
Other............................................. 36,473 14,348
------------ -----------
(2,389,180) 118,425
------------ -----------
Income (loss) before income taxes................... (33,238,649) 5,313,001
Provision (benefit) for income taxes................ (2,327,000) 2,189,000
------------ -----------
Net income (loss)................................... $(30,911,649) $ 3,124,001
============ ===========
Net income (loss) per common share:
Basic............................................. $ (3.15) $ 0.32
============ ===========
Diluted........................................... $ (3.15) $ 0.29
============ ===========
Weighted average number of common shares:
Basic............................................. 10,080,465 9,856,079
============ ===========
Diluted........................................... 10,080,465 10,824,001
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
CTC COMMUNICATIONS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................... $(30,911,649) $ 3,124,001
Adjustments to reconcile net income to net cash (used) by
operating activities:
Depreciation and amortization................................ 3,699,173 750,000
Stock compensation expense................................... 79,500 0
Interest expense related to warrants......................... 210,926 0
Changes in noncash working capital items:
Accounts receivable.......................................... (9,174,678) (6,475,864)
Other current assets......................................... (3,976,115) (352,378)
Other assets................................................. (3,198,072) 3,600
Accounts payable............................................. 20,129,538 1,008,833
Accrued liabilities.......................................... 1,586,140 (527,093)
Accrued taxes................................................ 0 (224,518)
Deferred revenue............................................. 0 (6,588)
------------ -----------
Net cash (used) by operating activities......................... (21,555,237) (2,700,007)
INVESTING ACTIVITIES
Additions to equipment.......................................... (17,436,552) (4,556,428)
------------ -----------
Net cash used in investing activities........................... (17,436,552) (4,556,428)
FINANCING ACTIVITIES
Proceeds from notes payable..................................... 27,631,216 1,846,073
Proceeds from the issuance of redeemable preferred stock........ 11,861,321 0
Repayments under capital leases................................. (187,505) 0
Proceeds from the issuance of common stock...................... 115,943 106,170
------------ -----------
Net cash provided by financing activities....................... 39,420,975 1,952,243
Increase (decrease) in cash..................................... 429,186 (5,304,192)
Cash at beginning of year....................................... 2,167,930 6,405,670
------------ -----------
Cash and cash equivalents at end of period...................... $ 2,597,116 $ 1,101,478
============ ===========
NON CASH INVESTING ACTIVITIES
Equipment acquired under capital leases......................... $ 4,825,279 0
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnote disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been included. Operating results for the nine months ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1999. These statements should be
read in conjunction with the financial statements and related notes included in
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1998.
NOTE 2: COMMITMENTS AND CONTINGENCIES
Lawsuit Against Bell Atlantic. In December 1997, the Company terminated its
agency contract and filed suit against Bell Atlantic in Federal District Court
for breach of contract, including the failure of Bell Atlantic to pay
approximately $11.5 million of agency commissions owed to the Company. The
Company also asserted violations by Bell Atlantic of the antitrust laws and
Telecommunications Act. On February 24, 1999, the Company settled the lawsuit.
Under the terms of the settlement, the Company will receive cash and other
consideration. Both parties have agreed to keep the specific terms of the
settlement confidential. Although the Company believes that the settlement will
now permit the Company to actively expand its customer base and increase its
revenues from the sale of communications products and services, there is no
assurance that it will do so. During the quarter ended March 31, 1999, the
Company expects to recognize approximately $5,300,000 in legal fees and other
costs incurred in connection with the final resolution of the matter. The
Company does not expect to incur any additional costs related to this matter
subsequent to March 31, 1999.
The Company is otherwise party to suits arising in the normal course of
business which management believes are not material individually or in the
aggregate.
NOTE 3. PREFERRED STOCK
On April 10, 1998, the Company issued for investment to Spectrum Equity
Investors II, L.P. ("Spectrum") and certain other private investors (together
with Spectrum, the "Investors") an aggregate of 666,666 shares of Series A
Convertible Preferred Stock (the "Preferred Shares") for $12 million, pursuant
to the terms and conditions of a Securities Purchase Agreement among the Company
and the Investors. The Company also issued for investment to the Investors five-
year warrants to purchase an aggregate of 133,333 shares of its Common Stock at
an exercise price of $9.00 per share. Spectrum purchased 98.63% of the Preferred
Shares and warrants in the private placement. On the date of issuance, the
Preferred Shares were convertible into 1,333,333 shares of the Company's Common
Stock at $9.00 per share, which conversion ratio is subject to certain
adjustments. Reference is made to the Company's Report on Form 8-K and exhibits
thereto dated and filed on May 15, 1998 for a complete description of the
transaction.
NOTE 4. CISCO VENDOR FINANCING FACILITY
On October 14, the Company obtained three-year vendor financing facility
for up to $25 million with Cisco Capital Corp. Under the terms of the agreement,
the Company has agreed to a three year, $25 million volume purchase commitment
of Cisco Systems equipment and services and Cisco Capital Corp has agreed to
advance funds as these purchases occur. In addition, a portion of the Cisco
facility can be utilized for working capital costs associated with the
integration and operation of Cisco Systems solutions and related peripherals.
Pursuant to the terms of the Cisco Vendor Financing Agreement dated as of
October 14, 1998, the Company has agreed to give the Lender a senior security
interest in all products provided to the Company by Cisco and other products
purchased with the proceeds advanced under the facility and a subordinate
security interest in all other assets of the Company. Under the terms of the
facility, the Company is required to pay interest on funds advanced under the
facility at an annual rate of 12.5%. In addition, the Company is required to pay
a commitment fee of .50% per annum on any unused amounts under the facility and
certain other fees. As of February 16, 1999, the Company had borrowed $11.5
million under the facility. Reference is made to the Company's Current Report on
Form 8-K and the agreement filed as an exhibit thereto filed on October 14, 1998
for a complete description of the transaction.
F-20
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 5. GOLDMAN SACHS/FLEET FINANCING AND TORONTO DOMINION FINANCING
As of September 1, 1998, the Company as Borrower, entered into a Loan and
Security Agreement with Goldman Sachs Credit Partners L.P. and Fleet National
Bank as Lenders. Under the terms of the Loan and Security Agreement, the Lenders
have provided a three-year senior secured credit facility to the Company
consisting of revolving loans in the aggregate amount of up to $75 million (the
"Credit Facility"). Advances under the facility bear interest at 1.75% over
the prime rate and are secured by a first priority perfected security interest
on all of the Company's assets, provided, however, that the Company has the
ability to exclude assets acquired through purchase money financing. In
addition, the Company is required to pay a commitment fee of 0.5% per annum on
any unused amounts under the facility as well as a monthly line fee of $150,000
per month. The Company may borrow $15 million unconditionally and $60 million
based on trailing 120 days accounts receivable collections (reducing to the
trailing 90 days accounts receivable collections by March 31, 2000). The Company
paid a one-time up front fee of $2,531,250, representing 3/3//8% of the
facility. In the event that the Company wishes to prepay the loan, the agreement
provides for a prepayment penalty of 2% during the first 18 months of the term
of the loan. Warrants to purchase an aggregate of 974,412 shares of the
Company's common stock at an purchase price of $6.75 per share were issued to
the Lenders in connection with the transaction. The Company has valued the
Warrants at $1.3 million which is being amortized and included in interest
expense over the three-year term of the Loan and Security Agreement. As of March
19, 1999, the Company had availability under the Credit Facility of $44.6
million and had borrowed approximately $38 million as of that date.
The Company entered into a Loan Agreement dated as of March 15, 1999 with
Toronto Dominion (Texas), Inc. ("TD") to provide an unsecured standby credit
facility for up to $30 million for capital expenditures and other general
corporate purposes (the "TD Facility"). Under the terms of the TD Facility,
$10 million is immediately available and the remaining $20 million would become
available if the Company raises an additional $5 million in proceeds from the
issuance of common or preferred equity (which could be satisfied by calling the
Spectrum Commitment). The Company is required to pay a commitment fee of
$450,000 with additional commitment fees payable if the TD Facility is still
outstanding on the dates six months, nine months and one year after the closing.
In addition, the Company is required to pay a quarterly availability fee on
unfunded amounts as well as a funding fee for any draws. Draws under the TD
Facility will initially bear interest at 7.00% over the three-month US Dollar
deposit LIBOR rate and would increase quarterly thereafter. Warrants to purchase
69,216 shares of the Company's Common Stock at $11.8125 per share were issued to
TD as part of the transaction and contingent warrants to purchase up to 573,913
shares of Common Stock at $11.8125 per share may be issued to TD if advances
under the TD Facility are outstanding six months after the closing. The TD
Facility matures 15 months after the closing. The TD Facility matures 15 months
after the closing. The Company is required to repay draws with the proceeds from
subsequent issuances of equity or debt securities or from subsequent bank
financings. To date, the Company has not utilized the TD Facility.
NOTE 6. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share". Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
F-21
<PAGE>
CTC COMMUNICATIONS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
NUMERATOR:
Net income (loss)....................................................... (30,911,649) 3,124,001
Accretion to redemption value on redeemable preferred stock............. (840,252) 0
----------- ----------
Numerator for basic net income (loss) per share and diluted net
income (loss) per share............................................ (31,751,901) 3,124,001
=========== ==========
DENOMINATOR:
Denominator for basic net income (loss) per share-weighted average
shares............................................................. 10,080,465 9,856,079
EFFECT OF DILUTIVE SECURITIES:
Employee stock options................................................. 0 967,922
----------- ----------
Denominator for diluted net income (loss) per share-weighted-
average shares..................................................... 10,080,465 10,824,001
=========== ==========
Basic net income (loss) per share...................................... (3.15) 0.32
=========== ==========
Diluted net income (loss) per share.................................... (3.15) 0.29
=========== ==========
</TABLE>
NOTE 7. INCOME TAXES
The provision (benefit) for income taxes is less than the statutory rate
based upon management's assessment of the realizability of net operating losses.
The benefit is recognized ratably during the year based on the relationship of
amounts recoverable and management's estimate of the total loss for the fiscal
year ending March 31, 1999. The effective rate of the benefit may vary with
changes in management's estimates.
F-22
<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;
-2-
<PAGE>
(d) each share of CTC Massachusetts Common Stock and CTC
Massachusetts Preferred Stock outstanding immediately prior to the Effective
Time shall be converted into one share of Surviving Parent Common Stock and one
share of Surviving Parent Preferred Stock, respectively, pursuant to Article III
herein;
(e) without further transfer, act, or deed, the separate
existence of Delaware Subsidiary shall cease and CTC Massachusetts shall possess
all the rights, privileges, powers and franchises, and shall be subject to all
the restrictions, disabilities and duties, of Delaware Subsidiary; and all
property, real, personal and mixed, and all debts due to Delaware Subsidiary on
whatever account, as well as stock subscriptions and all other things belonging
to Delaware Subsidiary shall be vested in CTC Massachusetts; and all property,
rights, privileges, powers and franchises, and all and every other interest of
Delaware Subsidiary shall be thereafter as effectually the property of the CTC
Massachusetts as they were of Delaware Subsidiary, and the title to any real
estate vested by deed or otherwise in Delaware Subsidiary shall not revert or be
in any way impaired by reason of the Merger; and all rights of creditors of
Delaware Subsidiary and all liens upon any property of Delaware Subsidiary shall
be preserved unimpaired and all debts, liabilities and duties of Delaware
Subsidiary shall attach to CTC Massachusetts and may be enforced against it to
the same extent as if such debts, liabilities and duties had been incurred or
contracted by it.
2.4 Further Assurances. Delaware Subsidiary agrees that if, at any time
after the Effective Time, CTC Massachusetts shall consider or be advised that
any further deeds, assignments or assurances are necessary or desirable to vest,
perfect or confirm in the CTC Massachusetts title to any property or rights of
Delaware Subsidiary, the CTC Massachusetts and its officers and directors may
execute and deliver all such deeds, assignments and assurances and do all other
things necessary or desirable to vest, perfect or confirm title to such property
or rights in the CTC Massachusetts and otherwise to carry out the purposes of
this Agreement, in the name of Delaware Subsidiary or otherwise.
ARTICLE III
CONVERSION OF STOCK
3.1 Conversion of Stock. At the Effective Time, the stock of CTC
Massachusetts shall be converted into stock of Surviving Parent, as follows:
(a) each share of CTC Massachusetts Common Stock and each share
of Preferred Stock issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into one share of Surviving Parent Common Stock and
one share of Preferred Stock, respectively; and
(b) each share of Delaware Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted into one
share of common stock of the Surviving Subsidiary.
3.2 Stock Certificates. At and after the Effective Time, all of the
outstanding certificates which immediately prior to the Effective Time
represented shares of CTC Massachusetts Common Stock and shares of Preferred
Stock shall be deemed for all purposes to evidence ownership of, and to
represent, shares of Surviving Parent Common Stock and Preferred Stock into
which the shares of CTC Massachusetts Common Stock and Preferred Stock formerly
represented by such certificates have been converted as provided in this
Agreement. The registered owner on the books and records of Surviving Parent or
its transfer agent of any outstanding stock certificate shall, until such
certificate shall have been surrendered for transfer or otherwise accounted for
to Surviving Parent or its transfer agents, have and be entitled to exercise any
voting and other rights with respect to, and to receive any dividends and other
distributions upon, the shares of CTC Massachusetts Common Stock and Preferred
Stock evidenced by such outstanding certificates as provided above.
-3-
<PAGE>
3.3 Stock Options. Each right or option to purchase shares of CTC
Massachusetts Common Stock granted under the 1993 Employee Stock Option Plan,
the 1996 Employee Stock Option Plan, the Employee Stock Purchase Plan, the
Employee Stock Benefit Plan and the 401(k) Savings Plan, and, upon approval of
the stockholders of CTC Massachusetts, the 1998 Incentive Plan,(collectively,
the "Plans"), and all other rights, options and warrants to purchase CTC
Massachusetts Common Stock which is outstanding immediately prior to the
Effective Time, shall by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and become an option, right and warrant
to purchase the same number of shares of Surviving Parent Common Stock at the
same price per share, and upon the same terms and subject to the same conditions
as in effect at the Effective Time. The same number of shares of Delaware Common
Stock shall be reserved for purposes of said Plans and upon exercise of such
rights, options and warrants as is equal to the number of shares of CTC
Massachusetts Common Stock so reserved as of the Effective Time. As of the
Effective Time, Surviving Parent hereby assumes the Plans and all obligations of
CTC Massachusetts under the Plans including the outstanding options or awards or
portions thereof granted pursuant to the Plans and assumes all obligations of
CTC Massachusetts under all other options, rights and warrants.
3.4 Validity of Surviving Parent Common Stock and Preferred Stock. All
shares of Surviving Parent Common Stock and Preferred Stock into which CTC
Massachusetts Common Stock and Preferred are to be converted pursuant to the
Merger shall not be subject to any statutory or contractual preemptive rights,
shall be validly issued, fully paid and nonassessable and shall be issued in
full satisfaction of all rights pertaining to such CTC Massachusetts Common
Stock and Preferred Stock.
3.5 Rights of Former Holders. From and after the Effective Time, no holder
of certificates which evidenced CTC Massachusetts Common Stock and Preferred
Stock immediately prior to the Effective Time shall have any rights with respect
to the shares formerly evidenced by those certificates, other than to receive
the shares of Surviving Parent Common Stock and Preferred Stock into which such
CTC Massachusetts Common Stock and Preferred Stock shall have been converted
pursuant to the Merger.
ARTICLE IV
GENERAL
4.1 Consents. Each of the parties hereto shall use its best efforts to
obtain the consent and approval of each person whose consent or approval shall
be required in order to permit consummation of the Merger.
4.2 Governmental Authorizations. Each of the parties shall cooperate in
filing any necessary reports or other documents with any federal, state, local
or foreign authorities having jurisdiction with respect to the Merger.
4.3 Waiver and Amendment. This Agreement may be amended by action of the
Board of Directors of each party hereto without any action by the stockholders
of the parties, except that (a) any amendment to Section 3.1, (b) any amendment
changing the terms, rights, powers or preferences of the Surviving Parent Common
Stock or Preferred Stock, or (c) any amendment altering any terms of this
Agreement if such alteration would adversely affect the holders of CTC
Massachusetts Common Stock or Preferred Stock, or Surviving Parent Common Stock
or Preferred Stock, must be approved by a majority of the voting power of the
outstanding CTC Massachusetts Common Stock and Preferred Stock.
4.4 Termination. This Agreement may be terminated and the Merger and other
transactions provided for by this Agreement abandoned at any time prior to the
Effective Time, whether before or after adoption and approval of this Agreement
at the Shareholders' Meeting, by action of the Board of Directors of CTC
Massachusetts if the Board determines that the consummation of the transactions
contemplated by this Agreement would not, for any reason, be in the best
interests of Delaware Subsidiary and its shareholders.
-4-
<PAGE>
4.5 Entire Agreement. This Agreement (including any exhibits), contains
the entire agreement among the parties with respect to the Merger and supersedes
all prior and concurrent arrangements, letters of intent or understandings
relating to the Merger.
4.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which when taken
together shall constitute one and the same agreement. This Agreement shall
become effective when one or more counterparts has been signed by each of the
parties and delivered to each of the other parties.
4.7 Headings. The article, section and paragraph headings in this
Agreement have been inserted for identification and reference and shall not by
themselves determine the meaning or interpretation of any provision of this
Agreement.
4.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware and, so far as applicable, the
merger provisions of the Massachusetts General Corporation Law.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
CTC COMMUNICATIONS CORP.,
a Massachusetts corporation
____________________________
By:
Title:
CTC COMMUNICATIONS GROUP, INC.
a Delaware corporation
____________________________
By:
Title:
CTC-NEWCO, INC.
a Delaware corporation
____________________________
By:
Title:
-5-
<PAGE>
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
-6-
<PAGE>
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.
-7-
<PAGE>
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
-8-
<PAGE>
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.
-9-
<PAGE>
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.
-10-
<PAGE>
(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
-11-
<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
-12-
<PAGE>
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
-14-
<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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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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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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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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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________________________________
