==============================================================================
As filed with the Securities and Exchange Commission on September 5, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------
AMENDMENT NO. 2 TO
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-------------
CABLE MICHIGAN, INC.
(Exact name of registrant as specified in its charter)
-------------
PENNSYLVANIA 23-2566892
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
105 Carnegie Center
Princeton, New Jersey
(Address of Principal 08540-6215
executive offices) (Zip Code)
609-734-3700
(Registrant's telephone number, including area code)
-------------
Securities to be registered
pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Securities to be registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
==============================================================================
Cable Michigan, Inc.
Information Included In Information Statement
And Incorporated In Form 10 By Reference
Cross-Reference Sheet Between Information Statement
And Items of Form 10
<TABLE>
<CAPTION>
Item Location In Information Statement
---- ---------------------------------
<S> <C> <C>
Item 1 Business......................................... Summary; Risk Factors; The Distribution;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Financial Statements
Item 2 Financial Information............................ Summary; Risk Factors; Pro Forma Capitalization;
Unaudited Pro Forma Consolidated Financial
Statements; Selected Historical Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Financial Statements
Item 3 Properties....................................... Business
Item 4 Security Ownership of Certain Beneficial
Owners and Management............................ Security Ownership of Certain Beneficial Owners
and Management
Item 5 Directors and Executive Officers................. Management
Item 6 Executive Compensation........................... Management; Security Ownership of Certain
Beneficial Owners and Management
Item 7 Certain Relationships and Related Transactions... Summary; Relationship Among the Company,
C-TEC and RCN; The Distribution
Item 8 Legal Proceedings................................ Business
Item 9 Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters.............................. Summary; Risk Factors; The Distribution; Trading
Market; Dividends; Security Ownership of Certain
Beneficial Owners and Management; Description of
Capital Stock
Item 10 Recent Sales of Unregistered Securities.......... Description of Capital Stock
Item 11 Description of Registrant's Securities to be
Registered....................................... Risk Factors; Description of Capital Stock; Certain
Statutory, Charter and Bylaw Provisions
Item 12 Indemnification of Directors and Officers........ Certain Statutory, Charter and Bylaw Provisions
Item 13 Financial Statements and Supplementary Data...... Summary; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Financial Statements
Item 14 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... None
Item 15 Financial Statements and Exhibits
(a)Financial Statements.......................... See Index To Financial Statements
(b)Exhibits...................................... See Exhibit Index
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Distribution Agreement among C-TEC Corporation, RCN Corporation and the Registrant
3.1 Amended and Restated Articles of Incorporation of the Registrant(*)
3.2 Amended and Restated Bylaws of the Registrant(*)
4.1 Credit Agreement dated July 1, 1997 between Cable Michigan, Inc. and First Union National Bank, as
agent(*+)
4.2 Amended and Restated Credit Agreement dated August 16,
1995, to Credit Agreement dated as of November 26,
1989, by and between Mercom, Inc. and Morgan Guaranty
Trust Company of New York. (Incorporated by
reference to Exhibit 10.10 of the Form 8-K of the
Mercom, Inc. dated August 22, 1995, File No. 0-17750.)**
4.3 Amendment No. 1 dated August 14, 1996 to Amended and
Restated Credit Agreement dated August 16, 1995, to
Credit Agreement dated as of November 26, 1989, by
and between Mercom, Inc. and Morgan Guaranty Trust
Company of New York.**
10.1 Tax Sharing Agreement by and among C-TEC Corporation, RCN Corporation and the Registrant
10.2 Management Agreement dated January 1, 1997 by and
between Mercom, Inc. and C-TEC Cable Systems of
Michigan, Inc.**
21.1 Subsidiaries of the Registrant(*)
27.1 Financial Data Schedule(*)
</TABLE>
(*) Previously filed
** Incorporated by reference to the Annual Report Form 10-K for the year
ended December 31, 1996 filed by Mercom, Inc. (File No. 0-17750)
(+) Exhibits and schedules which have not been filed with Exhibit 4.1 will be
provided to the Commission by the Registrant upon request
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cable Michigan, Inc.
By: /s/ Timothy J. Stoklosa
-------------------------------------
Name: Timothy J. Stoklosa
Title: Executive Vice President and
Chief Financial Officer
Date: September 5, 1997
<PAGE>
[C-TEC Corporation Letterhead]
September 5, 1997
Dear Stockholder:
I am pleased to inform you that the Board of Directors of C-TEC Corporation has
conditionally approved two distributions to our common equity holders. One
distribution (the "RCN Distribution") involves the distribution of all the
outstanding shares of common stock of C-TEC's wholly owned subsidiary RCN
Corporation ("RCN"). Following the Distribution, RCN will own the following
C-TEC businesses: its competitive telecommunications services operations in
New York City, Boston and other markets (the "RCN Telecom Business"); its
cable television operations in New York, New Jersey and Pennsylvania; its
40% interest in Megacable S.A. de C.V., Mexico's second largest cable
operator; and its long distance operations (other than the operations in
certain areas of Pennsylvania that will remain with C-TEC as described
below).
The second distribution (the "Cable Michigan Distribution") involves the
distribution of all of the outstanding shares of common stock of C-TEC's wholly
owned subsidiary Cable Michigan, Inc. ("Cable Michigan"). Cable Michigan
operates cable television systems in the State of Michigan and will own a 62%
interest in Mercom, Inc., a publicly held Michigan cable television operator.
Both Distributions will be made to holders of record of C-TEC Common Stock
and C-TEC Class B Common Stock (collectively, the "C-TEC Common Equity") on
September 19, 1997. In the RCN Distribution, you will receive one share
of RCN Common Stock for every one share of C-TEC Common Equity you hold on
the record date. In the Cable Michigan Distribution, you will receive one
share of Cable Michigan Common Stock for every four shares of C-TEC Common
Equity you hold on the record date. Shares of RCN Common Stock and Cable
Michigan Common Stock are expected to trade on the Nasdaq Stock Market under
the symbols "RCNC" and "CABL," respectively. Holders of C-TEC Common
Equity are not required to take any action to participate in the
Distributions.
In connection with the Distributions, C-TEC will change its name to
Commonwealth Telephone Enterprises, Inc. Following the Distributions,
Commonwealth Telephone Enterprises will own the following: Commonwealth
Telephone Company (C-TEC's rural LEC business); Commonwealth Communications
(C-TEC's communications engineering business); C-TEC's Pennsylvania CLEC
business; and C-TEC's long distance operations in certain areas of
Pennsylvania.
Your Board of Directors has concluded that the Distributions are in the best
interests of C-TEC, RCN, Cable Michigan and C-TEC's Common Equity holders
because the Distributions will, among other things, (i) permit C-TEC to raise
financing to fund the development of the RCN Telecom Business on more
advantageous economic terms than the other alternatives available, (ii)
facilitate possible future acquisitions and joint venture investments by RCN
and Cable Michigan and possible future offerings by RCN, (iii) allow the
management of each company to focus attention and financial resources on its
respective business and permit each company to offer employees incentives that
are more directly linked to the performance of its respective business, (iv)
facilitate the ability of each company to grow in both size and profitability;
and (v) permit investors and the financial markets to better understand and
evaluate C-TEC's various businesses.
The enclosed Information Statements explain the proposed RCN Distribution and
the proposed Cable Michigan Distribution in detail and provide important
financial and other information regarding RCN and Cable Michigan, respectively.
We urge you to read these Information Statements carefully. A stockholder vote
is not required in connection with the Distributions and, accordingly, your
proxy is not being sought.
Very truly yours,
David C. McCourt
Chairman and Chief
Executive Officer
<PAGE>
INFORMATION STATEMENT [LOGO]
CABLE MICHIGAN, INC.
COMMON STOCK
(par value $1.00 per share)
This Information Statement relates to the distribution (the
"Distribution") by C-TEC Corporation ("C-TEC") of 100% of the shares of common
stock, par value $1.00 per share (the "Company Common Stock"), of Cable
Michigan, Inc., a Pennsylvania corporation ("Cable Michigan" or the
"Company"), outstanding on the Distribution Date (as defined below) to holders
of C-TEC's common stock, par value $1.00 per share ("C-TEC Common Stock"), and
holders of C-TEC's Class B Common Stock, par value $1.00 per share ("C-TEC
Class B Common Stock" and together with the C-TEC Common Stock, the "C-TEC
Common Equity"). Such shares of Company Common Stock will represent all of
the Company Common Stock owned by C-TEC on the Distribution Date and will be
distributed by C-TEC to the holders of record of C-TEC Common Equity as of the
close of business on September 19, 1997 (the "Record Date") on the basis of
one share of Company Common Stock for every four shares of C-TEC Common Equity
held of record on the Record Date. No consideration will be paid to C-TEC or
the Company by C-TEC stockholders for the shares of Company Common Stock
received in the Distribution. Following the Distribution, C-TEC will own no
shares of Company Common Stock or other securities of the Company. See "The
Distribution."
The Distribution is currently expected to be effected on or
about September 30, 1997 (the date on which the Distribution is effected being
the "Distribution Date"). Certificates representing the shares of Company
Common Stock will be mailed on the Distribution Date or as soon thereafter as
practicable to holders of C-TEC Common Equity.
The Company operates cable television systems in the State of
Michigan. Prior to the time the Distribution is effected, C-TEC will engage
in a series of internal restructuring transactions that will include the
contribution of its 62% interest in Mercom, Inc., a Delaware corporation
("Mercom") and an operator of cable systems in the State of Michigan, to the
Company in accordance with the terms of the Distribution Agreement dated
September 5, 1997 among C-TEC, the Company and RCN Corporation, a Delaware
corporation ("RCN"), the form of which is filed as an exhibit to the
Registration Statement on Form 10 (the "Form 10") filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), of which this
Information Statement is a part. See "The Distribution" and "Relationship
Among the Company, C-TEC and RCN."
Concurrently with the Distribution, C-TEC will distribute (the
"RCN Distribution," and collectively with the Distribution, the
"Distributions") to the holders of C-TEC Common Equity 100% of the shares of
common stock of C-TEC's wholly owned subsidiary RCN. Following the
Distribution, RCN will own and operate C-TEC's competitive telecommunications
services operations in New York City, Boston, and certain other markets (the
"RCN Telecom Business"), its cable television operations in New York State,
New Jersey and Pennsylvania, certain of its long distance operations and its
40% interest in Megacable, S.A. de C.V. (collectively, the "RCN Businesses").
The RCN Distribution is described in a separate Information Statement that is
being provided to the holders of C-TEC Common Equity.
There has been no trading market for the Company Common Stock,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. The Company Common Stock has been approved for listing
on the Nasdaq Stock Market ("NASDAQ") under the symbol "CABL." See "Trading
Market."
In reviewing this Information Statement, stockholders should
carefully consider the matters described under the section entitled "Risk
Factors" on page 10.
STOCKHOLDER APPROVAL IS NOT REQUIRED IN CONNECTION WITH THE DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is September 5, 1997.
TABLE OF CONTENTS
Page
INTRODUCTION.................................................................1
SUMMARY......................................................................2
RISK FACTORS................................................................10
THE DISTRIBUTION............................................................16
RELATIONSHIP AMONG THE COMPANY, C-TEC AND RCN...............................19
TRADING MARKET..............................................................24
DIVIDENDS...................................................................25
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.......................26
PRO FORMA CAPITALIZATION....................................................31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.............................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................33
DESCRIPTION OF THE CREDIT AGREEMENT.........................................37
BUSINESS....................................................................39
LEGISLATION AND REGULATION..................................................48
MANAGEMENT..................................................................55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............60
DESCRIPTION OF CAPITAL STOCK................................................63
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS.............................64
INDEPENDENT AUDITORS........................................................67
ADDITIONAL INFORMATION......................................................67
INTRODUCTION
On September 5, 1997, the Board of Directors of C-TEC declared
a dividend payable to holders of record of C-TEC Common Equity at the close of
business on the Record Date of one share of Company Common Stock for every
four shares of C-TEC Common Equity owned of record on the Record Date. It is
expected that certificates representing shares of Company Common Stock will be
mailed on the Distribution Date or as soon thereafter as practicable to
holders of C-TEC Common Equity.
Prior to the Distribution Date, approximately 62% of the common
stock of Mercom, Inc. will have been transferred by C-TEC to, and will be
owned by, the Company. As a result of the Distribution, 100% of the
outstanding shares of Company Common Stock will be distributed to holders of
C-TEC Common Equity. C-TEC will not own any securities of the Company
immediately after the Distribution.
C-TEC stockholders with inquiries relating to the Distribution
should contact First Union National Bank (the "Distribution Agent"), Corporate
Trust Client Operations -- NC1153, 1525 West W.T. Harris Boulevard, 3C3,
Charlotte, NC 28288-1153; or C-TEC Corporation, Valerie Haertel, Director of
Investor Relations, 105 Carnegie Center, Princeton, New Jersey 08540-6215.
The Distribution Agent's telephone number is 800-829-8432. C-TEC's telephone
number is (609) 734-3700. After the Distribution, stockholders of the Company
with inquiries relating to the Distribution should contact Cable Michigan,
Inc., 105 Carnegie Center, Princeton, New Jersey 08540-6215. The Company's
telephone number is (609) 734-3700.
No action is required by holders of C-TEC Common Equity in
order to receive the Company Common Stock to which they are entitled in the
Distribution.
SUMMARY
The following is a brief summary of the matters covered by this
Information Statement and is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto)
included elsewhere herein. Unless the context indicates otherwise, the
"Company" or "Cable Michigan" means Cable Michigan, Inc. and its subsidiaries
(including Mercom, Inc.) after giving effect to the Distribution.
The Company
Cable Michigan is a cable television operator in the State of
Michigan which, as of June 30, 1997, served approximately 210,000
subscribers. These figures include the approximately 42,000 subscribers served
by Mercom, Inc., a 62% owned subsidiary of the Company ("Mercom"). Except
where the context indicates otherwise, the terms the "Company" and "Cable
Michigan" mean the Company and its subsidiaries, including Mercom.
Clustered primarily around the Michigan communities of Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom), the Company's systems serve
a total of approximately 400 municipalities in attractive suburban markets and
small towns. The Company has generated strong growth in new homes passed and
basic subscriber levels. From 1992 to 1996, compounded annual growth in basic
subscribers was 4.4%; during the same period, basic penetration rose from
58.4% to 60.6%. Growth in homes passed has primarily been the result of new
home construction and plant extensions.
The following table summarizes the development of the Company's
operations since December 31, 1992:
<TABLE>
<CAPTION>
As of December 31, As of June 30,
----------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Passed:
Wholly Owned Systems......... 226,384 235,188 244,622 250,747 261,441 254,495 266,135
Mercom Systems............... 59,988 61,730 63,721 65,449 65,998 65,479 66,617
Total...................... 286,372 296,918 308,343 316,196 327,439 319,974 332,752
Basic Subscribers:
Wholly Owned Systems(1)...... 133,017 135,420 141,785 152,921 158,310 162,195 168,231
Mercom Systems(1)............ 34,118 34,714 37,324 38,853 40,012 40,876 41,919
Total...................... 167,135 170,134 179,109 191,774 198,322 203,071 210,150
Basic Penetration:
Wholly Owned Systems......... 58.8% 57.6% 58.0% 61.0% 60.6% 63.7% 63.2%
Mercom Systems .............. 56.9% 56.2% 58.6% 59.4% 60.6% 62.4% 62.9%
All Systems................ 58.4% 57.3% 58.1% 60.7% 60.6% 63.5% 63.2%
Average Monthly Revenue per
Subscriber for Last Month of
the Period:(2)
Wholly Owned Systems......... $29.66 $29.64 $27.06 $31.59 $32.20 $32.11 $33.83
Mercom Systems............... $30.05 $29.70 $29.36 $30.41 $32.72 $31.93 $34.14
All Systems................ $29.74 $29.65 $27.53 $31.36 $32.30 $32.07 $33.89
<FN>
- ------------------
(1) Systems include seasonal communities which experience increased subscriber
levels during the second and third quarters.
(2) The revenue per subscriber calculation includes premium revenue for each
period.
</TABLE>
Cable Michigan plans to emphasize high technical standards and
seeks to incorporate, when cost effective, technological advances that
enhance product quality and service. In particular, the Company plans to
upgrade the technical quality of its cable plant and to increase system
capacity for the delivery of additional programming and new services. The
Company has already deployed 538 miles of fiber optic cable as of June 30,
1997 and reduced the number of headends in its systems as part of its
commitment to improved service quality and platform development for new
technologies. The Company's strategic plan calls for a capital expenditure
program intended to result in over 90% of the Company's customers being served
by systems with a capacity of 550 MHz or 750 MHz by the end of 2001. The
Company's wholly owned systems are currently built to 300 - 450 MHz, with the
majority of the systems having a capacity of 300 - 330 MHz. These systems
include 53 headends, with two of these headends serving approximately 63,500
subscribers. The Mercom systems in Michigan include 5 headends and are built
to 400 - 450 MHz.
The Company derives the majority of its revenues from recurring
subscription services and generates additional revenues from non-subscription
services such as advertising, pay-per-view, installations and commissions from
electronic retailing. Monthly subscription rates and related charges vary
according to the type of service or equipment selected.
The Company's systems include the Mercom systems, which as of
June 30, 1997 served approximately 40,100 subscribers in Michigan and
approximately 1,900 subscribers in a planned development community in Port St.
Lucie, Florida. In July 1997 Mercom sold its Port St. Lucie, Florida system
to Adelphia Communications Corporation for $3,650,000 in cash. As the 62%
owner of Mercom, the Company accounts for all Mercom subscribers as Cable
Michigan subscribers. The Company and Mercom have entered into a Management
Agreement dated January 1, 1997 (the "Management Agreement") pursuant to which
the Company has been retained to operate and manage the cable television
systems of Mercom. In May 1997, C-TEC proposed to acquire the remaining 38%
interest in Mercom held by the public in exchange for 8.75% of the Company's
common stock. Mercom's Board of Directors formed a special committee composed
of directors unaffiliated with the Company to evaluate the proposal, but
discussions have been suspended pending completion of the Distribution. After
the Distribution is completed, the Company will reevaluate the previous
proposal and determine whether to resume discussions with the special
committee.
The Distribution
The following is a brief summary of certain terms of the
Distribution.
Distributing Company................ C-TEC Corporation. After the
Distribution, C-TEC will own no
shares of Company Common Stock.
Primary Purposes of the
Distribution.................. C-TEC has concluded that the
Distribution and the RCN
Distribution are in the best
interests of C-TEC, the Company, RCN
and the holders of C-TEC Common
Equity because the Distributions
will, among other things, (i) permit
C-TEC to raise equity or
equity-linked financing to fund the
development of the RCN Telecom
Business on more advantageous
economic terms than the other
alternatives available, (ii) allow
for the establishment of an employee
stock ownership plan for the
employees of RCN with stock that
correlates more closely to the
performance of the RCN Businesses,
(iii) facilitate possible future
acquisitions and joint venture
investments by the Company; (iv)
facilitate possible future equity or
equity-linked offerings by RCN; (v)
facilitate possible future
acquisitions and joint venture
investments by RCN; (vi) permit
investors and the financial markets
to better understand and evaluate
C-TEC's various businesses; (vii)
facilitate the ability of each
company to grow in both size and
profitability; (viii) allow the
management of each company to focus
attention and financial resources on
its respective business and (ix)
permit each company to offer
employees incentives that are more
directly linked to the performance
of its respective business. See "The
Distribution--Background to and
Reasons for the Distribution."
Securities to Be Distributed........ All of the outstanding shares of
Company Common Stock. Based on the
number of shares of C-TEC Common
Equity outstanding as of September
5, 1997, it is estimated that
approximately 6,871,157 shares of
Company Common Stock will be
distributed to holders of C-TEC
Common Equity in the Distribution.
After the Distribution, the Company
estimates that the Company Common
Stock will be held by approximately
2,371 stockholders of record,
although some of the shares may be
registered in nominee names
representing an additional number of
stockholders.
Distribution Ratio.................. One share of Company Common Stock for
every four shares of C-TEC Common
Equity held of record on the Record
Date.
Record Date......................... September 19, 1997 (4 p.m. New York
time).
Distribution Date................... September 30, 1997 (4 p.m. New York
time). Certificates representing
the shares of Company Common Stock
will be mailed on the Distribution
Date or as soon thereafter as
practicable.
Distribution Agent.................. Prior to the Distribution Date, the
Company will appoint First Union
National Bank to serve as
Distribution Agent in connection
with the Distribution.
Trading Market and Symbol........... There has been no trading market for
the Company Common Stock, although
it is expected that a "when-
issued" trading market may
develop on or about the Record
Date. The Company Common Stock
has been approved for listing on
NASDAQ under the symbol "CABL".
See "Trading Market."
Tax Consequences.................... C-TEC has received a private letter
ruling from the Internal Revenue
Service to the effect that, among
other things, the Distributions will
qualify as tax-free distributions
for federal income tax purposes. It
is a condition precedent to C-TEC's
obligation to consummate the
Distributions that the letter ruling
not be withdrawn. See "The
Distribution--Certain Federal Income
Tax Consequences" for a more
detailed description of the federal
income tax consequences of the
Distribution.
Risk Factors........................ Stockholders should carefully consider
the matters discussed under the
section entitled "Risk Factors" in
this Information Statement.
No Fractional Shares................ No fractional shares of Company Common
Stock will be distributed. All
fractional share interests will be
aggregated and sold by the
Distribution Agent on behalf of
stockholders and the cash proceeds
distributed to those stockholders
otherwise entitled to a fractional
interest. See "The Distribution--
Description of the Distribution."
Relationship with C-TEC and RCN
after the Distribution........ In connection with the Distributions,
C-TEC, the Company and RCN have
entered into the Distribution
Agreement and the Tax Sharing
Agreement (as defined below)
described under "Relationship Among
the Company, C-TEC and RCN." These
agreements are not the result of
arm's length negotiations between
unrelated parties as the Company,
C-TEC and RCN have certain common
officers and directors.
Nevertheless, the transitional
service arrangements in such
agreements are designed to reflect
arrangements that would have been
agreed upon by parties negotiating
at arm's length. See "Relationship
Among the Company, C-TEC and RCN"
and "Management-- Executive Officers
and Directors." Additional or
modified agreements, arrangements
and transactions may be entered into
between the Company and either or
both of C-TEC and RCN after the
Distribution, which will be
negotiated at arm's length. Certain
persons who serve as executive
officers and directors of the
Company will also be officers and
directors of C-TEC and RCN following
the Distribution. See
"Management--Executive Officers and
Directors."
Change of Name by C-TEC............. In connection with the Distributions,
C-TEC will change its name to
Commonwealth Telephone Enterprises,
Inc..
Concurrent Distribution of the
Common Stock of RCN........... Concurrently with the Distribution,
C-TEC will distribute to the holders
of C-TEC Common Equity 100% of the
shares of common stock of C-TEC's
wholly owned subsidiary RCN. The
RCN Distribution is described in a
separate Information Statement that
is being provided to the holders of
C-TEC Common Equity.
Organization of C-TEC's Historical Businesses Following the
Distributions
Set forth below are charts illustrating the organization of the
historical businesses of C-TEC following the Distributions. (The charts are
not intended to set forth the corporate structure of any of the companies
comprising the various groups.)
----------------
Cable Michigan
(CABL)
----------------
-------------------------
Michigan Cable Television
Business (including 62%
interest in Mercom, Inc.)
-------------------------
----------------
RCN
(RCNC)
----------------
- ---------------- ----------------- -------------------- ----------------
Long Distance Hybrid Fiber/Coaxial
RCN Telecom Business Cable Television International
Business (other than Business in New (Megacable
(Boston and New Commonwealth York, New Jersey Investment)
York City) Service Terrirory and Pennsylvania
Operations)
- ---------------- ----------------- -------------------- ----------------
------------------
C-TEC
(to be renamed
Commonwealth
Telephone
Enterprises, Inc.)
(CTCO)
------------------
- ------------------- --------------- ------------------- ----------------
Commonwealth Commonwealth Commonwealth Commonwealth
Telephone Telephone Service Terrorory Communications
Company (Pennsylvania Long Distance (Communications
(Pennsylvania Rural CLEC Business) Business Engineering
LEC Business) Business)
- ------------------- --------------- ------------------- ----------------
Summary Selected Historical Consolidated Financial Data
Prior to the Distribution Date, the Company has been operating
as part of C-TEC. The table below sets forth selected historical consolidated
financial data for the Company. The historical financial data presented below
reflect periods during which the Company did not operate as an independent
company and, accordingly, certain assumptions were made in preparing such
financial data. Therefore, such data may not reflect the results of
operations or the financial condition which would have resulted if the Company
had operated as a separate, independent company during such periods, and are
not necessarily indicative of the Company's future results of operation or
financial condition.
The selected historical consolidated financial data for the
years ended December 31, 1993 and 1992 and as of December 31, 1994, 1993 and
1992 are derived from the Company's unaudited historical consolidated financial
statements not included in this Information Statement. The selected
historical consolidated financial data of the Company for the years ended
December 31, 1996, 1995 and 1994 and as of December 31, 1996 and 1995 are
derived from and should be read in conjunction with the Company's audited
historical consolidated financial statements (the "Financial Statements")
included elsewhere in this Information Statement. The selected historical
consolidated financial data for the six month periods ended June 30, 1997 and
1996 and as of those dates are derived from and should be read in conjunction
with the Company's unaudited historical consolidated financial statements
included elsewhere in this Information Statement. In the opinion of the
Company's management, these six month consolidated historical financial
statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The results for such interim periods are not necessarily
indicative of the results for the full year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and the Financial
Statements. Earnings per share data are presented elsewhere in this
Information Statement on a pro forma basis only. See "Unaudited Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------ ---------------------------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994 1993 1992
-------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Statement of Operations Data:
Sales........................................ $40,230 $37,345 $76,187 $60,675 $49,141 $48,665 $43,860
Costs and expenses, excluding
depreciation and amortization.............. 23,251 21,835 44,091 34,749 28,543 28,655 28,142
Depreciation and amortization................ 15,896 15,713 31,427 25,154 28,685 32,697 31,720
-------- -------- ------- -------- ------- ------- -------
Operating (loss) income...................... 1,083 (203) 669 772 (8,087) (12,687) (16,002)
Interest income.............................. 79 55 127 55 -- -- 44
Interest expense............................. (6,893) (7,874) (15,179) (15,973) (15,767) (15,960) (16,672)
Other (expense) income, net.................. (320) (266) (736) (363) (1,307) (461) (178)
(Benefit) provision for income taxes......... (2,371) (3,056) (5,712) (5,590) 52 (799) (11,019)
Minority interest in (income) of
consolidated entities...................... 427 609 1,151 (186) -- -- --
Equity in (loss) of unconsolidated entities.. -- -- -- (396) (1,013) (834) (840)
-------- -------- ------- -------- ------- ------- -------
Net (Loss)................................... (3,253) (4,623) (8,256) (10,501) (26,226) (29,143) (22,629)
======== ======== ======= ======== ======= ======= =======
Balance Sheet Data:
Total assets................................. 137,296 159,336 149,200 172,759 116,972 147,286 162,088
Long-term liabilities........................ 14,138 16,555 15,680 17,430 -- -- --
Common shareholder's (deficit)............... (81,984) (77,294) (79,741) (73,757) (76,931) (60,419) (38,251)
</TABLE>
Summary Selected Pro Forma Financial Data
The following summary pro forma financial data include
adjustments to the historical statements of operations of the Company for the
six months ended June 30, 1997 and the year ended December 31, 1996 as if the
Distribution had occurred on January 1, 1996 and to the historical balance
sheet of the Company as of June 30, 1997 as if the Distribution had occurred
on June 30, 1997. Such adjustments result primarily from changes in the
capital structure of the Company. See "Unaudited Pro Forma Consolidated
Financial Statements" and the notes thereto. The following pro forma
financial data are provided for information purposes only and should not be
construed to be indicative of the Company's results of operations or financial
conditions had the Distribution occurred on the dates assumed, may not reflect
the results of operations or financial condition which would have resulted had
the Company been operated as a separate, independent Company during such
period, and are not necessarily indicative of the Company's future results of
operations or financial condition.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
1997 1996
---------- ------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Sales................................................................... $40,230 $76,187
Cost and expenses, excluding depreciation and amortization.............. 23,251 44,091
Depreciation and amortization........................................... 15,896 31,427
-------- --------
Operating income........................................................ 1,083 669
Interest income......................................................... 79 127
Interest expense........................................................ (4,885) (9,861)
Other expense, net...................................................... (320) (736)
-------- --------
(Loss) before income taxes.............................................. (4,043) (9,801)
(Benefit) for income taxes.............................................. (1,668) (3,851)
-------- --------
(Loss) before minority interest......................................... $(2,375) $(5,950)
Balance Sheet Data: ======== ========
Total assets........................................................... $136,228 N/A
Total long-term debt (including current portion)....................... $141,063 N/A
Shareholder's (deficit)................................................ $55,622 N/A
</TABLE>
RISK FACTORS
In addition to the other information contained in this
Information Statement, stockholders should carefully review the following
factors.
The Information Statement contains certain forward looking
statements regarding the Company's operations, economic performance and
financial condition, including, in particular, statements made as to plans to
upgrade systems and facilities. Such forward looking statements are subject
to known and unknown risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in this Section and elsewhere in this Information
Statement.
Factors Affecting Future Operations
The cable television industry may be affected by among other
things: (i) changes in government law and regulation; (ii) changes in the
competitive environment; (iii) changes in technology; (iv) franchise related
matters; (v) market conditions that may adversely affect the availability of
debt and equity financing; and (vi) general economic conditions. The cable
television industry is subject to extensive regulation on the federal, state
and local levels. No assurance can be given as to what future actions
Congress, the Federal Communications Commission ("FCC") or other regulatory
authorities may take or the effects thereof on the cable television industry
in general or on the Company in particular. See "Legislation and Regulation."
Recent and Anticipated Losses and Stockholders' Deficiency.
On a separate company basis, the Company has incurred aggregate
net losses from commencement of operations through June 30, 1997 of
approximately $140,136,153. At June 30, 1997, the Company's consolidated
stockholders' deficiency was approximately $81,984,000. The Company incurred
net losses of $22,629,000, $29,143,000, $26,226,000, $10,501,000 and
$8,256,000 for the years ended December 31, 1992, 1993, 1994, 1995 and 1996,
respectively. The net losses primarily reflect high levels of interest
expense and depreciation and amortization charges. The Company expects to
continue to incur additional net losses and there can be no assurance that the
Company's operations will become profitable.
Substantial Leverage
The Company will be substantially leveraged at the time of the
Distribution. At the time of the Distribution, the Company's aggregate debt
will be approximately $141,063,000. The extent of the Company's leverage may
have the following consequences: (i) limit the ability of the Company to
obtain necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes, (ii) require that a
substantial portion of the Company's cash flows from operations be dedicated
to the payment of principal and interest on its indebtedness and therefore not
be available for other purposes; (iii) limit the Company's flexibility in
planning for, or reacting to, changes in its business; (iv) place the Company
at a competitive disadvantage vis a vis less leveraged competitors and (v)
render the Company more vulnerable in the event of a downturn in its business.
The Company anticipates that, in light of the amount of existing indebtedness,
it will continue to have substantial leverage for the foreseeable future.
The Company's subsidiary, Mercom, is a party to a loan
agreement with a commercial bank (the "Mercom Loan Agreement"). The principal
amount outstanding under the Mercom Loan Agreement was approximately $16
million as of June 30, 1997. The Distribution, if it occurs, will constitute
a change of control as defined in the Mercom Loan Agreement and, if no other
action is taken, will be an event of default. Upon the occurrence of such an
event of default, the lender under the Mercom Loan Agreement could accelerate
the principal amount outstanding. The Company is exploring a number of
alternatives, including: (i) amending the Credit Agreement (defined below) to
increase the amount of loans available thereunder by an amount equal to the
principal amount outstanding under Mercom Loan Agreement balance (which would
require the agreement of all the banks), borrowing such amount under the Credit
Agreement and using the proceeds to purchase the Mercom Loan Agreement; (ii)
obtaining a waiver of the event of default from the lender under the Mercom
Loan Agreement and (iii) refinancing the Mercom Loan Agreement. Management
believes that it will be able to resolve this matter in a satisfactory
manner, but there can be no assurances in that regard.
Need for Substantial Capital Expenditures
The Company's business requires substantial investment on a
continuing basis to finance capital expenditures and related expenses for,
among other things, upgrades of the Company's cable plant (including the need
to make cable system upgrades mandated by franchise authorities) and the
servicing, repayment or refinancing of its indebtedness. The foregoing
upgrades are necessary to enable the Company to better position itself to
withstand potential competition, expand channel lineups (which would permit
the Company to increase revenue) and facilitate new services when economically
viable. The Company estimates that its capital requirements for planned
system upgrades over the three year period through 1999 will be approximately
$52.6 million. The Company currently has budgeted capital expenditures in
respect of system upgrades of approximately $12.5 million during 1997,
approximately $22.6 million during 1998 and approximately $17.5 million during
1999. The Company believes that cash flow generated by operations, cash
balances and, if necessary, borrowings under committed credit facilities
available on the date hereof, will enable the Company to fund its capital
expenditure requirements and to make scheduled payments of principal and
interest on indebtedness through 1999. There can, however, be no assurances
in that regard.
Rapid Technological Change
The cable television industry is subject to rapid and
significant changes in technology. The Company is upgrading the technical
quality of its cable plant and increasing network capacity for the delivery of
additional programming and, if economically viable, new services. There can
be no assurance, however, that existing, proposed or yet undeveloped
technologies will not become dominant in the future or otherwise render cable
television services less profitable or less viable.
Competition
Cable television systems face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment such as off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. The extent to which a cable television system
is competitive depends, in part, upon the cable system's ability to provide,
at a reasonable price to consumers, a greater variety of programming and other
services than are available off-air or through other alternative delivery
sources and upon superior technical performance and customer service.
The FCC and Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
systems. These technologies include, among others, direct broadcast satellite
("DBS") service whereby signals are transmitted by satellite to receiving
facilities located on customer premises. The availability of reasonably priced
home satellite dish earth stations ("HSDs") enables individual households to
receive many of the satellite-delivered program services formerly available
only to cable subscribers. Furthermore, the 1992 Act contains provisions,
which the FCC has implemented with regulations, to enhance the ability of
cable competitors to purchase and make available to HSD owners certain
satellite-delivered cable programming at competitive costs. DBS providers
provide significant competition to cable service providers, including the
Company, and such competition will likely increase. See
"Business--Competition."
The 1996 Act makes it easier for local exchange telephone
companies ("LECs") and others to provide a wide variety of video services
competitive with services provided by cable systems and to provide cable
services directly to subscribers. Various LECs currently are providing video
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire
facilities and the use of wireless transmission facilities. The Company cannot
predict the likelihood of success of video service ventures by LECs or the
impact on the Company of such competitive ventures. Cable television systems
generally operate pursuant to franchises granted on a non-exclusive basis. The
1992 Act prohibits franchising authorities from unreasonably denying requests
for additional franchises and permits franchising authorities to operate cable
systems. Well-financed businesses from outside the cable industry (such as
the public utilities that own certain of the poles on which cable is attached)
may become competitors for franchises or providers of competing services.
Certain municipal power companies have been exploring building new video
networks to compete with the Company within the areas where such companies
deliver power. Competition from other cable television operators exists in
some areas served by the Company. Currently, approximately 2% of homes passed
by the Company's wholly-owned systems have been overbuilt (4% including
Mercom).
Cable operators face additional competition from private
satellite master antenna television ("SMATV") systems that serve condominiums,
apartment and office complexes and private residential developments. Cable
television systems also compete with wireless program distribution services
such as multipoint, multichannel distribution service ("MMDS") which use
low-power microwave frequencies to transmit video programming over-the-air to
subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served
by the Company's cable systems. The Company is unable to predict whether
wireless video services will have a material impact on its operations.
Other new technologies, including internet-based services, may
become competitive with services that cable television systems can offer.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring. Thus,
it is not possible to predict the effect that ongoing or future developments
might have on the cable television industry or on the operations of the
Company.
Franchises
The cable television systems owned or managed by the Company
are constructed and operated under fixed-term franchises or other types of
operating authorities (referred to collectively herein as "franchises") that
are generally non-exclusive and are granted by local governmental
authorities. These franchises typically contain many conditions, such as
time limitations on commencement and completion of construction, conditions
of service, including the number of channels, the provision of free service
to schools and certain other public institutions, and the maintenance of
insurance and indemnity bonds. The provisions of these local franchises
are subject to federal regulation. There can be no assurance that the
Company will be able to maintain its existing franchises on acceptable
terms. Although the Company does not believe that any of the existing
arrangements will be canceled or will not be renewed as needed in the near
future, cancellation or non-renewal of certain of such franchises could
materially adversely affect the Company's business in the affected area.
See "Business--Franchises."
Ability to Procure Third Party Programming and Related Services
The Company's cable programming services are dependent upon
its ability to procure programming that is attractive to its customers at
reasonable commercial rates. The Company has entered into an arrangement
pursuant to which RCN will obtain third party programming for the Company's
systems. RCN generally purchases this programming at prices that are better
than the Company would be able to obtain independently. Programming
purchasers such as RCN generally pay a monthly fee per subscriber per channel.
Under the arrangement between the Company and RCN, the Company reimburses RCN
for the third party costs incurred by RCN to obtain such programming. The
arrangement is terminable by the Company upon 60 days notice and by RCN upon 1
year advance notice. If the programming supply arrangement with RCN were
terminated, the Company's programming costs could increase significantly.
There can be no assurance that RCN will not terminate this programming
arrangement, that the Company will have access to programming services or that
management can secure rights to such programming on commercially acceptable
terms. The Company anticipates that the cost of obtaining programming will
rise in the future.
Reliance on RCN for Management and Other Services
The Company is dependent on RCN for the provision of management
and other services to the Company, including customer and billing services.
These services are terminable by either party upon 60 days' notice, provided
that RCN may not terminate customer service or billing service on less than
one year's notice. The termination of one or more of these services could
have a material adverse effect on the Company.
In connection with the Distributions, the Company has agreed to
purchase from RCN and C-TEC certain specified services for a transitional
period after the Distribution. Depending on the type of service to be
provided, the fees for such services will be based on, among other things, a
portion of the Company's revenues, or an allocated portion (based on relative
usage) of the cost incurred by RCN or C-TEC to provide such service. Based on
the Cable Michigan Group's revenue for 1996 and these allocation arrangements,
the charges for such services by RCN and C-TEC for that year would have been
approximately $7,532,000 and $248,000, respectively. See "Relationship Among
the Company, C-TEC and RCN--Transitional Services and Arrangements." The
aforementioned arrangements are not the result of arm's length negotiation
between unrelated parties as the Company, C-TEC and RCN have certain common
officers and directors. Although the transitional service arrangements in
such agreements are designed to reflect arrangements that would have been
agreed upon by parties negotiating at arm's length, there can be no assurance
that the Company would not be able to obtain similar services at a lower cost
from unrelated third parties. Additional or modified agreements, arrangements
and transactions may be entered into between the Company and either or both of
C-TEC and RCN after the Distribution, which will be negotiated at arm's
length. In addition, RCN has agreed to obtain third party programming and
monthly cable guides for the Company, and the Company will reimburse RCN for
the third party expenses incurred by RCN to obtain such programming and guides.
Dividend Policy
The Company anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future. The payment of any cash dividends in the
future will be at the discretion of the Company's Board of Directors (the
"Company Board"). The declaration of any dividends and the amount thereof
will depend on a number of factors, including the Company's financial
condition, capital requirements, funds from operations, future business
prospects and such other factors as the Company Board may deem relevant. The
Credit Agreement (as defined below) into which the Company has entered
contains restrictions on the payment of dividends. See "Description of the
Credit Agreement" and "Dividends."
No Prior Market for Common Stock
Prior to the Distribution, there has been no public market for
the Company Common Stock, and there can be no assurance that an active trading
market will develop or be sustained in the future. The Company Common Stock
has been approved for listing on NASDAQ. There can be no assurance as to the
price at which the Company Common Stock will trade. See "Trading Market."
There can be no assurance that the Company Common Stock will
not experience substantial price volatility, particularly as a result of
quarter to quarter variations in the actual or anticipated financial results
of the Company or other companies in the markets served by the Company. In
addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market price of many telecommunications
stocks and that have often been unrelated or disproportionate to the operating
performance of individual companies. These and other factors may adversely
affect the market price of the Company Common Stock.
Control by Kiewit Telecom; Conflicts of Interest
Following the Distribution, Kiewit Telecom Holdings, Inc.
("Kiewit Telecom") will beneficially own approximately 48.5% of the Company
Common Stock. Consequently, Kiewit Telecom will effectively have the power
to elect a majority of the Company's directors and to determine the outcome of
substantially all matters to be decided by a vote of shareholders. The
control of the Company by Kiewit Telecom may tend to deter non-negotiated
tender offers or other efforts to obtain control of the Company and thereby
deprive shareholders of opportunities to sell shares at prices higher than
those prevailing in the market. Moreover, a disposition by Kiewit Telecom of
a significant portion of its Company Common Stock, or the perception that such
a disposition may occur, could affect the trading price of the Company Common
Stock and could affect the control of the Company. The common stock of Kiewit
Telecom is owned 90% by Kiewit Diversified Group, Inc. ("KDG") and 10% by
David C. McCourt, the Chairman and Chief Executive Officer of the Company.
KDG is a wholly owned subsidiary of Peter Kiewit Sons Inc.
After the Distribution, there will exist relationships that may
lead to conflicts of interest. After the Distribution, Kiewit Telecom will
effectively control the Company, C-TEC and RCN. The majority of the Company's
named executive officers will also be acting as directors and/or executive
officers of C-TEC or RCN following the Distribution. See "Management." In
particular, David C. McCourt, Chairman and Chief Executive Officer of the
Company as of the Distribution, will also serve as Chairman and Chief
Executive Officer of RCN and will remain as a director and Chairman and
Chief Executive Officer of C-TEC. Mr. McCourt expects to devote 10% or less
of his time to managing the affairs of the Company. The Company's other named
executive officers expect to devote only a portion of their time to the
affairs of the Company, as follows: Mr. Haverkate (approximately 25%); Mr.
Stoklosa (approximately 25%) and Mr. Gdovin (over 50%). The success of the
Company may be affected by the degree of involvement of its officers and
directors in the Company's business and the abilities of the Company's
officers, directors and employees in managing both the Company and the
operations of RCN and/or C-TEC. Potential conflicts of interest will be dealt
with on a case-by-case basis taking into consideration relevant factors
including the requirements of NASDAQ and prevailing corporate practices.
Possibility of Substantial Sales of Common Stock
The Distribution will involve the distribution of an aggregate
of approximately 6,871,157 million shares of Company Common Stock to the
holders of C-TEC Common Equity. Approximately one-half of such shares would
be eligible for immediate resale in the public market. The Company is unable
to predict whether substantial amounts of Company Common Stock will be sold in
the open market in anticipation of, or following, the Distribution. Any sales
of substantial amounts of Company Common Stock in the public market, or the
perception that such sales might occur, whether as a result of the
Distribution or otherwise, could materially adversely affect the market price
of the Company Common Stock.
Anti-Takeover Effects of Certain Statutory, Charter, Bylaw and Contractual
Provisions
Several provisions of the Company's Articles of Incorporation
and Bylaws (as will be in effect as of the Distribution) and Pennsylvania law
could discourage potential acquisition proposals and could deter or delay
unsolicited changes in control of the Company, including provisions of the
Articles of Incorporation and Bylaws creating a classified Board of Directors,
limiting the stockholders' powers to remove directors, and prohibiting the
taking of action by written consent in lieu of a stockholders' meeting. In
addition, the Company Board has the authority, without further action by the
stockholders, to fix the rights and preferences of and to issue preferred
stock. The issuance of preferred stock could adversely affect the voting
power of the owners of Company Common Stock, including the loss of voting
control to some.
The Credit Agreement into which the Company has entered
includes as an event of default certain changes in control (as defined
therein) of the Company. See "Description of the Credit Agreement."
These provisions and others that could be adopted or entered
into in the future could discourage unsolicited acquisition proposals or delay
or prevent changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions could
limit the ability of stockholders to approve transactions that they may deem
to be in their best interests. See "Description of Capital Stock" and
"Certain Statutory, Charter and Bylaw Provisions."
THE DISTRIBUTION
Background to and Reasons for the Distribution
C-TEC is a diversified, international telecommunications and
high technology company with interests in local telephone, video programming,
long distance telephone, communications engineering, and competitive telephone,
video and Internet services. In November 1995, C-TEC announced that it had
engaged Merrill Lynch & Co. to assist with evaluating strategic options for
its various business units with a view toward enhancing shareholder value.
Specifically, C-TEC announced that it would evaluate the advisability and
feasibility of separating or restructuring its local telephone business, its
cable television business and its various other communications businesses.
In March 1996, C-TEC announced that it intended to distribute
to its shareholders in a tax-free spin-off its Pennsylvania-based local
telephone operations, its communications engineering operations, and certain
other assets, and that following the spin-off, it intended to combine its
domestic cable television operations with a third party pursuant to a tax-free
stock-for-stock transaction (collectively, the "Prior Restructuring Plan").
Also in March 1996, in connection with and in order to facilitate the Prior
Restructuring Plan, C-TEC signed a definitive agreement (the "Stock Purchase
Agreement") for the sale to Kiewit Telecom of the following businesses
(collectively, the "Businesses Transferred Under Contractual Arrangement"):
(i) C-TEC International, Inc., a subsidiary that owns a 40% interest in
Megacable; (ii) TEC-Air, Inc., which owns a corporate jet aircraft; (iii)
C-TEC's long distance operations; and (iv) C-TEC's interest in the RCN Telecom
Business, (the "RCN Telecom Interest").
The Businesses Transferred Under Contractual Arrangement were
to be sold at two separate closings. In April 1996, at the first closing, RCN
sold the RCN Telecom Interest to Kiewit Telecom for $17.5 million in cash in
accordance with the Stock Purchase Agreement. In addition, C-TEC retained a
warrant to purchase approximately 6% of the equity of RCN Telecom (the "RCN
Warrant"). The second closing, involving the sale of the other Businesses
Transferred Under Contractual Arrangement (the "Other Businesses"), was
expected to take place in the second half of 1996 subject to certain
conditions. The purchase price for the Other Businesses was expected to be
approximately $106 million.
The Stock Purchase Agreement provided C-TEC an option, at its
election, to repurchase from Kiewit Telecom any or all of the Businesses
Transferred Under Contractual Arrangement, if C-TEC did not restructure its
domestic cable television and local telephone operations by January 1, 1997.
The Stock Purchase Agreement further provided that if C-TEC elected to
exercise its option to rescind the sale of the Businesses Transferred Under
Contractual Arrangement, it would have the right and the obligation to
purchase Kiewit Telecom's 80.1% interest in Freedom New York, L.L.C.
("Freedom") and all related rights and liabilities (collectively, the "Freedom
Interest"). The Stock Purchase Agreement provided that the repurchase price
for the RCN Interest and the purchase price for the Freedom Interest would be
equal to Kiewit Telecom's investment in those assets plus an amount to
compensate for forgone interest on the amount invested. In March 1996,
Freedom had acquired the wireless video services business of Liberty Cable
Television of New York.
In August 1996, in the wake of the newly issued rules under the
1996 Act, depressed cable stock prices and other changed circumstances, C-TEC
determined not to proceed with the Prior Restructuring Plan. Following that
determination, (i) C-TEC exercised its option under the Stock Purchase
Agreement to reacquire the RCN Interest and to acquire from Kiewit Telecom the
Freedom Interest and (ii) C-TEC and Kiewit Telecom agreed that the closing of
the purchase and sale of the Other Businesses would not be consummated. The
repurchase price for the RCN Interest was approximately $28 million and the
purchase price for the Freedom Interest was approximately $29 million. In
connection with the closing of those transactions, C-TEC acquired from Kiewit
Telecom a note issued by Freedom in connection with a loan from Kiewit Telecom
to Freedom. The purchase price for the note was approximately $1.5 million,
an amount equal to the accreted value of the note. Shortly after the closing
of these transactions, the RCN Warrant was canceled.
The Stock Purchase Agreement, the exercise of the repurchase
option and all of the related transactions were approved by a special
committee of the Board of Directors of C-TEC composed of directors
unaffiliated with Kiewit Telecom.
At the time C-TEC announced that it would not pursue the
Initial Restructuring Plan, it also announced that it would continue to
explore ways to increase its profitability and value including other possible
restructuring transactions. Following that announcement, and at the direction
of the C-TEC Board of Directors, management of C-TEC and Merrill Lynch
continued to analyze the structure and strategy of C-TEC and its business
groups. In the course of that analysis, management determined that two of the
primary goals to be achieved in any restructuring would be the following: (i)
facilitating the raising of capital necessary for the development of the RCN
Telecom Business and (ii) facilitating the creation of targeted equity-based
incentives for RCN employees. The C-TEC Board of Directors was updated by
management and provided direction to management as the analysis and the
restructuring plans developed.
On February 12, 1997, the C-TEC Board of Directors approved a
plan to restructure C-TEC (the "Restructuring"). Under the Restructuring,
C-TEC will be separated into three different, publicly traded companies
engaged, respectively, in the following businesses:
(i) the Cable Michigan Business, which will be owned by Cable
Michigan and will consist of C-TEC's Cable Michigan television business,
including C-TEC's 61.92% interest in Mercom, Inc.;
(ii) the RCN Businesses, which will be owned by RCN and will
consist of the RCN Telecom Business, C-TEC's New Jersey, New York (excluding
New York City) and Pennsylvania cable television operations, C-TEC's long
distance business (other than the portion of such business that consists of
providing long distance services to customers in the franchise area of
Commonwealth Telephone Company and in the Pennsylvania communities of
Wilkes-Barre, Scranton and Harrisburg (the "Commonwealth Service Territory
Long Distance Business")) and C-TEC International, which owns a 40% interest
in Megacable S.A. de C.V.; and
(iii) the Pennsylvania Telephone and Engineering Business, which
will be owned by C-TEC and will consist of C-TEC's Commonwealth Telephone
Company business (Pennsylvania rural LEC operations), C-TEC's CLEC operations,
Commonwealth Communications, Inc. (communications engineering) and the
Commonwealth Service Territory Long Distance Business.
The Restructuring will include the following transactions: (i)
the incurrence of certain indebtedness by C-TEC and certain of its
subsidiaries, (ii) an internal restructuring to segregate C-TEC's businesses
as set forth in the preceding paragraph, (iii) following such internal
restructuring, a distribution by C-TEC to its common equity holders of all of
the outstanding capital stock of the Company (referred to herein as the
"Distribution") and RCN (referred to herein as the "RCN Distribution"), (iv)
the formation of an employee stock ownership plan by RCN and (v) within one
year of the Distributions, an equity or equity-linked financing by C-TEC (the
"Equity-Financing"). As part of the Restructuring, C-TEC will be renamed
Commonwealth Telephone Enterprises, Inc.
The C-TEC Board of Directors determined that the Restructuring
and the Distributions would be in the best interests of C-TEC, the Company,
RCN and the holders of the C-TEC Common Equity because it will, among other
things, (i) permit C-TEC to raise equity or equity-linked financing to fund
the development of the RCN Telecom Business on more advantageous economic
terms than the other alternatives available, (ii) allow for the establishment
of an employee stock ownership plan for the employees of RCN with stock that
correlates more closely to the performance of the RCN Businesses, (iii)
facilitate possible future acquisitions and joint venture investments by the
Company; (iv) facilitate possible future equity or equity-linked offerings by
RCN; (v) facilitate possible future acquisitions and joint venture investments
by RCN; (vi) permit investors and the financial markets to better understand
and evaluate C-TEC's various businesses; (vii) facilitate the ability of each
company to grow in both size and profitability; (viii) allow the management of
each company to focus attention and financial resources on its respective
business and (ix) permit each company to offer employees incentives that are
more directly linked to the performance of its respective business.
The February 12, 1997 approval of the Restructuring by the
C-TEC Board of Directors was subject to further action by the C-TEC Board of
Directors to determine and approve the record date for shareholders entitled
to participate in, and the distribution date for, the Distribution and the RCN
Distribution. On September 5, 1997, the C-TEC Board of Directors set the
record date as September 19, 1997, the distribution date as September 30,
1997, and the distribution ratios as one share of the Company's Common Stock
for every four shares of C-TEC Common Equity held as of the Record Date and
one share of RCN Common Stock for every one share of C-TEC Common Equity held
as of the Record Date.
Description of the Distribution
The general terms and conditions relating to the Distribution
are set forth in the Distribution Agreement among C-TEC, RCN and the Company.
See "Relationship Among the Company, C-TEC and RCN--Terms of the Distribution
Agreement."
C-TEC will effect the Distribution on September 30, 1997 (the
"Distribution Date") by the delivery of the shares of Company Common Stock to
the Distribution Agent for distribution to the holders of record of C-TEC
Common Stock and C-TEC Class B Common Stock on September 19, 1997 (the "Record
Date"). The Distribution will be made on the basis of one share of Company
Common Stock for every four shares of C-TEC Common Equity outstanding on the
Record Date. The actual total number of shares of Company Common Stock to be
distributed will depend on the number of shares of C-TEC Common Equity
outstanding on the Record Date. Based upon the number of shares of C-TEC
Common Equity outstanding on September 5, 1997, approximately 6,871,157 shares
of Company Common Stock will be distributed to holders of C-TEC Common Equity,
which will constitute all of the shares of Company Common Stock owned by
C-TEC. As a result of the Distribution, 100% of the outstanding shares of
Company Common Stock will be distributed to holders of C-TEC Common Equity.
The shares of Company Common Stock will be fully paid and nonassessable, and
the holders thereof will not be entitled to preemptive rights. See
"Description of Capital Stock." Certificates representing the shares of the
Company Common Stock will be mailed on the Distribution Date or as soon as
practicable thereafter to holders of C-TEC Common Equity.
No certificates or scrip representing fractional shares of
Company Common Stock will be issued to holders of C-TEC Common Equity as part
of the Distribution. The Distribution Agent will aggregate fractional shares
into whole shares and sell them in the open market at then prevailing prices
on behalf of holders who otherwise would be entitled to receive fractional
share interests, and such persons will receive instead a cash payment in the
amount of their pro rata share of the total sale proceeds thereof. Proceeds
from sales of fractional shares will be paid by the Distribution Agent based
upon the average gross selling price per share of Company Common Stock of all
such sales. See "The Distribution--Certain Federal Income Tax Consequences."
Such sales are expected to be made as soon as practicable after the
Distribution Date. None of C-TEC , the Company or the Distribution Agent will
guarantee any minimum sale price for the fractional shares of Company Common
Stock, and no interest will be paid on the proceeds of such shares.
Concurrently with the Distribution, C-TEC will distribute to
the holders of C-TEC Common Equity 100% of the shares of common stock of
C-TEC's wholly owned subsidiary RCN. The RCN Distribution is described in a
separate Information Statement that is being provided to the holders of C-TEC
Common Equity.
Certain Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences of the Distribution to C-TEC and the holders of C-TEC Common
Equity ("Holders"). C-TEC has received a ruling from the Internal Revenue
Service to the effect that the Distribution will generally qualify as tax-free
to C-TEC and the Holders under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code") and accordingly, for federal income tax purposes:
(i) Except as described below with respect to fractional shares,
a Holder will not recognize gain or loss as a result of the Distribution.
Cash received in lieu of a fractional share will be treated as received in
redemption of such fractional share. Gain or loss will be recognized to the
recipient Holder to the extent of the difference between the Holder's basis in
the fractional share and the amount received for the fractional share.
Provided the fractional share interest is held as a capital asset by the
recipient Holder, such gain or loss will constitute capital gain or loss.
(ii) A Holder will apportion its tax basis for its C-TEC Common
Equity among such C-TEC Common Equity, shares of common stock of RCN received
in the RCN Distribution, and the Company Common Stock received in the
Distribution in proportion to the relative fair market values of such C-TEC
Common Equity, common stock of RCN and Company Common Stock on the
Distribution Date.
(iii) A Holder's holding period for the Company Common Stock
received in the Distribution will include the period during which such Holder
held the C-TEC Common Equity with respect to which the Distribution was made,
provided that such C-TEC Common Equity is held as a capital asset by such
Holder as of the Distribution Date.
(iv) In general, no gain or loss will be recognized to C-TEC as a
result of the Distribution. However, gain may be recognized with respect to
certain items, such as excess loss accounts or deferred intercompany gains.
Current Treasury regulations require each Holder who receives
Company Common Stock pursuant to the Distribution to attach to its federal
income tax return for the year in which the Distribution occurs a descriptive
statement concerning the Distribution. C-TEC (or the Company on its behalf)
will make available requisite information to each such Holder.
ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
PARTICULAR FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM.
For a description of agreements pursuant to which C-TEC, RCN
and the Company have provided for certain tax sharing and other tax matters,
see "Relationship Among the Company, C-TEC and RCN--Tax Sharing Agreement."
RELATIONSHIP AMONG THE COMPANY, C-TEC AND RCN
This section of the Information Statement describes certain
agreements among the Company, C-TEC and RCN that will govern certain of the
on-going relationships among C-TEC, RCN and the Company after the Distribution
and will provide for an orderly transition to the status of three separate,
independent companies. To the extent that they relate to the Distribution
Agreement or the Tax Sharing Agreement (collectively, the "Distribution
Documents"), the following descriptions describe the Distribution Documents as
they will be in effect as of the Distribution, do not purport to be complete
and are qualified in their entirety by reference to the Distribution
Documents, which are filed as exhibits to the Company's Registration Statement
on Form 10 (the "Company Form 10") filed with the Securities and Exchange
Commission (the "Commission") of which this Information Statement (the
"Company Information Statement") is a part and as exhibits to RCN's
Registration Statement on Form 10 (the "RCN Form 10") filed with the
Commission of which RCN's Information Statement (the "RCN Information
Statement") is a part, and are incorporated herein by reference. All
stockholders should read the Distribution Documents in their entirety.
The Distribution Documents will be entered into in connection
with the Distributions and are, therefore, not the result of arm's length
negotiation between unrelated parties as the Company, C-TEC and RCN have
certain common officers and directors. Nevertheless, the transitional service
arrangements in such agreements are designed to reflect arrangements that
would have been agreed upon by parties negotiating at arm's length.
Additional or modified agreements, arrangements and transactions may be
entered into between the Company and either or both of C-TEC and RCN after the
Distribution, which will be negotiated at arm's length.
Terms of Distribution Agreement
C-TEC, RCN and the Company have entered into a Distribution
Agreement (the "Distribution Agreement") prior to the Distributions, among
other things, to provide for the principal corporate transactions and certain
procedures for effecting the Distributions, to define certain aspects (other
than those with respect to taxes, which shall be governed by the Tax Sharing
Agreement) of the relationship among C-TEC, RCN and the Company after the
Distributions and to provide for the allocation of certain assets and
liabilities (other than those with respect to taxes, which shall be governed
by the Tax Sharing Agreement) among C-TEC, RCN and the Company.
Conditions to the Distribution
The Distribution Agreement provides that the Distributions are
subject to the following conditions being satisfied prior to or as of the
Distribution Date: (i) the Company Form 10 and the RCN Form 10 shall have
become effective under the Exchange Act; (ii) the Company Common Stock and the
common stock, par value $1.00 per share, of RCN (the "RCN Common Stock")
shall, in each case, have been approved for trading on NASDAQ, subject to
official notice of issuance; (iii) the Board of Directors of C-TEC shall be
satisfied that (A) at the time of the Distributions and after giving effect to
the Distributions and the other related transactions constituting part of the
Restructuring, C-TEC will not be insolvent (in that, both before and
immediately following the Distributions, (i) the fair market value of C-TEC's
assets would exceed C-TEC's liabilities, (ii) C-TEC would be able to pay its
liabilities as they mature and become absolute and (iii) C-TEC would not have
unreasonably small capital with which to engage in its business) and (B) the
Distributions will be permitted under Section 1551 of the Pennsylvania
Business Corporations Act; (iv) C-TEC's Board of Directors shall have approved
the Distributions and shall not have abandoned, deferred or modified the
Distributions at any time prior to the Distribution Date; (v) (A) the
Company's Board of Directors, as named in this Information Statement, shall
have been elected by C-TEC, as sole stockholder of the Company, and the
Company's Articles of Incorporation and Bylaws (each as defined under
"Description of Capital Stock" below) shall be in effect and (B) RCN's Board
of Directors, as named in the RCN Information Statement, shall have been
elected by C-TEC, as sole shareholder of RCN, and RCN's certificate of
incorporation and bylaws (each as defined under "Description of Capital Stock"
in the RCN Information Statement) shall be in effect; (vi) the Tax Sharing
Agreement shall have been duly executed and delivered by the parties thereto;
(vii) the private letter ruling issued by the Internal Revenue Service as to
the tax-free nature of the Distribution shall not have been withdrawn; and
(viii) the Internal Restructuring (as defined below) shall have been
consummated in all material respects. The C-TEC Board of Directors may
abandon, amend or defer the Distributions at any time prior to the
Distribution Date.
As used herein, the term "Internal Restructuring" means the
series of transactions necessary to prepare for the Distributions and includes
certain borrowing transactions, the making of certain contributions to certain
C-TEC subsidiaries and the making of certain internal distributions by certain
C-TEC subsidiaries (the "Internal Distributions"). The Internal Distributions
are in each case subject to the condition that the Board of Directors of each
distributing company shall be satisfied that (A) at the time of the
distribution and after giving effect to the distribution, the distributing
company will not be insolvent (in that, both before and immediately following
the distribution, (i) the fair market value of the distributing company's
assets would exceed the distributing company's liabilities, (ii) the
distributing company would be able to pay its liabilities as they mature and
become absolute and (iii) the distributing company would not have unreasonably
small capital with which to engage in its business) and (B) the distribution
will be permitted under applicable state corporate law.
Indemnification
The Company, RCN and C-TEC have agreed to indemnify one another
against certain liabilities. RCN has agreed to indemnify C-TEC and its
subsidiaries at the time of the Distribution (collectively, the "C-TEC Group")
and the respective directors, officers, employees and Affiliates of each
Person in the C-TEC Group (collectively, the "C-TEC Indemnitees") and Cable
Michigan and its subsidiaries at the time of the Distribution (collectively,
the "Cable Michigan Group" or the "Company Group") and the respective
directors, officers, employees and Affiliates of each Person in the Cable
Michigan Group (collectively, the "Cable Michigan Indemnitees") from and
against any and all damage, loss, liability and expense ("Losses") incurred or
suffered by any of the C-TEC Indemnitees or the Cable Michigan Indemnitees,
respectively, (i) arising out of, or due to the failure of RCN or any of its
subsidiaries at the time of the Distribution (collectively, the "RCN Group")
to pay, perform or otherwise discharge any of the RCN Liabilities (as defined
below), (ii) arising out of the breach by any member of the RCN Group of any
obligation under the Distribution Agreement or any of the other Distribution
Documents and (iii) in the case of the C-TEC Indemnitees, arising out of the
provision by the C-TEC Group of the services described below to the RCN Group
except to the extent that such Losses result from the gross negligence or
willful misconduct of a C-TEC Indemnitee. "RCN Liabilities" refers to (i) all
liabilities of the RCN Group under the Distribution Agreement or any of the
other distribution documents, (ii) all other liabilities of the Company, RCN
or C-TEC (or their respective subsidiaries), except as specifically provided in
the Distribution Agreement or any of the other Distribution Documents and
whether arising before, on or after the Distribution Date, to the extent such
liabilities arise primarily from or relate primarily to the management or
conduct of the RCN Businesses prior to the effective time of the Distribution
(the liabilities in clauses (i) and (ii) collectively, the "True RCN
Liabilities") and (iii) 30% of the Shared Liabilities (as defined below).
The Company has agreed to indemnify the RCN Group and the
respective directors, officers, employees and Affiliates of each Person in the
RCN Group (collectively, the "RCN Indemnitees") and the C-TEC Indemnitees from
and against any and all Losses incurred or suffered by any of the RCN
Indemnitees or the C-TEC Indemnitees, respectively, (i) arising out of, or due
to the failure of any Person in the Cable Michigan Group to pay, perform or
otherwise discharge any of the Cable Michigan Liabilities (as defined below),
(ii) arising out of the breach by any member of the Cable Michigan Group of
any obligation under the Distribution Agreement or any of the other
distribution documents, (iii) in the case of the C-TEC Indemnitees, arising
out of the provision by the C-TEC Group of services to the Cable Michigan
Group except to the extent that such Losses result from the gross negligence
or willful misconduct of a C-TEC Indemnitee and (iv) in the case of the RCN
Indemnitees, arising out of the provision by RCN of the services described
below to the Cable Michigan Group except to the extent that such Losses result
from the gross negligence or willful misconduct of an RCN Indemnitee. "Cable
Michigan Liabilities" refers to (i) all liabilities of the Cable Michigan
Group under the Distribution Agreement or any of the other distribution
documents, (ii) all other liabilities of the Company, RCN or C-TEC (or their
respective subsidiaries), except as specifically provided in the Distribution
Agreement or any of the other Distribution Documents and whether arising
before, on or after the Distribution Date, to the extent such liabilities
arise primarily from or relate primarily to the management or conduct of the
business of the Cable Michigan Group prior to the effective time of the
Distribution (the liabilities in clauses (i) and (ii) collectively, the "True
Cable Michigan Liabilities") and (iii) 20% of the Shared Liabilities (as
defined below).
C-TEC has agreed to indemnify the Cable Michigan Indemnitees
and the RCN Indemnitees from and against any and all Losses incurred or
suffered by any of the Cable Michigan Indemnitees or the RCN Indemnitees,
respectively, (i) arising out of, or due to the failure of any Person in the
C-TEC Group to pay, perform or otherwise discharge any of the C-TEC
Liabilities (as defined below), (ii) arising out of the breach by any member
of the C-TEC Group of any obligation under the Distribution Agreement or any
of the other Distribution Documents and (iii) in the case of the RCN
Indemnitees, arising out of the provision by RCN of the services described
below to the C-TEC Group except to the extent that such Losses result from the
gross negligence or willful misconduct of an RCN Indemnitee. "C-TEC
Liabilities" refers to (i) all liabilities of the C-TEC Group under the
Distribution Agreement or any of the other distribution documents, (ii) all
other liabilities of the Company, RCN or C-TEC (or their respective
subsidiaries), except as specifically provided in the Distribution Agreement
or any of the other Distribution Documents and whether arising before, on or
after the Distribution Date, to the extent such liabilities arise primarily
from or relate primarily to the management or conduct of the business of the
C-TEC Group prior to the effective time of the Distribution (the liabilities
in clauses (i) and (ii) collectively, the "True C-TEC Liabilities") and (iii)
50% of the Shared Liabilities (as defined below).
"Shared Liability" means any liability (whether arising before,
on or after the Distribution Date) of the Company, RCN or C-TEC or their
respective subsidiaries which (i)(a) arises from the conduct of the corporate
overhead function with respect to C-TEC and its subsidiaries prior to the
effective time of the Distribution with certain exceptions or (b) is one of
certain fees and expenses incurred in connection with the Restructuring and
(ii) is not a True C-TEC Liability, a True RCN Liability or a True Company
Liability.
The Company, RCN and C-TEC have also generally agreed to
indemnify each other and each other's affiliates and controlling persons from
certain liabilities under the securities laws in connection with the Company
Form 10 and this Information Statement and the RCN Form 10 and RCN Information
Statement. For information regarding indemnification for tax liabilities, see
"-- Tax Sharing Agreement."
The Company does not believe that any of the foregoing
indemnities will have a material adverse effect on the business, financial
condition or results of operations of the Company.
The Distribution Agreement also includes procedures for notice
and payment of indemnification claims and provides that the indemnifying party
may assume the defense of claims or suits brought by third parties for
non-Shared Liabilities and may participate in the defense of claims or suits
brought by third parties for Shared Liabilities. RCN is entitled to assume
the defense of claims or suits brought by third parties for Shared
Liabilities. Any indemnification paid under the foregoing indemnities is to
be paid net of the amount of any insurance or other amounts that would be
payable by any third party to the indemnified party in the absence of such
indemnity.
Employee Matters
Under the Distribution Agreement, Cable Michigan, RCN and C-TEC
agreed generally to assume employee benefits-related liabilities with respect
to its current and, in some cases, former employees. Each of Cable Michigan,
RCN and C-TEC also agreed to an allocation of employee-related liabilities
arising out of certain shared operations prior to the Distribution on the same
basis as Shared Liabilities are allocated.
Transitional Services and Other Arrangements
RCN has agreed to provide or cause to be provided to the C-TEC
Group certain specified services for a transitional period after the
Distribution. The transitional services to be provided are the following: (i)
accounting, (ii) payroll, (iii) management supervision, (iv) cash management,
(v) human resources and benefit plan administration, (vi) insurance
administration, (vii) legal, (viii) tax, (ix) internal audit, (x) investor
and public relations and (xi) other miscellaneous administrative services.
The fee per year for these services will be 3.5% of the first $175 million of
revenue of the C-TEC Group and 1.75% of any additional revenue. Based on the
C-TEC Group's revenue for 1996, the fee for that year would have been
approximately $6,326,000.
RCN has also agreed to provide or cause to be provided to the
Cable Michigan Group certain specified services for a transitional period
after the Distribution. The transitional services to be provided are the
following: (i) customer service, (ii) marketing, (iii) accounting, (iv)
payroll, (v) management supervision, (vi) cash management, (vii) human
resources and benefit plan administration, (viii) insurance administration,
(ix) legal, (x) tax, (xi) internal audit, (xii) programming administration,
(xiii) billing, (xiv) monthly cable guides, (xv) investor and public
relations, (xvi) provision of third party programming, and (xvii) other
miscellaneous administrative services. Subject to certain limitations, the
fee per year for services listed in items (ii)-(xiii), (xv) and (xvii) will be
4.0% of the revenues of the Cable Michigan Group plus a direct allocation of
certain consolidated cable administration functions. Based on the Cable
Michigan Group's revenue for 1996 and the allocation of certain consolidated
cable administrative functions, the charge for such services for that year
would have been approximately $4,418,000. The fee for customer service listed
in item (i) along with the billing service listed in item (xiii) will be a pro
rata share (based on the relative number of subscribers) of the fees and
expenses incurred by RCN to provide such customer billing services and fees to
the RCN Group and the Cable Michigan Group. Based on the this allocation
arrangement, the charge to Cable Michigan for such customer and billing
services would have been approximately $3,114,000 in 1996. The third party
expense incurred by RCN to obtain third party programming and monthly cable
guides for Cable Michigan referred to in items (xiv) and (xvi) above, will be
reimbursed to RCN by Cable Michigan and no additional fee will be charged with
respect thereto.
C-TEC has agreed to provide or cause to be provided to the RCN
Group and the Cable Michigan Group financial data processing applications,
lockbox services, storage facilities, LAN and WAN support services, building
maintenance and other miscellaneous administrative services for a transitional
period after the Distribution. The fees for such services and arrangements
will be an allocated portion (based on relative usage) of the cost incurred by
C-TEC to provide such services and arrangements to all three groups. Based on
this allocation arrangement, the fees for providing such services and
arrangements to the RCN Group and the Cable Michigan Group would have been
approximately $753,000 and $248,000, respectively, for 1996.
The nature, scope and timing of the foregoing services are to
be substantially consistent with the nature, scope and timing of the service
provider's services prior to the Distribution, provided that the service
provider shall not be obligated to hire additional or replacement employees,
or increase the compensation of its existing employees, in order to provide
the services. The services are to commence on the Distribution Date and will
terminate upon 60 days notice by either the service provider or the relevant
service recipient, except that the billing, customer service, programming
administration and provision of third party programming services provided by
RCN to Cable Michigan may not be terminated by RCN on less than one year
advance notice to Cable Michigan. A service recipient may also terminate
individual services by giving 60 days notice to the applicable service
provider.
The aforementioned arrangements are not the result of arm's
length negotiation between unrelated parties as the Company, C-TEC and RCN
have certain common officers and directors. Although the transitional service
arrangements in such agreements are designed to reflect arrangements that
would have been agreed upon by parties negotiating at arm's length, there can
be no assurance that the Company would not be able to obtain similar services
at a lower cost from unrelated third parties. Additional or modified
agreements, arrangements and transactions may be entered into between the
Company and either or both of C-TEC and RCN after the Distribution, which will
be negotiated at arm's length
Access to Information
Pursuant to the Distribution Agreement, each of the Company
Group, the RCN Group and the C-TEC Group will provide to each other Group all
records in its possession relating to such other Group or such other Group's
business and affairs immediately prior to or as soon as practicable following
the Distribution. If records relate to more than one Group, true and complete
copies will be provided to the other Group or Groups. After the Distribution,
each Group will also afford to each other Group and certain of such other
Group's agents reasonable access during normal business hours to all records
in its possession relating to such other Group's business and affairs as
reasonably required, including, for auditing, accounting, litigation,
disclosure and reporting purposes, subject to limited exceptions. Finally,
each Group will use its best efforts to make available to each other Group,
upon written request, its officers, directors, employees and representatives
as witnesses, and will otherwise cooperate with each other Group, in
connection with any proceeding arising out of the business or operations of
any Group prior to the Distribution. In each case, the provider of
information or witnesses under the above provisions is entitled to
reimbursement for reasonable expenses from the recipient of such information
or witnesses.
Except as otherwise provided in the Distribution Agreement,
each of the Company, RCN and C-TEC, and its respective directors, officers,
employees, agents, consultants and advisors will hold all information
concerning each other party or its affiliates in strict confidence.
Intercompany Accounts; Intellectual Property Rights and Licenses
Except as otherwise provided in the Tax Sharing Agreement or
the Distribution Agreement, all intercompany receivable, payable and loan
balances among the Company Group, the RCN Group and the C-TEC Group will be
settled prior to the Distribution by payment in full by the party or parties
owing any such obligation; provided, however, that certain de minimus accounts
payable and accounts receivable may be settled within 30 days after the
Distribution. The Distribution Agreement provides that all arrangements and
agreements between the parties will terminate as of the Distribution Date
other than the Distribution Documents and certain commercial contracts on
terms that management believes to be arm's-length. These contracts comprise
switch and facilities leases, an Internet access resale agreement, an interim
carrier agreement, local and long distance phone service agreements, a
maintenance agreement and switch monitoring and traffic capacity services
agreements.
None of the Groups will have any right or license in or to any
technology, software, intellectual property, know-how or other proprietary
right owned, licensed or held for use by another Group.
Miscellaneous
Any dispute arising out of or in connection with the
Distribution Agreement will be submitted to arbitration in accordance with the
procedures described in the Agreement.
After the Distribution, there will exist relationships that may
lead to conflicts of interest. Each of the Company, C-TEC and RCN will
effectively be controlled by Kiewit Telecom. In addition, the majority of the
Company's named executive officers will also be acting as directors and/or
executive officers of C-TEC or RCN following the Distribution. See
"Management." In particular, David C. McCourt, Chairman and Chief Executive
Officer of the Company as of the Distribution, will also serve as Chairman and
Chief Executive Officer of RCN and will remain as a director and Chairman
and Chief Executive Officer of C-TEC. Mr. McCourt expects to devote 10% or
less of his time to managing the affairs of the Company. The Company's other
named executive officers expect to devote only a portion of their time to the
affairs of the Company, as follows: Mr. Haverkate (approximately 25%); Mr.
Stoklosa (approximately 25%) and Mr. Gdovin (over 50%). The success of the
Company may be affected by the degree of involvement of its officers and
directors in the Company's business and the abilities of the Company's
officers, directors and employees in managing both the Company and the
operations of RCN and/or C-TEC. Potential conflicts if interest will be dealt
with on a case-by-case basis taking into consideration relevant factors
including the requirements of NASDAQ and prevailing corporate practices.
Tax Sharing Agreement
The Tax Sharing Agreement dated as of September 5, 1997, by and
among the Company, RCN and C-TEC (the "Tax Sharing Agreement"), governs
contingent tax liabilities and benefits, tax contests and other tax matters
with respect to tax returns filed with respect to tax periods, in the case of
the Company, ending or deemed to end on or before the Distribution Date.
Under the Tax Sharing Agreement, Adjustments (as defined in the Tax Sharing
Agreement) to taxes that are clearly attributable to the Company Group, the
RCN Group, or the C-TEC Group will be allocated solely to such group.
Adjustments to all other tax liabilities will generally be allocated 50% to
C-TEC, 20% to the Company and 30% to RCN.
Notwithstanding the above, if the Company, RCN or C-TEC, takes
any action or fails to take any action that results in the Distribution or the
RCN Distribution not qualifying as a tax-free distribution under Section 355
of the Code, then the Company, RCN or C-TEC, as the case may be, will be
liable for any increased tax liability of the Company, RCN and C-TEC arising
therefrom.
TRADING MARKET
There has been no trading market for the Company Common Stock,
and there can be no assurances as to the establishment or continuity of any
such market. However, it is expected that a "when-issued" trading market may
develop on or about the Record Date. The Company Common Stock has been
approved for listing on NASDAQ under the symbol "CABL." It is a condition to
the obligation of C-TEC to consummate the Distributions that the Company
Common Stock to be issued in the Distribution and the common stock of RCN to
be distributed in the RCN Distribution shall have been approved for listing on
NASDAQ, subject to official notice of issuance. See "Relationship Among the
Company, C-TEC and RCN--Terms of Distribution Agreement."
Prices at which the Company Common Stock may trade prior to the
Distribution on a "when-issued" basis or after the Distribution cannot be
predicted. Prices at which trading in shares of Company Common Stock occurs
may fluctuate significantly. See "Risk Factors--No Prior Market for Common
Stock." The prices at which the Company Common Stock trades will be
determined by the marketplace and may be influenced by many factors,
including, among others, quarter to quarter variations in the actual or
anticipated financial results of the Company or other companies in the markets
served by the Company. In addition, the stock market has experienced extreme
price and volume fluctuations that have affected the market price of many
telecommunications stocks and that have often been unrelated or
disproportionate to the operating performance of individual companies. These
and other factors may adversely affect the market price of the Company Common
Stock.
The Company Common Stock received by holders of C-TEC Common
Equity pursuant to the Distribution will be freely transferable, except for
shares of such Company Common Stock received by any person who may be deemed
an "affiliate" of the Company within the meaning of Rule 144 ("Rule 144")
under the Securities Act of 1933, as amended (the "Securities Act"). Persons
who may be deemed to be affiliates of the Company after the Distribution
generally include individuals or entities that directly, or indirectly through
one or more intermediaries, control, are controlled by, or are under common
control with, the Company, and may include the directors and principal
executive officers of the Company as well as Kiewit Telecom, the principal
stockholder of the Company. Persons who are affiliates of the Company will be
permitted to sell their Company Common Stock received pursuant to the
Distribution only pursuant to an effective registration statement under the
Securities Act or pursuant to an exemption from registration under the
Securities Act, such as the exemption afforded by Rule 144.
The Company anticipates that options to purchase approximately
380,125 shares of Company Common Stock will be issued under the Company's
plans in connection with the adjustment of C-TEC stock options for the
Distributions. Such options will be issued shortly after the Distribution
Date. See "Management--Executive Compensation". The Company will not
permit the exercise of such options, and no shares of Company Common Stock
will be issued in respect of such options, prior to the registration of such
shares under the Securities Act. Upon issuance of such shares following such
registration, the shares will be freely transferable, except by affiliates as
described above. Except for the shares of Company Common Stock distributed
in the Distribution and such stock options, no securities of the Company will
be outstanding as of or immediately following the Distribution. The Company
has not entered into any agreement or otherwise committed to register any
shares of Company Common Stock under the Securities Act for sale by security
holders other than the Exchange Agreement (as defined below) entered into in
connection with the joint venture with BECO. Except for the shares registered
on this Registration Statement in connection with the Distribution, common
equity offered pursuant to employee benefit plans and shares issuable pursuant
to the Exchange Agreement, no common equity of the Company is being, or has
been publicly proposed to be, publicly registered or offered by the Company.
DIVIDENDS
The Company anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future. The payment of any cash dividends in the
future will be at the discretion of the Company Board. The declaration of any
dividends and the amount thereof will depend on a number of factors, including
the Company's financial condition, capital requirements, funds from
operations, future business prospects and such other factors as the Company
Board may deem relevant. The Credit Agreement into which the Company has
entered contains restrictions on the payment of dividends. See "Description
of the Credit Agreement."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Distribution Date, the Company has been operated
as part of C-TEC. The following Unaudited Pro Forma Consolidated Statement of
Operations sets forth the historical statements of operations of the Company
for the year ended December 31, 1996, and the six months ended June 30, 1997
and as adjusted for the Distribution and the related transactions and events
described in the Notes thereto as if the Distribution and such transactions
and events had been consummated on January 1, 1996. The following Unaudited
Pro Forma Consolidated Balance Sheet sets forth the historical balance sheet
of the Company as of June 30, 1997, and as adjusted for the Distribution and
the related transactions and events described in the Notes thereto as if the
Distribution and such transactions and events had been consummated on June 30,
1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Unaudited Pro Forma Condensed
Consolidated Financial Statements. The Unaudited Pro Forma Consolidated
Financial Statements should be read in conjunction with the historical
Financial Statements and Notes thereto included elsewhere in this Information
Statement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Unaudited Pro Forma Consolidated Financial
Statements are provided for information purposes only and should not be
construed to be indicative of the Company's results of operations or financial
condition had the Distribution and the transactions and events described above
been consummated on the dates assumed, may not reflect the results of
operations or financial condition which would have resulted had the Company
been operated as a separate, independent Company during such period, and are
not necessarily indicative of the Company's future results of operations or
financial condition.
Cable Michigan, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1996
($ in thousands, except per share
amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C>
Sales....................................................... $76,187 $76,187
Cost and expenses, excluding depreciation and amortization.. 44,091 44,091
Depreciation and amortization............................... 31,427 31,427
-------- --------
Operating income............................................ 669 669
Interest income............................................. 127 127
Interest expense............................................ (15,179) $13,952 (1)
(8,634) (2) (9,861)
Other expense, net.......................................... (736) (736)
-------- -------- --------
(Loss) before income taxes.................................. (15,119) 5,318 (9,801)
(Benefit) for income taxes.................................. (5,712) 4,883 (1)
(3,022) (2) (3,851)
-------- -------- --------
(Loss) before minority interest............................. $(9,407) $3,457 $(5,950)
======== ======== ========
Unaudited pro forma net (loss) per common share............. $ (0.70)
Weighted average number of common shares outstanding....... 6,871,157 (3)
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
Cable Michigan, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Six Months Ended June 30, 1997
($ in thousands, except per share
amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales....................................................... $40,230 $40,230
Cost and expenses, excluding depreciation and amortization.. 23,251 23,251
Depreciation and amortization............................... 15,896 15,896
------- -------
Operating income............................................ 1,083 1,083
Interest income............................................. 79 79
Interest expense............................................ (6,893) $6,325 (1)
(4,317) (2) (4,885)
Other expense, net.......................................... (320) (320)
------- ------- -------
(Loss) before income taxes.................................. (6,051) 2,008 (4,043)
(Benefit) for income taxes.................................. (2,371) 2,214 (1)
(1,511) (2) (1,668)
------- ------- -------
(Loss) before minority interest............................. $(3,680) $1,305 $(2,375)
======= ======= =======
Unaudited pro forma net (loss) per common share............. $ (0.28)
Weighted average number of common shares outstanding (3).... 6,871,157 (3)
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
Cable Michigan, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1997
($ in thousands)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and temporary cash investments................................. $3,233 $110,000 (4)
(110,000) (5)
(818) (6) $2,415
Accounts receivable, net of reserve for doubtful accounts of
$681.............................................................. 3,846 3,846
Prepayments and other............................................... 553 553
Accounts receivable - affiliates.................................... 1,068 (1,068) (7) --
Deferred income taxes............................................... 1,019 1,019
Property, plant and equipment, net of accumulation of depreciation.. 74,278 74,278
Intangible assets, net.............................................. 53,135 53,135
Deferred charges and other assets................................... 164 818 (6) 982
-------- ------- --------
Total Assets......................................................... $137,296 $(1,068) $136,228
======== ======= ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities
Current maturities of long-term debt................................ $1,925 $1,925
Accounts payable.................................................... 2,813 2,813
Advance billings and customer deposits.............................. 2,295 2,295
Accrued taxes....................................................... 245 245
Accrued interest.................................................... 13 13
Accrued cable programming expense................................... 2,158 2,158
Accrued litigation costs............................................ 2,150 2,150
Accrued expenses.................................................... 2,379 2,379
Accounts payable - affiliates.................................. 10,083 $(10,083) (7) --
Long-term debt................................................. 14,138 110,000 (4)
15,000 (8) 139,138
Notes payable - affiliates..................................... 142,347 (110,000) (5)
(32,347) (7) --
Deferred income taxes.......................................... 24,465 24,465
-------- ------- --------
Total liabilities.............................................. 205,011 (27,430) 177,581
-------- ------- --------
Minority Interest.............................................. 14,269 14,269
Commitments and contingencies.................................. (81,984) (15,000) (8)
Common shareholder's deficit................................... 41,362 (7) (55,622)
-------- ------- --------
Total Liabilities and Shareholder's Deficit.......................... $137,296 $(1,068) $136,228
======== ======= ========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
Cable Michigan, Inc.
Notes to Unaudited Pro Forma
Consolidated Financial Statements
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statements of Operations
and Balance Sheet of Cable Michigan assume that the Company was an autonomous
entity rather than a wholly owned subsidiary of C-TEC at the dates and for the
periods shown. The Pro Forma adjustments, as described below, are keyed to
the corresponding amounts shown in the "Adjustments for Distribution" column
in the relevant statement.
(1) Adjustment to eliminate interest expense and related
income taxes on outstanding affiliate notes payable
owned by the Company of which $110,000 are assumed to be
treated as repaid and the remaining balance is assumed
to be treated as a capital contribution to the Company
from the borrower.
(2) Adjustment to reflect interest expense and amortization of
debt issuance costs, and related income taxes, on new
third party debt of $125,000, which is assumed to be
incurred (see (4) and (8)).
(3) The weighted average number of common shares outstanding
reflects the product of (i) the Distribution ratio times
(ii) the number of shares of Company Common Stock
outstanding as of September 5, 1997.
(4) Adjustment to reflect the assumed incurrence of new third
party debt of $110,000 by the Company.
(5) Adjustment to reflect the assumed partial payment of notes
payable-affiliate. The Company will incur new third
party debt for the purpose of repaying a portion of the
total amount of outstanding affiliate notes payable owed
to a subsidiary of RCN.
(6) Adjustment to reflect debt issuance costs in connection
with the assumed incurrence of the new third party debt.
(7) Adjustment to reflect the assumed treatment of remaining
receivable and payable balances with affiliates as
capital contributions to (from) the respective
affiliates.
(8) Adjustment to reflect the assumption of third-party debt of
C-TEC of $15,000 collateralized by the 62% interest in
Mercom.
PRO FORMA CAPITALIZATION
Prior to the Distribution Date, the Company has been operated
as part of C-TEC. The following table sets forth the capitalization of the
Company as of June 30, 1997, and as adjusted to give effect to the
Distribution and the related transactions and events described in the notes
hereto and the Notes to the Unaudited Pro Forma Consolidated Balance Sheet
included in this Information Statement as if the Distribution and such
transactions and events had been consummated on June 30, 1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Pro Forma Capitalization. The Pro
Forma Capitalization table below should be read in conjunction with the
historical Financial Statements and Notes thereto included elsewhere in this
Information Statement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Consolidated
Financial Statements." The Pro Forma Capitalization table below is provided
for information purposes only and should not be construed to be indicative of
the Company's capitalization or financial condition had the Distribution and
such related transactions and events been consummated on the date assumed, may
not reflect the capitalization or financial condition which would have
resulted had the Company been operated as a separate, independent Company
during such period, and are not necessarily indicative of the Company's future
capitalization or financial condition.
<TABLE>
<CAPTION>
June 30, 1997
($ in thousands)
-----------------------------
Pro Forma
for
Historical Distribution
---------- ------------
<S> <C>
Long-term debt (including current portion)............ $ 16,063 $141,063
Notes payable - affiliates............................ 142,347 --
-------- --------
Total indebtedness................................. 158,410 141,063
Common shareholder's deficit.......................... (81,984) (55,622)
-------- --------
Total capitalization............................... $ 76,426 $ 85,441
======== ========
</TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Prior to the Distribution Date, the Company has been
operated as part of C-TEC. The table below sets forth selected historical
consolidated financial data for the Company. The historical consolidated
financial data presented below reflect periods during which the Company did
not operate as an independent company and, accordingly, certain assumptions
were made in preparing such financial data. Therefore, such data may not
reflect the results of operations or the financial condition which would
have resulted if the Company had operated as a separate, independent
company during such periods, and are not necessarily indicative of the
Company's future results of operation or financial condition.
The selected historical consolidated financial data for the
years ended December 31, 1993 and 1992 and as of December 31, 1994, 1993
and 1992 are derived from the Company's unaudited historical consolidated
financial statements not included in this Information Statement. The
selected historical consolidated financial data of the Company for the
years ended December 31, 1996, 1995 and 1994 and as of December 31, 1996
and 1995 are derived from and should be read in conjunction with the
Company's audited historical consolidated financial statements included
elsewhere in this Information Statement. The selected historical
consolidated financial data for the six month periods ended June 30, 1997
and 1996 and as of those dates are derived from and should be read in
conjunction with the Company's unaudited historical consolidated financial
statements included elsewhere in this Information Statement. In the
opinion of the Company's management, these six month consolidated
historical financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods. The results for such interim periods
are not necessarily indicative of the results for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements. Earnings per share data are
presented elsewhere in this Information Statement on a pro forma basis
only. See "Unaudited Pro Forma Consolidated Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- ---------------------------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales.............................. $40,230 $37,345 $76,187 $60,675 $49,141 $48,665 $43,860
Costs and Expenses, excluding
depreciation and amortization.... 23,251 21,835 44,091 34,749 28,543 28,655 28,142
Depreciation and amortization...... 15,896 15,713 31,427 25,154 28,685 32,697 31,720
-------- ------- -------- -------- -------- -------- --------
Operating income (loss)............ 1,083 (203) 669 772 (8,087) (12,687) (16,002)
Interest income.................... 79 55 127 55 -- -- 44
Interest expense................... (6,893) (7,874) (15,179) (15,973) (15,767) (15,960) (16,672)
Other (expense)/income, net........ (320) (266) (736) (363) (1,307) (461) (178)
(Benefit) provision for income
taxes............................ (2,371) (3,056) (5,712) (5,590) 52 (799) (11,019)
Minority interest in (income) loss
of consolidated entities......... 427 609 1,151 (186) -- -- --
Equity in (loss) of
unconsolidated entities.......... -- -- -- (396) (1,013) (834) (840)
-------- ------- -------- -------- -------- -------- --------
Net (Loss)......................... (3,253) (4,623) (8,256) (10,501) (26,226) (29,143) (22,629)
======== ======= ======== ======== ======== ======== ========
Balance Sheet Data:
Total assets....................... 137,296 159,336 149,200 172,759 116,972 147,286 162,088
Long-term liabilities.............. 14,138 16,555 15,680 17,430 -- -- --
Common shareholder's (deficit)..... (81,984) (77,294) (79,741) (73,757) (76,931) (60,419) (38,251)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's historical Consolidated Financial Statements and Unaudited Pro Forma
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Information Statement.
General
Prior to the Distribution Date, the Company has been operated
as part of C-TEC. The historical financial information presented herein
reflects periods during which the Company did not operate as an independent
company and accordingly, certain assumptions were made in preparing such
financial information. Such information, therefore, may not necessarily
reflect the results of operations or the financial condition of the Company
which would have resulted had the Company been an independent, public Company
during the reporting periods, and are not necessarily indicative of the
Company's future operating results or financial condition. Dollar amounts
contained in the following section are in thousands.
Results of Operations
Six Months Ended June 30, 1997 Compared With Six Months Ended
v. June 30, 1996
For the six months ended June 30, 1997, operating income before
depreciation and amortization was $16,979 as compared to $15,510 for the six
months ended June 30, 1996. Sales increased 7.7% to $40,230 for the six month
period ended June 30, 1997 from $37,345 for the same period in 1996. Net loss
was ($3,253) for the six months ended June 30, 1997 as compared to ($4,623)
for the six months ended June 30, 1996. The improvement is principally due to
lower interest expense of $981 in 1997 as compared to 1996 and higher
operating income before depreciation and amortization of $1,469 in 1997 as
compared to 1996, offset by a lower benefit for income taxes.
Sales are primarily comprised of subscription fees for basic
service packages, premium and pay per view services and cable advertising
sales. For the six months ended June 30, 1997, sales were $40,230, an
increase of $2,885 or 7.7%, primarily due to higher basic service revenue
resulting from approximately 6,521 additional average monthly subscribers over
the same period in 1996 and the effects of rate increases during the first
quarter of 1997. The Company recognizes that managing customer turnover is an
important factor in maximizing revenues and cash flow. The Company's average
monthly customer turnover rate for the six months ended June 30, 1997 was
approximately 1.5%.
Cost and expenses, excluding depreciation and amortization, are
comprised of direct costs of providing services, primarily cable programming
and franchise costs, salaries and benefits, customer service costs, sales and
marketing costs and general and administrative expenses. For the six months
ended June 30, 1997, costs and expenses, excluding depreciation and
amortization, were $23,251, an increase of $1,416 or 6.5% as compared to the
six months ended June 30, 1996. The increase is primarily due to higher basic
programming costs resulting from higher rates, additional channels and
increased subscribers.
Depreciation and amortization was $15,896 and $15,713 for the
six months ended June 30, 1997 and 1996, respectively.
Interest expense was $6,893 and $7,874 for the six months ended
June 30, 1997 and 1996, respectively. The decrease of $981 or 12.5% is due
primarily to lower average outstanding debt.
The Company's effective income tax rate was (42.2)% for the
six months ended June 30, 1997 and (39.8)% for the six months ended June
30, 1996. The difference is primarily due to the reversal of certain
valuation allowances for net operating loss carryforwards in 1997 based on
the expected utilization of such net operating loss carryforwards.
Year Ended December 31, 1996 Compared With Year Ended December
31, 1995
For the year ended December 31, 1996, operating income before
depreciation and amortization was $32,096 as compared to $25,926 for the year
ended December 31, 1995. Sales increased 25.6% to $76,187 for 1996 from
$60,675 in 1995. For the year ended December 31, 1996, net loss was $(8,256)
as compared to a net loss of $(10,501) for 1995. The improvement in operating
income before depreciation and amortization of $6,170 was substantially offset
by higher depreciation and amortization of $6,273. Lower interest expense of
$794 and a higher minority share of Mercom's losses of $1,337 primarily
account for the decrease in the net loss of $2,245 in 1996 as compared to 1995.
Sales for 1996 were $76,187, an increase of $15,512 or
25.6%, primarily as a result of the consolidation of Mercom for a full year
in 1996 as compared to five months in 1995. Mercom accounts for $9,648 of
the increase in sales over the same period in 1995. On an annualized
basis, Mercom's sales increased approximately $1,600 or 11.7%, of which
approximately $1,000 relates to a rate increase implemented in February
1996 and approximately $500 relates to 1,845 additional average subscribers
per month in 1996 as compared to 1995. The remaining $5,864 increase in
consolidated sales is due primarily to an increase in average subscribers
of Cable Michigan of approximately 7,600 and the effects of rate increases
of approximately 12.1% in April 1995, which affected 1996 results for a
full year, and approximately 5% in February 1996. On an annualized basis,
the rate increases, excluding Mercom, provide additional basic revenues of
approximately $3,700, subject to final decision by the FCC with respect to
these rate increases, of which no assurances can be given. The Company's
average monthly turnover rate for 1996 was approximately 1.6%.
Costs and expenses, excluding depreciation and amortization,
were $44,091 for 1996, an increase of $9,342, or 26.9% as compared to 1995.
The increase is primarily due to the consolidation of the financial results
of Mercom for a full year in 1996 as compared to five months in 1995, as
discussed above. Mercom contributed $6,097 to the increase in costs and
expenses in 1996.
On an annualized basis, Mercom's costs and expenses,
excluding deprecation and amortization, increased approximately $1,200 or
13.5%. Programming, franchise and other variable costs increased
approximately $775. This increase is directly related to costs associated
with subscriber growth, increased programming rates on existing channels
and new basic channels added during the year. Operating, marketing and
other fixed system costs increased by $423. This increase is primarily due
to salaries and benefits, costs associated with maintaining a larger
subscriber base and a concentration on customer service initiatives. The
remaining increase in costs and expenses, excluding depreciation and
amortization, is primarily due to higher programming expense of Cable
Michigan due to license fee increases, subscriber growth and channel
additions.
Depreciation and amortization was $31,427 in 1996, an increase
of $6,273, or 24.9% as compared to 1995. The increase is attributable to the
securing of a majority voting interest in Mercom in August 1995. Mercom's
financial results have been consolidated since that time resulting in an
increase in depreciation and amortization of approximately $5,800 for the
twelve months in 1996 as compared to the five months in 1995.
Interest expense was $15,179 in 1996, a decrease of
approximately $800, or 5% as compared to 1995, due to a combination of lower
average outstanding borrowings and lower average interest rates.
The Company acquired a majority voting interest in Mercom in
August 1995 pursuant to a common stock rights offering. Immediately prior to
the rights offering, the Company had a 43.63% interest in Mercom and accounted
for its investment under the equity method. Following the rights offering,
the Company has a 61.92% interest in Mercom and has consolidated Mercom in its
financial statements since August 1995. As a result, for 1995, minority
interest in the income of Mercom was $(186) while for 1996, minority interest
in the loss of Mercom was $1,151.
The Company's effective income tax rate was (34.7)% in 1995 and
(40.9)% in 1996. For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in Note 5 to the Financial
Statements.
Year Ended December 31, 1995 Compared With Year Ended December
31, 1994
For the year ended December 31, 1995, operating income before
deprecation and amortization was $25,926 as compared to $20,598 for the year
ended December 31, 1994. Sales increased 23.5% to $60,675 for 1995 from
$49,141 in 1994. For the year ended December 31, 1995, net loss was $(10,501)
as compared to a net loss of $(26,226) for 1994. The higher operating income
before depreciation and amortization of $5,328, lower depreciation and
amortization of $3,531 and higher income tax benefits of $5,642 primarily
account for the decrease in the net loss of $15,725 in 1995 as compared to
1994.
Sales increased $11,534 or 23.5% primarily as a result of the
securing of a majority voting interest in Mercom in August 1995, whose
financial results are included in the consolidated results since that time.
The Company previously owned 43.63% of the voting stock of Mercom and
accounted for its investment under the equity method. Mercom accounts for
$5,922 of the increase in sales over the same period in 1994. On an
annualized basis, Mercom's sales increased approximately $1,000, or 7.8%
primarily due to approximately 2,300 average additional basic subscribers per
month, which generated approximately $600 of the increase, and a rate increase
in April, which generated approximately $300 of the increase. The remaining
$5,612 increase in consolidated sales is due primarily to an increase in
average subscribers of Cable Michigan of approximately 10,800 and the effect
of a rate increase of approximately 12.1% in April. The Company's average
monthly turnover rate for 1995 was approximately 1.6%.
Costs and expenses, excluding depreciation and amortization,
were $34,749, an increase of $6,206 or 21.7% in 1995 as compared to 1994. The
increase is primarily due to the consolidation of Mercom since August 1995.
Mercom contributed $3,831 to the increase in costs and expenses in 1995. On
an annualized basis, Mercom's costs and expenses, excluding depreciation and
amortization, increased approximately $900, or 6.5%. Programming, franchise
and other variable costs increased $461. This increase is directly related to
costs associated with subscriber growth, increased programming rates on
existing channels and new basic channels added during 1995. Operating,
marketing, fixed and other general and administrative costs increased $412, or
8.6%, in 1995. The increase is primarily due to salaries and benefits, costs
associated with maintaining a larger subscriber base and a concentration on
customer service initiatives.
The remaining increase in costs and expenses, excluding
depreciation and amortization, is attributable to higher allocated corporate
management fees, higher customer service expense and higher programming
expense of Cable Michigan due to license fee increases, subscriber growth and
channel additions.
Depreciation and amortization for 1995 was $25,154, a decrease
of $3,531 due to the expiration of a noncompete agreement entered into in
connection with the acquisition of the Cable Michigan system, partially offset
by higher depreciation and amortization resulting from the consolidation of
Mercom since August 1995.
The Company's effective income tax rate was (0.2)% in 1994 and
(34.7)% in 1995. For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in Note 5 to the 1996
consolidated financial statements.
Liquidity and Capital Resources
Pursuant to the restructuring, it is anticipated that the
Company will incur approximately $110,000 of newly issued third party debt for
the purpose of repaying a portion of the total amount of outstanding
intercompany notes payable owed to C-TEC Cable Systems, Inc., which is an RCN
business. C-TEC Cable Systems, Inc. will treat the remaining amount of
outstanding intercompany indebtedness of the Company as a capital contribution
to the Company. Also in connection with the restructuring, the Company will
assume approximately $15,000 of C-TEC indebtedness, which indebtedness will be
secured by the 62% interest in Mercom. Following the refinancing of its
intercompany debt with third party debt, the Company expects to have a ratio
of debt to operating income before depreciation and amortization of
approximately 4.3:1.0. The Company expects to be in compliance with all
provisions and covenants of its Credit Agreement following the Distribution.
See "Description of the Credit Agreement." The Company's subsidiary, Mercom,
is a party to the Mercom Loan Agreement, under which loans in a principal
amount of approximately $16 million were outstanding as of June 30, 1997. The
Distribution, if it occurs, will constitute a change of control as defined in
the Mercom Loan Agreement and, if no other action is taken, will be an event
of default. Upon the occurrence of such an event of default, the lender under
the Mercom Loan Agreement could accelerate the principal amount outstanding.
The Company is exploring a number of alternatives, including: (i) amending the
Credit Agreement (defined below) to increase the amount of loans available
thereunder by an amount equal to the principal amount outstanding under Mercom
Loan Agreement balance (which would require the agreement of all the banks),
borrowing such amount under the Credit Agreement and using the proceeds to
purchase the Mercom Loan Agreement; (ii) obtaining a waiver of the event of
default from the lender under the Mercom Loan Agreement and (iii) refinancing
the Mercom Loan Agreement. Management believes that it will be able to
resolve this matter in a satisfactory manner, but there can be no assurances
in that regard.
The Company has generated operating income before depreciation
and amortization of $32,096, $25,926 and $20,598 for the years ended December
31, 1996, 1995 and 1994, respectively. The Company expects to continue
generating positive cash flow which will be reinvested and which the Company
believes will be sufficient to fund its capital requirements and debt service.
The Company estimates that its capital requirements for planned system
upgrades over the three year period through 1999 will be approximately $52.6
million. The Company currently has budgeted capital expenditures in respect
of system upgrades of approximately $12.5 million during 1997, approximately
$22.6 million during 1998 and approximately $17.5 million during 1999. The
Company believes that cash flow generated by operations, cash balances and, if
necessary, borrowings under committed credit facilities available on the date
hereof, will enable the Company to fund its capital expenditure requirements
and to make scheduled payments of principal and interest on indebtedness
through 1999, but there can be no assurances in that regard.
For the first six months of 1997, the Company's net cash
provided by operating activities was $11,082 comprised primarily of a net loss
of $3,253 adjusted by non-cash depreciation and amortization of $15,896, other
non-cash items totaling ($2,225) and working capital changes of ($243). Net
cash used in investing activities of $4,560 consisted primarily of additions
to property, plant and equipment of $4,503. Net cash used in financing
activities of $6,586 consisted of a change in affiliate notes of $5,219 and
redemption of long-term debt of $1,367.
For the year ended December 31, 1996, the Company generated
cash from operating activities of $27,817, comprised principally of a net loss
of $8,256 adjusted for non-cash depreciation and amortization of $31,427,
other non-cash items of $2,099 and working capital changes of $2,393. Net
cash used in investing activities was $9,215, comprised principally of
capital expenditures of $9,605. Net cash used in financing activities was
$18,334, comprised of a decrease in affiliate notes of $16,834 and
principal payments on long-term debt of $1,500.
DESCRIPTION OF THE CREDIT AGREEMENT
This section of the Information Statement describes the terms
and conditions of the Credit Agreement that the Company has in place. The
following description does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the provisions of the
Credit Agreement, which is filed as an exhibit to the Form 10 and is
incorporated herein by reference. Capitalized terms used in this Section and
not otherwise defined herein are used as defined in the Credit Agreement.
The Company has in place two secured credit facilities (the
"Credit Facilities") pursuant to a single credit agreement with a group of
lenders (the "Lenders") for which First Union National Bank acts as agent (the
"Credit Agreement"), which was effective as of July 1, 1997 (the "Closing
Date"). The first is a five-year revolving credit facility in the amount of
$45 million (the "Revolving Credit Facility"). The second is an eight-year
term credit facility in the amount of $100 million (the "Term Credit
Facility"). Borrowings under the Credit Facilities are available for the
following purposes: (i) to refinance all existing indebtedness of the Company
(including intercompany indebtedness owed to C-TEC Cable Systems, Inc.), (ii)
to finance permitted acquisitions, and (iii) for capital expenditures, working
capital and general corporate purposes. Borrowings under the Credit
Facilities are subject to the conditions that there can be no default or event
of default under the Credit Agreement and that the representations and
warranties of the Company contained in the Credit Agreement must be true.
The interest rate on the Credit Facilities will be, at the
election of the Company, based on either a LIBOR or a Base Rate option (each
as defined in the Credit Agreement). In the case of the LIBOR option, the
interest rate will include a spread that varies, based on the Company's
Leverage Ratio (defined as the ratio of Total Debt at the last day of the most
recently ended fiscal quarter to Operating Cash Flow for the four fiscal
quarters then ended, each as defined in the Credit Agreement), from 62.5 basis
points to 137.5 basis points. In the case of the Base Rate option, the
interest rate will include a spread of 12.5 basis points if such ratio exceeds
4.75:1. In the case of the Revolving Credit Facility, a fee of 20 basis
points on the unused revolving commitment will accrue from the Closing Date
and will be payable quarterly in arrears.
The entire amount of the Term Credit Facility has been drawn
and as of August 1, 1997, $100 million of principal was outstanding
thereunder. The entire amount of the Revolving Credit Facility is available
to the Company until June 30, 2002 (subject to the discussion in the last
paragraph of this section). As of August 1, 1997, $10 million of principal
was outstanding thereunder. Revolving loans may be repaid and reborrowed from
time to time.
The term loan must be repaid over six years in quarterly
installments, at the end of September, December, March and June of each year
from September 30, 1999 through June 30, 2005. The aggregate annual
installments payable on the term loan are as follows:
1999 $5,000,000
2000 $11,250,000
2001 $13,750,000
2002 $16,250,000
2003 $20,000,000
2004 $22,500,000
2005 $11,250,000
The Company has the option to repay the term loan in whole or in part at any
time, without penalty, subject to customary "breakage" charges. Any amount of
the term loan that is repaid may not be reborrowed.
The Company is required to apply 100% of the net cash
proceeds realized from certain asset sales, certain payments under
insurance policies and certain incurrences of additional debt to repay the
revolving loans. Any excess amounts of such net cash proceeds not applied
to repay revolving loans are applied to reduce the scheduled installments
of the term loan on a pro rata basis.
All borrowings under the Credit Facilities will be pari passu,
and will be secured under a common collateral package including (i) a first
priority pledge by the Company of 100% of the stock in each other material
subsidiary created after the Closing Date (other than Mercom); and (ii) if a
holding company is ever formed to hold the stock of the Company, a first
priority pledge by such holding company of the stock it owns of the Company.
In addition, the Company is subject to a negative pledge on the assets of the
Company and its subsidiaries and a prohibition on granting other negative
pledges to other parties on the assets of the Company and each of its
subsidiaries. Mercom will not be treated as a subsidiary of the Company until
it is 100% owned by the Company.
The Credit Agreement contains customary covenants for
facilities of this nature, including covenants limiting debt, liens,
investments, consolidations, mergers, acquisitions and sales of assets,
payment of dividends and other distributions and transactions with affiliates.
The Credit Agreement requires the Company and its subsidiaries to maintain the
following financial ratios: (i) the ratio of Total Debt at any fiscal quarter
end to Operating Cash Flow for the trailing four fiscal quarters is not to
exceed 5.0:1 initially, adjusting over time to 4.0:1; (ii) the ratio of
Operating Cash Flow to Interest Expense for any four consecutive fiscal
quarters is not to fall below 2.75:1 for the first 3 years after the Closing
Date, adjusting to 3.00:1 thereafter; and (iii) the ratio of Operating Cash
Flow (minus certain capital expenditures, cash taxes and cash dividends) to
Fixed Charges (defined as scheduled principal payments and interest expense)
for any four consecutive quarters is not to fall below 1.05:1 for periods
ending on or after December 31, 1997.
The Credit Agreement also includes customary events of default.
Upon the occurrence of any event of default the lenders may accelerate the
outstanding loans and cancel any unborrowed commitment. These events of
default include payment and covenant defaults (subject in certain cases to a
grace period), misrepresentations, cross default to certain other debt,
bankruptcy, ERISA and judgment defaults and a change of control default. For
this purpose, "change of control" is defined to mean any time after the
Distribution Date that (A) Peter Kiewit Sons, Inc. ("PKS") shall cease to
hold, either directly or indirectly through one or more PKS entities, (1)
shares of the Company constituting at least thirty percent (30%) of the number
of outstanding common shares or at least thirty percent (30%) of the voting
power represented by the outstanding voting shares of the Company (in each
case, outstanding shares excluding shares issued after the Distribution Date
(i) for cash, (ii) in consideration for the acquisition of any investment or
property or the provision of services, (iii) upon the exercise of any warrant,
option, convertible security or similar instrument issued, after such date for
consideration described in clauses (i) and (ii) or (iv) in connection with an
employee stock option plan and similar benefit arrangement adopted after the
Distribution Date by the Company or any of its wholly owned subsidiaries), or
(B) any person (other than PKS or a PKS entity) or group of persons shall have
acquired in one or more series of transactions beneficial ownership of more
than fifty-one percent (51%) of the outstanding common stock or of the voting
power represented by the outstanding voting shares of the Company.
It is contemplated that prior to the Distribution Date the
Company will assume all obligations of C-TEC under a $15 million credit
facility extended by a separate group of lenders for which First Union
National Bank also acts as agent (the "$15 Million Facility"). The $15
Million Facility matures in a single installment on June 30, 1999 and is
secured by a first priority pledge of all shares of Mercom owned by C-TEC. As
described elsewhere in this Information Statement, C-TEC proposes to
contribute those shares to the Company prior to the Distribution Date, subject
to the lien securing the $15 Million Facility. Prior to the time that the $15
Million Facility has been repaid (including periods prior to it being assumed
by the Company), $15 million of the Revolving Credit Facility (or such lesser
amount as is outstanding under the $15 Million Facility) is not available to
be borrowed by the Company (the "Restricted Commitment"). If after the $15
Million Facility is assumed by the Company it is not paid when due, or an
other event of default thereunder occurs, the Company must borrow the
Restricted Commitment (and the lenders are obligated to make such a revolving
loan regardless of whether any default under the Credit Facilities exists) and
apply the proceeds to repay the $15 Million Facility. Upon being assumed by
the Company, the $15 Million Facility will have interest rate provisions,
covenants and events of default substantially the same as those in the Credit
Agreement.
BUSINESS
Overview
Cable Michigan is a cable television operator in the State of
Michigan which, as of June 30, 1997, served approximately 210,000
subscribers. These figures include the approximately 42,000 subscribers served
by Mercom, a 62% owned subsidiary of the Company. Except where the context
indicates otherwise, the terms the "Company" and "Cable Michigan" mean the
Company and its subsidiaries, including Mercom.
Clustered primarily around the Michigan communities of Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom), the Company's systems serve
a total of approximately 400 municipalities in attractive suburban markets and
small towns. The Company has generated strong growth in new homes passed and
basic subscriber levels. From 1992 to 1996, compounded annual growth in basic
subscribers was 4.4%; during the same period, basic penetration rose from
58.4% to 60.6%. Growth in homes passed has primarily been the result of new
home construction and plant extensions.
The following table summarizes the development of the Company's
operations since December 31, 1992:
<TABLE>
<CAPTION>
As of December 31, As of June 30,
------------------------------------------------------------ ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Passed:
Wholly Owned Systems..... 226,384 235,188 244,622 250,747 261,441 254,495 266,135
Mercom Systems........... 59,988 61,730 63,721 65,449 65,998 65,479 66,617
Total................. 286,372 296,918 308,343 316,196 327,439 319,974 332,752
Basic Subscribers:
Wholly Owned Systems(1).. 133,017 135,420 141,785 152,921 158,310 162,195 168,231
Mercom Systems(1)........ 34,118 34,714 37,324 38,853 40,012 40,876 41,919
Total................. 167,135 170,134 179,109 191,774 198,322 203,071 210,150
Basic Penetration:
Wholly Owned Systems..... 58.8% 57.6% 58.0% 61.0% 60.6% 63.7% 63.2%
Mercom Systems .......... 56.9% 56.2% 58.6% 59.4% 60.6% 62.4% 62.9%
All Systems........... 58.4% 57.3% 58.1% 60.7% 60.6% 63.5% 63.2%
Average Monthly Revenue
per Subscriber for Last
Month of the Period:(2)
Wholly Owned Systems..... $29.66 $29.64 $27.06 $31.59 $32.20 $32.11 $33.83
Mercom Systems........... $30.05 $29.70 $29.36 $30.41 $32.72 $31.93 $34.14
All Systems........... $29.74 $29.65 $27.53 $31.36 $32.30 $32.07 $33.89
<FN>
- ---------------
(1) Systems include seasonal communities which experience increased subscriber
levels during the second and third quarters.
(2) The revenue per subscriber calculation includes premium revenue for each
period.
</TABLE>
Cable Michigan plans to emphasize high technical standards and
seeks to incorporate, when cost effective, technological advances that
enhance product quality and service. In particular, the Company plans to
upgrade the technical quality of its cable plant and to increase system
capacity for the delivery of additional programming and new services. The
Company has already deployed 538 miles of fiber optic cable as of June 30,
1997 and reduced the number of headends in its systems as part of its
commitment to improved service quality and platform development for new
technologies. The Company's strategic plan calls for a capital expenditure
program intended to result in over 90% of the Company's customers being served
by systems with a capacity of 550 MHz or 750 MHz by the end of 2001. The
Company's wholly owned systems are currently built to 300 - 450 MHz, with the
majority of the systems having a capacity of 300 - 330 MHz. These systems
include 53 headends, with two of these headends serving approximately 63,500
subscribers. The Mercom systems in Michigan include 5 headends and are built
to 400 - 450 MHz.
The Company derives the majority of its revenues from recurring
subscription services and generates additional revenues from non-subscription
services such as advertising, pay-per-view, installations and commissions from
electronic retailing. Monthly subscription rates and related charges vary
according to the type of service or equipment selected.
The Company's systems include the Mercom systems, which as of
June 30, 1997 served approximately 40,100 subscribers in Michigan and
approximately 1,900 subscribers in a planned development community in Port St.
Lucie, Florida. In July 1997 Mercom sold its Port St. Lucie, Florida system
to Adelphia Communications Corporation for $3,650,000 in cash. As the 62%
owner of Mercom, the Company accounts for all Mercom subscribers as Cable
Michigan subscribers. The Company and Mercom have entered into a Management
Agreement pursuant to which the Company has been retained to operate and
manage the cable television systems of Mercom. In May 1997, C-TEC proposed to
acquire the remaining 38% interest in Mercom held by the public in exchange
for 8.75% of the Company's common stock. Mercom's Board of Directors formed a
special committee composed of directors unaffiliated with the Company to
evaluate the proposal, but discussions have been suspended pending completion
of the Distribution. After the Distribution is completed, the Company will
reevaluate the previous proposal and determine whether to resume discussions
with the special committee.
Cable Television Industry Overview
Cable television provides a wide variety of channels of
television programming, consisting primarily of video entertainment, sports
and news, as well as informational services, locally originated programming
and digital audio programming, to the homes of subscribers who pay a monthly
fee for the service. Television and radio signals are received by means of
off-air antennas, microwave relay systems and satellite earth stations and
then distributed, along with locally originated programs and ancillary
services, to subscribers' homes over networks of coaxial and fiber-optic
cables.
Cable television systems generally offer subscribers various
levels or "tiers" of cable services consisting of broadcast television signals
available off-air in any locality, television signals from so-called
"superstations" originating in distant cities such as WTBS from Atlanta and
WGN from Chicago, various satellite-delivered, non-broadcast channels (such as
ESPN, Inc. ("ESPN"), Cable News Network ("CNN"), the USA Network, and MTV:
Music Television ("MTV")), displays of information featuring news, weather and
stock market reports and programming originating locally in the systems (such
as public, educational and governmental access channels). Cable systems also
generally provide premium services to subscribers for an extra monthly charge.
These premium services include, for example, Home Box Office[Registered],
Cinemax[Registered], Showtime[Registered], The Movie Channel[Trademark] and
Encore[Registered], which generally offer, without commercial interruption,
feature motion pictures, live and taped sporting events, concerts and other
special features. A cable system may also offer pay-per-view services, which
permit a subscriber to order, for a separate fee, individual feature motion
pictures and special event programs.
Monthly service fees constitute the major source of revenue for
cable television systems. A subscriber to a cable television system generally
pays an initial connection charge and a fixed monthly fee for the cable
programming services received. The amount of the monthly service fee varies
from one area to another, and historically has been a function, in part, of
the number of channels and services included in the service package and the
cost of such services to the cable television system operator. Rates are
generally subject to regulation under the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Act"). See "Legislation and Regulation."
Cable television operators have been able to generate other
sources of revenue. In most instances, a separate monthly fee for each
premium service and certain other specific programming is charged to
subscribers, with discounts generally available to subscribers receiving
multiple premium services. Operators have been able to generate additional
revenue through the sale of commercial spots and channel space to advertisers.
As with other forms of advertising, the cable television operator receives a
fee from the advertisers that is based on the programming service on which the
advertisements appear, the volume of advertising and the time of the day at
which it is broadcast. Advertising, as well as fees generated by home
shopping and pay-per-view, represent additional sources of revenue for cable
television systems. These services are not regulated under the 1992 Act.
Cable television operators have been taking steps to expand
their service offerings in order to generate additional revenue. These new
services include Internet and other data services. These new services require
high capacity networks, and as a result, many cable operators have been
upgrading their facilities in anticipation of offering these services.
Cable television systems are generally constructed and operated
under non-exclusive franchises granted by state or local governmental
authorities. Franchises typically contain many conditions, such as time
limitations on commencement or completion of construction; conditions of
service, including number of channels and provision of free services to
schools and other public institutions; and the maintenance of insurance and
indemnity bonds. Cable franchises are subject to the Cable Communications
Policy Act of 1984 (the "1984 Act"), the 1992 Act (together with the 1984 Act,
the "Cable Acts") and the Telecommunications Act of 1996 (the "1996 Act"), as
well as FCC, state and local regulations. See "Legislation and Regulation."
Franchises typically provide for periodic payment of fees to
franchising authorities which are negotiated in each franchise agreement.
These fees cannot exceed 5% of gross revenues and may be passed on to
subscribers. Franchises are generally not exclusive and are generally not
transferable without the consent of the governmental authority. Although
franchises are often renewed for companies that have provided adequate service
and have complied generally with franchise terms, in the future, renewals may
be more difficult as a result of the 1992 Act and may include less favorable
terms and conditions. Furthermore, governmental authorities may choose to
award additional franchises to competing companies at any time. See
"--Competition," "-- Franchises" and "Legislation and Regulation." In
addition, under the 1996 Act, certain providers of programming services may be
exempt from local franchising requirements.
Company Strategy
The Company intends to maintain and enhance the value of its
current cable television systems through upgrading their networks as
appropriate given the characteristics of the particular service area. The
Company also intends to institute new services as they are developed and
become economically viable. At this stage, the Company's highest priority is
to increase system capacity and improve system reliability and picture
quality. Such network improvements are necessary to enable the Company to
better withstand potential competition, expand channel lineups (which would
permit the Company to increase revenue) and facilitate new services when
economically viable. The Company's strategic plan calls for a capital
expenditure program intended to result in over 90% of the Company's customers
being served by systems with a capacity of 550 MHz or 750 MHz by the end of
2001. The Company's wholly owned systems are currently built to 300 - 450
MHz, with the majority of the systems having a capacity of 300 - 330 MHz, and
include 53 headends, with two of these headends serving approximately 63,500
subscribers. The Mercom systems in Michigan include 5 headends and are built
to 400 - 450 MHz.
The Company intends to evaluate and, if appropriate, pursue
potential acquisitions of cable television systems that are contiguous, or
otherwise in reasonable geographic proximity, to the Company's existing
systems. Increasing the size of the Company's clusters will enable the
Company to obtain operating efficiencies and may position the Company to
capitalize on new revenue and business opportunities as the telecommunications
industry evolves. Given the number of relatively small independently owned
systems located near the Company's systems, the Company believes that there
may be a number of attractive acquisition opportunities.
Capital expenditures for system extensions and upgrades, the
development of new services and the acquisition of additional cable television
systems are subject to the availability of cash generated from operations and
debt or equity financing. The capital resources needed to accomplish these
strategies are expected to be provided by cash flow from operations, the
Credit Agreement and, in the case of acquisitions, borrowings from other
sources. There can be no assurance that the capital resources necessary to
accomplish the Company's plans will be available on terms and conditions
acceptable to the Company, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, the
Company may consider using equity as consideration for acquisitions in
appropriate cases.
The Clusters
The Company's Michigan systems are clustered in four main
areas: Grand Rapids, Traverse City, Lapeer and Monroe (Mercom). A brief
description of these clusters as of June 30, 1997 is set forth below.
<TABLE>
<CAPTION>
Grand Rapids Traverse City Lapeer Monroe
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Subscribers (approximate)......... 71,000 81,000 16,000 40,100
Penetration Rate.................. 61.3% 65.3% 61.5% 62.9%
Bandwidth Range................... 300-450MHz 300-450MHz 300-450MHz 400-450MHz
Aerial Miles...................... 1,687 1,962 467 1,130
Underground Miles................. 930 946 184 201
Total Miles....................... 2,617 2,908 651 1,331
Total Fiber Miles................. 69 462 0 7
Headends.......................... 20 28 5 5
</TABLE>
Mercom
The Company's systems include the Mercom systems, which as of
June 30, 1997 served approximately 40,100 subscribers in Michigan and
approximately 1,900 subscribers in a planned development community in Port St.
Lucie, Florida. In July 1997 Mercom sold its Port St. Lucie, Florida system
to Adelphia Communications Corporation for $3,650,000 in cash. C-TEC acquired
an interest in Mercom in 1990 and C-TEC Cable Systems was subsequently hired
to manage the Mercom systems by Mercom's Board of Directors on January 1,
1992. In August 1995, C-TEC increased its ownership interest in Mercom to
approximately 62%. In May 1997, C-TEC proposed to acquire the 38% minority
stockholders' interest in Mercom in exchange for 8.75% of the common stock of
the Company, with the result that Mercom would become a wholly owned
subsidiary of the Company. Mercom's Board of Directors formed a special
committee composed of directors unaffiliated with the Company to evaluate the
proposal, but discussions have been suspended pending completion of the
Distribution. After the Distribution is completed, the Company will reevaluate
the previous proposal and determine whether to resume discussions with the
special committee.
The Company has entered into a Management Agreement with Mercom
dated January 1, 1997. Under the terms of the agreement, Mercom pays a
management fee equal to the greater of $500,000 or an amount equal to a certain
percentage of Mercom's annual revenue. The fee schedule ranges from 5% of
revenue up to $10 million to 4% of revenue over $20 million. In addition to
the basic fee, the Company is also entitled to an annual incentive fee based
on increases in Mercom's operating cash flow. Based on Mercom's financial
performance in Michigan from July 1, 1996 through June 30, 1997, the total
management fee payable to the Company under the Management Agreement would
have been approximately $1,119,000. The term of the Management Agreement is
three years. The Management Agreement was approved by a committee of Mercom's
Board of Directors composed of directors unaffiliated with the Company.
Service Offerings
The Company offers a variety of basic and pay cable
programming packages. Since 1993, the Company has divided its service into
three levels: Limited Basic Service, Expanded Basic Service and the Family
Value Package.
The first level of service is referred to as Limited Basic. It
consists primarily of off-air broadcast networks, access channels and the home
shopping networks. Expanded Basic Service includes Limited Basic Service plus
certain channels regulated by the FCC as "Cable Programming Service" or "CPS"
tier channels. These include ESPN, USA Network, MTV, Lifetime and other
traditional cable channels.
The Family Value Package was created through the conversion of
some of its traditional cable channels such as CNN and Discovery and the
launch of new channels such as ESPN 2 and fX to form a new a la carte level.
Networks offered through the Family Value Package may be purchased
individually or as a group at a reduced rate.
Like many cable operators in the United States, over the last
four years the Company has modified its existing programming services,
equipment and rates in an effort to comply with changing FCC regulations. See
"Legislation and Regulation."
Monthly service rates include fees for Limited Basic Service,
Expanded Basic Service, the Family Value Package, and premium services. At
June 30, 1997, monthly residential subscriber rates were as follows: Limited
Basic Service rates ranged from $8.50 to $17.00; Expanded Basic Service rates
ranged from $6.70 to $13.75; Family Value Package rates ranged from $2.15 to
$7.69; and premium service rates ranged from $4.95 to $12.95 per service. In
addition, the Company earns revenues from pay-per-view programs and
advertising fees. Pay-per-view programs, which usually are either unique
sporting events or recently released movies, are available on many of the
Company's cable television systems. Subscribers are permitted to choose
individual movies for a set fee of $3.95 per movie and individual special
events for a set fee ranging from $5.95 to $49.95 or higher per event.
Related charges may include a nonrecurring installation fee that ranges from
$20.00 to $38.00; however, from time to time the Company has followed the
common industry practice of reducing the installation fee during promotional
periods. Commercial subscribers such as hotels, motels and hospitals are
charged a nonrecurring connection fee that usually covers the cost of
installation. Except under the terms of certain contracts with commercial
subscribers and residential apartment and condominium complexes, subscribers
are free to discontinue the service at any time without penalty, and most
terminations occur because a subscriber moves to another home or to another
city. For the year ended December 31, 1996, of the total subscriber fees
received by the Company's systems, Limited Basic Service, Expanded Basic
Service and Family Value Package fees accounted for approximately 75% of total
revenues, premium service fees accounted for approximately 10% of total
revenues, pay-per-view fees were approximately 2% of total revenues,
advertising fees were approximately 2% of total revenues and the remaining 11%
of total revenues came from equipment rentals, installation fees, home
shopping, franchise fees and program guide charges.
Programming and Suppliers
The Company has entered into an arrangement pursuant to which
RCN will obtain third party programming for the Company's systems. RCN
generally purchases this programming at prices that are better than the
Company would be able to obtain independently. Programming purchasers such as
RCN generally pay a monthly fee per subscriber per channel. Under the
arrangement between the Company and RCN, the Company reimburses RCN for the
third party costs incurred by RCN to obtain such programming. The arrangement
is terminable by the Company upon 60 days notice and by RCN upon 1 year
advance notice.
Programming costs increase in the ordinary course of the
Company's business as a result of increases in the number of subscribers,
expansion of the number of channels provided to customers and contractual rate
increases from programming suppliers. The Company anticipates that
programming costs will increase, exceeding current levels, particularly for
sports programming. If the programming supply arrangement with RCN were
terminated, the Company's programming costs could increase significantly.
A wide range of national manufacturers are the primary sources
of supplies, equipment and materials utilized in the construction and upgrade
of the Company's cable television systems. The Company anticipates that its
programming and construction, rebuild and upgrade costs will be significant in
future periods. The amount of such costs will depend on numerous factors,
many of which are beyond the Company's control.
Advertising Revenues
Advertising accounts for 2% of the Company's revenues.
Advertising sales are handled primarily by Cable Time, an independent turnkey
ad sales contractor. Cable Time provides sales, billing, collection and
production services. It remits an agreed portion of its collected revenues to
the Company. In addition, the Company operates its own classified advertising
channel selling real estate and other products and services offered locally.
The Company's net advertising revenue for 1996 was $0.42 per subscriber per
month after compensation to Cable Time.
Marketing and Sales
The Company utilizes a variety of means to market premium and
basic service offerings. Marketing and sales have included door-to-door
sales, direct mail, telemarketing, incentive programs and print and broadcast
advertising. In addition to marketing efforts to attract new subscribers, the
Company conducts periodic campaigns to encourage customers to purchase
additional services.
Customer Service and Billing
The Company places a great deal of importance on customer
service. The Company has entered into an arrangement with RCN pursuant to
which RCN will handle calls by most Cable Michigan customers at RCN's 24-hour
centralized customer service facility in Dallas, Pennsylvania and administer
the customer billing function for the Company's subscribers. The Dallas
facility communicates with Cable Michigan's subscribers, field technicians and
field offices. Features include multiple 800 telephone numbers that allow a
customer service representative ("CSR") to identify the caller's location, an
automatic call distribution system to the next available CSR, Cable Data
computers with billing cycles, a centralized radio dispatch office to provide
two-way communication with the field technician's vehicles and alpha-numeric
pagers. Although the RCN facility handles the Company's customer service
calls and communications, the Company directly operates and manages its own
customer service field offices, technicians and vehicles. The Dallas facility
also maintains rate tables and subscriber base information that is provided to
CableData, which prepares and mails the customer bills for Cable Michigan.
The customer service and billing administration arrangement is terminable by
Cable Michigan on 60 days notice and by RCN on one year notice. Mercom
administers its own customer service function, primarily out of its office in
Monroe.
Franchises
The cable television systems owned or managed by the Company
are constructed and operated under fixed-term franchises or other types of
operating authorities (referred to collectively herein as "franchises") that
are generally non-exclusive and are granted by local governmental
authorities. These franchises typically contain many conditions, such as
time limitations on commencement and completion of construction, conditions
of service, including the number of channels, the provision of free service
to schools and certain other public institutions, and the maintenance of
insurance and indemnity bonds. The provisions of these local franchises
are subject to federal regulation.
The Company holds approximately 400 franchises. These
franchises provide for the payment of fees to the issuing authorities and
generally range from 3% to 5% of revenues. The 1984 Act prohibits franchising
authorities from imposing annual franchise fees in excess of 5% of gross
revenues and also permits the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by
changed circumstances.
The duration of the Company's outstanding franchises expire at
various points in time through the year 2019. The Company's ability to
provide cable television service is dependent to a large extent on its ability
to obtain and renew its franchises on acceptable terms. Virtually all of the
Company's cable franchises have been renewed or extended, generally at or
prior to their stated expirations and on acceptable terms. During 1996, the
Company completed negotiations with 42 communities resulting in franchise
renewals on terms which are acceptable to it. Some of the issues involved in
recent renewal negotiations include customer service standards, access
facilities and equipment, cable plant upgrade or replacement and shorter terms
of franchise agreements. Approximately 86 of the Company's franchises are
due for renewal within the next three years. No one franchise accounts for
more than 3% of the Company's total revenue.
Services Provided by RCN
Pursuant to the Distribution Agreement, RCN has agreed to
provide, or cause to be provided, the Company with certain management,
administrative and other services, including: (i) customer service, (ii)
marketing, (iii) accounting, (iv) payroll, (v) management supervision, (vi)
cash management, (vii) human resources services and benefit plan
administration, (viii) insurance administration, (ix) legal, (x) tax, (xi)
internal audit, (xii) programming administration, (xiii) billing, (xiv)
monthly cable guides, (xv) investor and public relations, (xvi) provision of
third party programming and (xvii) other miscellaneous administrative
services. See "- Customer Service and Billing" and "--Programming and
Suppliers."
Subject to certain limitations, the total fee for services
listed in items (ii)-(xii), (xv) and (xvii) will be 4.0% of revenues per
year plus a direct allocation of certain consolidated cable administration
functions. The fee for customer service listed in item (i) along with the
billing service listed in item (xiii) will be a pro rata share (based on
subscribers) of the expenses incurred by RCN to provide such services for
RCN and the Company. The third party expense incurred by RCN to obtain
third party programming and monthly cable guides for the Company will be
reimbursed to RCN by the Company and no additional fee will be charged with
respect thereto.
These services are to commence on the Distribution Date and
may be terminated upon 60 days notice by either RCN or the Company, except
that the services listed as items (i), (xii), (xiii) and (xvi) above may
not be terminated by RCN on less than one year advance notice to the
Company.
Competition
Cable television systems face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment such as off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. The extent to which a cable television
system is competitive depends, in part, upon the cable system's ability to
provide, at a reasonable price to consumers, a greater variety of
programming and other services than are available off-air or through other
alternative delivery sources and upon superior technical performance and
customer service. See "Legislation and Regulation."
The FCC and Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
systems. These technologies include, among others, DBS service whereby
signals are transmitted by satellite to receiving facilities located on
customer premises. The availability of reasonably-priced HSDs enables
individual households to receive many of the satellite-delivered program
services formerly available only to cable subscribers. Furthermore, the
1992 Act contains provisions, which the FCC has implemented with
regulations, to enhance the ability of cable competitors to purchase and
make available to HSD owners certain satellite-delivered cable programming
at competitive costs. The 1996 Act and FCC regulations implementing that
law preempt certain local restrictions on the use of HSDs and roof-top
antennae to receive satellite programming and over-the-air broadcasting
services. See "Legislation and Regulation."
Programming is currently available to the owners of HSDs
through conventional, medium and high-powered satellites. DirecTv, Inc.,
which includes AT&T Corp. ("AT&T") as an investor, began offering
nationwide high-power direct broadcast satellite ("DBS") service in 1994
accompanied by extensive marketing efforts. PRIMESTAR Partners, L.P.
("Primestar"), a consortium comprised of cable operators, currently
provides digital satellite service including broadcast signals and pay-per-
view service. The Primestar partners recently announced an agreement to
consolidate their DBS assets into a new publicly traded company.
Primestar's services may compete with the services offered by the Company.
Several other major companies, including EchoStar Communications
Corporation ("EchoStar") and American Sky Broadcasting ("ASkyB"), a joint
venture between MCI Telecommunications Corporation ("MCI") and The News
Corporation Limited ("News Corp."), have begun offering or are currently
developing high-power DBS service. EchoStar has already commenced its
domestic DBS service and offers approximately 120 channels of video
programming. Recently announced plans for News Corp. to purchase an
interest in EchoStar are currently the subject of litigation between News
Corp. and EchoStar. Primestar, News Corp., MCI and ASkyB recently
announced several agreements in which News Corp., MCI and ASkyB will sell
to Primestar two satellites under construction and MCI will assign to
Primestar an FCC DBS license. The satellites to be sold to Primestar, when
operational, are expected to be capable of providing approximately 200
channels of DBS service in the US. See "Business--Competition."
DBS systems are expected to use video compression technology to
increase the channel capacity of their systems to provide movies, broadcast
stations and other program services comparable to those of cable systems.
Digital satellite service ("DSS") offered by DBS systems currently has certain
advantages over cable systems with respect to programming capacity and digital
quality, as well as certain current disadvantages that include high up-front
customer equipment costs and a lack of local programming, local customer
service and equipment distribution. While DSS presents a competitive threat
to cable, the Company has implemented a program to increase its channel
capacity in many of its systems by upgrading its networks. These upgrades
will enable the Company to introduce new premium channels, pay-per-view
programming, interactive computer-based services and may enable these systems
to deliver digital video along with other communications services. These
upgrades, when combined with superior customer service and technical support,
will enhance the Company's ability to compete.
The 1996 Act makes it easier for LECs and others to provide a
wide variety of video services competitive with services provided by cable
systems and to provide cable services directly to subscribers. See
"Legislation and Regulation." Various LECs currently are providing video
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire
facilities and the use of wireless transmission facilities. Cable systems
could be placed at a competitive disadvantage if the delivery of video
services by LECs becomes widespread since LECs are not required, under certain
circumstances, to obtain local franchises to deliver such video services or to
comply with the variety of obligations imposed upon cable systems under such
franchises. See "Legislation and Regulation." Issues of cross-subsidization
by LECs of video and telephony services also pose strategic disadvantages for
cable operators seeking to compete with LECs which provide video services.
Ameritech has obtained cable television franchises in eastern Michigan and has
overbuilt some cable operators thereby creating a competitive environment. To
date, Ameritech has not applied for cable franchises where the Company
operates. The Company cannot predict the likelihood of success of video
service ventures by LECs or the impact on the Company of such competitive
ventures.
Cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis. The 1992 Act prohibits
franchising authorities from unreasonably denying requests for additional
franchises and permits franchising authorities to operate cable systems. See
"Legislation and Regulation." Well-financed businesses from outside the cable
industry (such as the public utilities that own certain of the poles on which
cable is attached) may become competitors for franchises or providers of
competing services. Certain municipal power companies have been exploring
building new video networks to compete with the Company within the areas where
such companies deliver power. See "Legislation and Regulation." Competition
from other cable television operators exists in some areas served by the
Company. Approximately 2% of homes passed by the Company's wholly owned
system have been overbuilt (4% for Mercom). The Company believes that its
systems are less likely to be overbuilt than those of many other operators
because of their location in more rural and less populated areas.
Cable operators face additional competition from private SMATV
systems that serve condominiums, apartment and office complexes and private
residential developments. The 1996 Act broadens the definition of SMATV systems
not subject to regulation as a franchised cable communications service. SMATV
systems offer both improved reception of local television stations and many of
the same satellite-delivered programming services offered by franchised cable
communications systems. SMATV operators often enter into exclusive agreements
with building owners or homeowners' associations, although some states have
enacted laws to provide franchised cable systems access to such private
complexes, and the 1984 Act gives a franchised cable operator the right to use
existing compatible easements within its franchise area under certain
circumstances. These laws have been challenged in the courts with varying
results. In addition, some companies are developing and/or offering packages
of telephony, data and video services to these private residential and
commercial developments. The ability of the Company to compete for subscribers
in residential and commercial developments served by SMATV operators is
uncertain.
Cable television systems also compete with wireless program
distribution services such as MMDS which use low-power microwave
frequencies to transmit video programming over-the-air to subscribers.
There are MMDS operators who are authorized to provide or are providing
broadcast and satellite programming to subscribers in areas served by the
Company's cable systems. Additionally, the FCC recently adopted new
regulations allocating frequencies in the 28-GHz band for a new
multichannel wireless video service similar to MMDS. The Company is unable
to predict whether wireless video services will have a material impact on
its operations.
Other new technologies, including Internet-based services, may
become competitive with services that cable television systems can offer. The
1996 Act directed the FCC to establish, and the FCC has adopted, regulations
and policies for the issuance of licenses for digital television ("DTV") to
incumbent television broadcast licensees. DTV is expected to deliver high
definition television pictures, multiple digital-quality program streams, as
well as CD-quality audio programming and advanced digital services, such as
data transfer or subscription video. The FCC also has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and non-commercial
FM stations to use their subcarrier frequencies to provide non-broadcast
services including data transmissions. The FCC established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. LECs and other common carriers also provide facilities for the
transmission and distribution to homes and businesses of interactive
computer-based services, including the Internet, as well as data and other
non-video services. The FCC has conducted spectrum auctions for licenses to
provide personal communications services ("PCS"). PCS will enable license
holders, including cable operators, to provide voice and data services.
Advances in communications technology as well as changes in
the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, it is not possible to predict the effect that
ongoing or future developments might have on the cable television industry
or on the operations of the Company.
Property
The principal physical assets of a cable television system
consist of a central receiving apparatus, distribution equipment, cables,
converters, electronics, vehicles, origination equipment and local business
offices. The Company owns or leases the receiving and distribution equipment
of each system and owns or leases parcels of real property for the receiving
sites and local business offices. The physical components of cable television
systems require maintenance and periodic upgrading and rebuilding to keep pace
with technological advances. The Company's management believes that
substantially all of its physical assets are in good operating condition.
Employees
As of June 30, 1997 the Company had a total of approximately
229 employees. The Company believes that its relationships with its employees
are good.
Legal Proceedings
On May 13, 1997, Mercom shareholder Moise Katz filed a
purported class action suit on behalf of Mercom's public shareholders against
Mercom and C-TEC, among others. Plaintiff alleges that the proposal to
exchange the approximately 38% of Mercom common stock that is publicly held
for 8.75% of the common stock of the Company undervalues Mercom's shares and
is therefore unlawful. This lawsuit has been dormant since the Company
announced that the discussions on the exchange transactions have been
suspended.
The Company is not party to any litigation which, in the
opinion of the Company's management, will have a material adverse effect on
the Company's financial position, results of operations or liquidity.
LEGISLATION AND REGULATION
The Cable Communications Policy Act of 1984 (the "1984 Act"),
the Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Act") and the Telecommunications Act of 1996 (the "1996 Act") amended the
Communications Act of 1934 (as amended, the "Communications Act") and
established a national policy to guide the development and regulation of cable
systems. Principal responsibility for implementing the policies of the
Communications Act relating to cable television is allocated between the FCC
and state agencies or local franchising authorities. The following is a
summary of federal laws and regulations materially affecting the growth and
operation of the cable television industry and a description of certain state
and local laws.
The 1992 Act authorized rate regulation for cable television
services and equipment in communities that are not subject to "effective
competition," as defined by federal law. Basic cable service and equipment is
subject to regulation by local franchising authorities that choose to become
certified by the FCC to regulate rates. Such local regulation occurs with
oversight by the FCC, which has prescribed detailed criteria for the
regulation of basic services. The 1992 Act also requires the FCC to resolve
complaints about rates for cable programming services tiers ("CPST") (other
than programming offered on a per channel or per program basis, which is not
subject to rate regulation) and to reduce any such rates found to be
unreasonable. The 1996 Act provides for rate deregulation of CPSTs by March
1999.
The 1996 Act deregulates rates for CPSTs in March 1999 for
large Multiple System Operators ("MSOs") and immediately for certain small
operators. The 1996 Act also modifies the uniform rate provisions of the 1992
Act by prohibiting regulation of non-predatory, bulk discount rates offered to
subscribers in commercial residential developments and permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level. The 1996 Act
eliminates the right of individual subscribers to file rate complaints with
the FCC concerning CPSTs and permits franchising authorities to file CPST rate
complaints with the FCC only after having received multiple subscriber
complaints. The FCC is required to issue a final order within 90 days after
receipt of a CPST rate complaint filed by any franchising authority.
FCC regulations, which became effective in September 1993,
govern rates that may be charged to subscribers for basic cable service and
certain CPSTs (together, the "Regulated Services"). The FCC uses a benchmark
methodology as the principal method of regulating rates for Regulated
Services. Cable operators are also permitted to justify rates using various
cost-of-service methodologies. In 1994, the FCC's benchmark regulations
required operators to implement rate reductions for Regulated Services of up
to 17% of the rates for such services in effect on September 30, 1992,
adjusted for inflation and changes in programming costs, equipment costs and
certain operating costs. The FCC has also adopted comprehensive and
restrictive regulations allowing operators to modify their regulated rates on a
quarterly or annual basis using various methodologies that account for changes
in the number of regulated channels, inflation and increases in certain
external costs, such as franchise and other governmental fees, copyright and
retransmission consent fees, taxes, programming costs and the cost of
franchise-related obligations. The Company cannot predict whether the FCC will
modify these "going forward" regulations in the future.
Franchising authorities are empowered to regulate the rates
charged for additional outlets and for the installation, lease and sale of
equipment used by subscribers to receive the basic cable service tier, such as
converter boxes and remote control units. The FCC's rules require franchising
authorities to regulate these rates on the basis of actual cost plus a
reasonable profit, as defined by the FCC. Cable operators required to reduce
rates may also be required to refund overcharges with interest.
Under the FCC's standard cost of service analysis, a cable
operator can demonstrate that existing rates for Regulated Services are
reasonable using the FCC's cost-of-service rate regulations which require,
among other things, the exclusion from the rate base of 34% of system
acquisition costs related to intangible and tangible assets used to provide
Regulated Services. The FCC's cost-of-service regulations contain a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an
operator's allowable rate base, but the FCC has initiated a further rule
making in which it proposes to use an operator's actual debt cost and capital
structure to determine an operator's cost of capital or rate of return.
There are currently CPST rate complaints pending against rates
in numerous communities served by the Company in Michigan. In addition, in
many of the communities where the Company provides cable service, local
franchising authorities have become certified to regulate rates for basic
service.
The FCC has issued decisions requiring rate reductions for
certain of the CPSTs of the Company, based on, among other things, the finding
that the Company does not qualify for small system rate relief under the 1996
Act. The FCC staff issued a ruling that the Company does not qualify as a
"small system operator" because all affiliated companies served more than
400,000 subscribers (due to C-TEC's investment in Mexican cable systems). The
Company has challenged those decisions on the basis that it should qualify as
"small cable operators" under the 1996 Act and the FCC's rules, or, in the
alternative, that its rates are justified under the FCC's standard price
caps/going forward methodology in any event.
"Anti-Buy Through" Provisions
The 1992 Act requires cable systems to permit subscribers to
purchase video programming offered by the operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service,
other than the basic cable service tier, unless technological limitations
prevent the system from doing so. There is a statutory exemption for cable
systems that do not have the technological capability to offer programming in
the manner required by the statute. This exemption is available until a system
obtains such capability, but not later than December 2002. The FCC may waive
such time periods. The Company expects that its systems will be in compliance
with this requirement by the December 2002 deadline.
Must Carry/Retransmission Consent
The 1992 Act contains broadcast signal carriage requirements
that allow local commercial television broadcast stations to elect once every
three years to require a cable system to carry the station ("must-carry"),
subject to certain exceptions, or to withhold consent and negotiate the terms
of carriage ("retransmission consent"). A cable system generally is required
to devote up to one-third of its activated channel capacity for the carriage
of local commercial television stations whether pursuant to the mandatory
carriage or retransmission consent requirements of the 1992 Act. Local
non-commercial television stations are also given mandatory carriage rights;
however, such stations are not given the option to negotiate retransmission
consent for the carriage of their signals by cable systems. Additionally, cable
systems are required to obtain retransmission consent for all "distant"
commercial television stations (except for certain commercial
satellite-delivered independent "superstations"), commercial radio stations
and low-power television stations carried by such systems. In March 1997, the
U.S. Supreme Court affirmed a three-judge district court decision upholding
the constitutional validity of the 1992 Act's mandatory signal carriage
requirements.
The FCC recently issued rules establishing standards for DTV.
Among other provisions, the FCC's rules require television stations to
simulcast their NTSC and DTV signals for a period of years. During this
simulcast period, it is unclear whether must-carry rules will apply to DTV
signals.
The FCC will conduct a rule making in the future to consider
the requirements, if any, for mandatory carriage of DTV signals. The Company
cannot predict the ultimate outcome of such a rule making or the impact of new
carriage requirements on the Company or its business.
Access Channels
The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental ("PEG") access programming. The 1984 Act also requires a
cable system with 36 or more channels to designate a portion of its channel
capacity for commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator. The FCC has
adopted rules regulating: (i) the maximum reasonable rate a cable operator may
charge for commercial use of the designated channel capacity; (ii) the terms
and conditions for commercial use of such channels; and (iii) the procedures
for the expedited resolution of disputes concerning rates or commercial use of
the designated channel capacity. The U.S. Supreme Court recently held parts of
the 1992 Act regulating "indecent" programming on PEG access channels to be
unconstitutional, but upheld the statutory right of cable operators to
prohibit or limit the provision of "indecent" programming on commercial leased
access channels.
Franchise Procedures
The 1984 Act affirms the right of franchising authorities
(state or local, depending on the practice in individual states) to award one
or more franchises within their jurisdictions and prohibits non-grandfathered
cable systems from operating without a franchise in such jurisdictions. The
1992 Act encourages competition with existing cable systems by (i) allowing
municipalities to operate their own cable systems without franchises; (ii)
preventing franchising authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing
cable system's service area; and (iii) prohibiting (with limited exceptions)
the common ownership of cable systems and co-located MMDS or SMATV systems. In
January, 1995, the FCC relaxed its restrictions on ownership of SMATV systems
to permit a cable operator to acquire SMATV systems in the operator's existing
franchise area so long as the programming services provided through the SMATV
system are offered according to the terms and conditions of the cable
operator's local franchise agreement. The 1996 Act provides that the
cable/SMATV and cable/MMDS cross-ownership rules do not apply in any franchise
area where the operator faces "effective competition" as defined by federal
law.
The Communications Act also provides that in granting or
renewing franchises, local authorities may establish requirements for
cable-related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications Act
limits the payment of franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to obtain modification of franchise
requirements by the franchise authority or judicial action if warranted by
changed circumstances. The Company's franchises typically provide for periodic
payment of fees to franchising authorities of 3% to 5% of "revenues" (as
defined by each franchise agreement), which fees may be passed on to
subscribers. The 1996 Act generally prohibits franchising authorities from (i)
imposing requirements in the cable franchising process that require, prohibit
or restrict the provision of telecommunications services by an operator, (ii)
imposing franchise fees on revenues derived by the operator from providing
telecommunications services over its cable system, or (iii) restricting an
operator's use of any type of subscriber equipment or transmission technology.
The Communications Act contains renewal procedures designed to
protect incumbent franchisees against arbitrary denials of renewal.
Franchising authorities may seek to impose new and more onerous requirements,
such as significant upgrades in facilities and services or increased franchise
fees, as a condition of renewal. Similarly, if a franchising authority's
consent is required for the purchase or sale of a cable system or franchise,
the franchising authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The Company believes that it has generally met the terms of its
franchises and has provided quality levels of service. As such, the Company
anticipates that its future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities
have the legal right to limit franchise awards to a single cable operator and
to impose certain substantive franchise requirements (e.g., access channels,
universal service and other technical requirements). These decisions have been
somewhat inconsistent and, until the U.S. Supreme Court rules definitively on
the scope of cable operators' First Amendment protections, the legality of the
franchising process generally and of various specific franchise requirements
is likely to be in a state of flux.
Ownership Limitations
Pursuant to the 1992 Act, the FCC adopted rules prescribing
national subscriber limits and limits on the number of channels that can be
occupied on a cable system by a video programmer in which the operator has an
attributable interest. The effectiveness of these FCC horizontal ownership
limits has been stayed because a federal district court found the statutory
limitation to be unconstitutional. An appeal of that decision has been
consolidated with appeals challenging the FCC's regulatory ownership
restrictions and is pending. The 1996 Act eliminates the statutory prohibition
on the common ownership, operation or control of a cable system and a
television broadcast station in the same service area and directs the FCC to
review its broadcast/cable ownership restrictions to determine if they are
necessary in the public interest. Pursuant to the mandate of the 1996 Act, the
FCC eliminated its regulatory restriction on cross-ownership of cable systems
and national broadcasting networks.
LEC Ownership of Cable Systems
The 1996 Act makes far-reaching changes in the regulation of
LECs that provide cable services. The 1996 Act eliminates the requirement that
LECs obtain FCC approval under Section 214 of the Communications Act before
providing video services in their telephone service areas and removes the
statutory telephone company/cable television cross-ownership prohibition,
thereby allowing LECs to offer video services in their telephone service
areas. LECs may provide service as traditional, franchised cable operators or
they may opt to provide their programming over unfranchised "open video
systems," subject to certain conditions, including, but not limited to,
setting aside up to two-thirds of their channel capacity for use by
unaffiliated program distributors. The 1996 Act also prohibits a LEC from
acquiring an existing cable system in its telephone service area except in
limited circumstances. The 1996 Act removes barriers to entry into the
local telephone exchange market by preempting state and local laws that
restrict competition and by requiring all LECs to provide nondiscriminatory
access and interconnection to potential competitors, such as cable
operators, wireless telecommunications providers and long distance
companies.
The FCC adopted regulations implementing the 1996 Act
requirement that LECs open their telephone networks to competition by
providing competitors interconnection, access to unbundled network elements
and retail services at wholesale rates. Numerous parties have appealed these
regulations. The appeals have been consolidated and will be reviewed by the
U.S. Court of Appeals for the Eighth Circuit, which has stayed the FCC's
pricing and nondiscrimination regulations. The ultimate outcome of these rule
makings, and the ultimate impact of the 1996 Act or any final regulations
adopted pursuant to the new law on the Company or its businesses cannot be
determined at this time.
Pole Attachment
The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services. The FCC concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of service
provided over the equipment attached to the utility's pole. The 1996 Act and
the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain
providers of telecommunications services to rely upon the protections of the
current law and by requiring that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility. Additionally, within two years of
enactment of the 1996 Act, the FCC is required to adopt new regulations to
govern the charges for pole attachments used by companies providing
telecommunications services, including cable operators. These new pole
attachment rate regulations will become effective five years after enactment
of the 1996 Act, and any increase in attachment rates resulting from the FCC's
new regulations will be phased in equal annual increments over a period of
five years beginning on the effective date of the new FCC regulations. The
ultimate outcome of these rulemakings and the ultimate impact of any revised
FCC rate formula or of any new pole attachment rate regulations on the Company
or its businesses cannot be determined at this time.
Other Statutory Provisions
The 1992 Act, the 1996 Act and FCC regulations preclude any
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to its subscribers, from favoring
an affiliated company over competitors and require such programmers to sell
their programming to other multichannel video distributors. These provisions
limit the ability of program suppliers affiliated with cable companies or with
common carriers providing satellite delivered video programming directly to
their subscribers to offer exclusive programming arrangements to their
affiliates. The 1992 Act requires operators to block fully both the video and
audio portion of sexually explicit or indecent programming on channels that
are primarily dedicated to sexually oriented programming or alternatively to
carry such programming only at "safe harbor" time, periods currently defined
by the FCC as the hours between 10 p.m. and 6 a.m. Several adult-oriented
cable programmers have challenged the constitutionality of this statutory
provision, but the U.S. Supreme Court recently refused to overturn a lower
court's denial of a preliminary injunction motion seeking to enjoin the
enforcement of this law. The FCC's regulations implementing this statutory
provision are now in effect. The 1996 Act also contains provisions regulating
the content of video programming and computer services. Specifically, the new
law prohibits the use of computer services to transmit "indecent" material to
minors. The U.S. Supreme Court has ruled that the provisions relating to the
regulation of indecent material are unconstitutional. In accordance with the
1996 Act, the television industry recently adopted a voluntary ratings system
for violent and indecent video programming. The 1996 Act also requires all new
television sets to contain a so-called "V-chip" capable of blocking all
programs with a given rating. The Communications Act also includes provisions,
among others, concerning horizontal and vertical ownership of cable systems,
customer service, subscriber privacy, marketing practices, equal employment
opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
The 1996 Act modifies the existing statutory provisions
governing cable system technical standards, equipment compatibility,
subscriber notice requirements and program access, permits certain operators
to include losses incurred prior to September 1992 in setting regulated rates
and repeals the three-year anti-trafficking prohibition adopted in the 1992
Act. FCC regulations implementing the 1996 Act preempt certain local
restrictions on satellite and over-the-air antenna reception of video
programming services, including zoning, land-use or building regulations, or
any private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user.
Other FCC Regulations
The FCC has numerous rule making proceedings pending that will
implement various provisions of the 1996 Act; it also has adopted regulations
implementing various provisions of the 1992 Act and the 1996 Act that are the
subject of petitions requesting reconsideration of various aspects of its rule
making proceedings. In addition to the FCC regulations noted above, there are
other FCC regulations covering such areas as equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration
of cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, sponsorship identification,
antenna structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast children's
programming, consumer protection and customer service, ownership of home
wiring, indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and closed captioning. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
Other bills and administrative proposals pertaining to cable
television have previously been introduced in Congress or considered by other
governmental bodies over the past several years. It is probable that there
will be legislative proposals in the future by Congress and other governmental
bodies relating to the regulation of communications services.
Copyright
Cable television systems are subject to federal compulsory
copyright licensing covering the retransmission of television and radio
broadcast signals. In exchange for filing certain reports and contributing a
percentage of their basic revenues to a federal copyright royalty pool, cable
operators can obtain blanket licenses to retransmit the copyrighted material
on broadcast signals. The nature and amount of future payments for broadcast
signal carriage cannot be predicted at this time. The possible simplification,
modification or elimination of the compulsory copyright license is the subject
of continuing legislative review. The elimination or substantial modification
of the cable compulsory license could adversely affect the Company's ability
to obtain suitable programming and could substantially increase the cost of
programming available for distribution to the Company's subscribers. The
Company cannot predict the outcome of this legislative activity.
Cable operators distribute programming and advertising that use
music controlled by the two major music performing rights organizations, ASCAP
and BMI. In October 1989, the special rate court of the U.S. District Court
for the Southern District of New York imposed interim rates on the cable
industry's use of ASCAP-controlled music. The same federal district court
recently established a special rate court for BMI. BMI and cable industry
representatives recently concluded negotiations for a standard licensing
agreement covering the performance of BMI music contained in advertising and
other information inserted by operators into cable programming and on certain
local access and origination channels carried on cable systems. ASCAP and
cable industry representatives have met to discuss the development of a
standard licensing agreement covering ASCAP-controlled music in local
origination and access channels and pay-per-view programming. Although the
Company cannot predict the ultimate outcome of these industry negotiations or
the amount of any license fees it may be required to pay for past and future
use of ASCAP-controlled music, it does not believe such license fees will be
significant to the Company's financial position, results of operations or
liquidity.
State and Local Regulation
Because a cable television system uses local streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. Cable television systems
generally are operated pursuant to non-exclusive franchises, permits or
licenses granted by a municipality or other state or local government entity.
Franchises generally are granted for fixed terms and in many cases are
terminable if the franchisee fails to comply with material provisions. The
terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
service rates, franchise fees, franchise term, system construction and
maintenance obligations, system channel capacity, design and technical
performance, customer service standards, franchise renewal, sale or transfer
of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. A number of states subject cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Attempts in
other states to regulate cable television systems are continuing and can be
expected to increase. At this time, the state of Michigan does not regulate
rates on behalf of its municipalities. State and local franchising
jurisdiction is not unlimited, however, and must be exercised consistently
with federal law. The 1992 Act immunizes franchising authorities from monetary
damage awards arising from regulation of cable systems or decisions made on
franchise grants, renewals, transfers and amendments.
The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
cable industry. Other existing federal regulations, copyright licensing, and,
in many jurisdictions, state and local franchise requirements, are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or the Company can be predicted at
this time.
MANAGEMENT
Structure of the Company's Board of Directors
The Company will amend its Articles of Incorporation prior to
the Distribution to provide for a classified board of directors. The Company
Board will be divided into three classes of directors and will consist of 8
directors. The term of office of Class I Directors will expire at the 1998
annual meeting, the term of office of Class II Directors will expire at the
1999 annual meeting and the term of office of Class III Directors will expire
at the 2000 annual meeting. At each annual meeting of stockholders held after
the Distribution, a class of directors will be elected for a three year term
to replace the class whose term has then expired. See "Certain Statutory,
Charter and Bylaw Provisions."
The Company Board will establish an executive committee which
will, among other things, have all the powers of the Company Board in the
management of the business and affairs of the Company at all times when the
Company Board is not in session.
The Company Board will establish a compensation committee which
will make recommendations to the Company Board on matters related to employee
compensation and plans concerning the orderly succession of officers and key
management personnel.
The Company Board will also establish an audit committee which
will, among other things, consider the overall scope and approach of the
annual audit and recommendations from the audit performed by the independent
accountants; recommend the appointment of the independent accountants;
consider significant accounting methods adopted or proposed to be adopted; and
consider procedures for internal controls.
Executive Officers and Directors
The following table sets forth certain information as of May 1,
1997, concerning the directors and executive officers of Cable Michigan who
will be serving in office as of the Distribution Date:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- -------- ---------------------------------------------------------
<S> <C> <C>
David C. McCourt 40 Director (Class III) Chairman and Chief Executive Officer
Mark Haverkate 42 Director (Class II) President and Chief Operating Officer
John J. Gdovin 39 Executive Vice President of Operations
Timothy J. Stoklosa 36 Director (Class III) Executive Vice President, Chief Financial
Officer
Bruce C. Godfrey 41 Director (Class I)
Raymond B. Ostroski 42 Director (Class I)
David C. Mitchell 55 Director (Class II)
Daniel Knowles 67 Director (Class I)
Frank Henry 63 Director (Class III)
</TABLE>
David C. McCourt is the Chairman and Chief Executive Officer of
the Company. Mr. McCourt will also serve as Chairman and Chief Executive
Officer of RCN as of the Distribution. In addition, he will remain Chairman
and Chief Executive Officer of C-TEC, a position he has held since October
1993. Mr. McCourt has also been President and Chief Executive Officer, as
well as a director, of Kiewit Telecom. He has also been Chairman and Chief
Executive Officer of Mercom since October 1993, President and a director of
Metropolitan Fiber Systems/McCourt, Inc., a subsidiary of MFS Telecom, Inc.,
since 1988, a director of Cable Satellite Public Affairs Network ("C-SPAN")
since June 1995, and a director of Worldcom, Inc. since December 1996.
Mark Haverkate will be the President and Chief Operating
Officer and a director of the Company as of the Distribution. Mr. Haverkate
will also serve as Executive Vice President of Business Development of RCN as
of the Distribution. He has also been the President of RCN Development since
June 1997 and the Executive Vice President of Business Development at C-TEC
since May 1997. Previously, he was President for Business Operations at RCN
Telecom Services, Inc. from November 1996 to June 1997, Executive Vice
President of RCN Telecom Services, Inc. from August 1996 to November 1996,
Executive Vice President of C-TEC's Cable Television Group from July 1995 to
August 1996, Executive Vice President of Development for C-TEC from February
1995 to July 1995, Executive Vice President for Development at Mercom from
November 1995 to February 1996, Vice President of Development for C-TEC
from December 1993 to February 1995, Vice President of Development at
Mercom from December 1993 to February 1995, Vice President of C-TEC's Cable
Television Group from October 1989 to December 1993, Director of
Acquisitions and Development for C-TEC from July 1988 to October 1989 and
Corporate Marketing Manager for the Cable Television Group from May 1981 to
July 1988.
John J. Gdovin will be Executive Vice President of Operations
of the Company as of the Distribution. Mr. Gdovin has also been Executive
Vice President of C-TEC's Cable Television Group since August 1996, Senior
Vice President of RCN Telecom Services, Inc. since February 1997 and Executive
Vice President of Mercom since August 1996. Mr. Gdovin will continue in these
positions after the Distribution. Previously, Mr. Gdovin was Vice President
of C-TEC's Cable Television Group from August 1995 to August 1996, Director of
Operations of C-TEC's Cable Television Group from February 1992 to August 1995
and Director of Marketing and Business Administration of C-TEC's Cable
Television Group from May 1991 to February 1992.
Timothy J. Stoklosa will be the Executive Vice President and
Chief Financial Officer and a director of the Company as of the Distribution.
Mr. Stoklosa has also been Senior Vice President of Finance of C-TEC since
February 1997, Treasurer of C-TEC since August 1994 and Vice President and
Treasurer of Mercom since October 1996. Mr. Stoklosa will continue in these
positions after the Distribution. Previously, Mr. Stoklosa was Vice President
of Finance of C-TEC from May 1995 to February 1997, Manager of Mergers and
Acquisitions at PKS from October 1991 to August 1994 and Senior Financial
Analyst of Corporate Development at Citizens Utilities Co. from February 1990
to October 1991.
Bruce C. Godfrey will be a director of the Company as of the
Distribution. Mr. Godfrey will also be Executive Vice President and Chief
Financial Officer and a director of RCN as of the Distribution, as well as
continue in his current positions at C-TEC. Mr. Godfrey has been a director
of C-TEC since November 1996 and has been Executive Vice President and Chief
Financial Officer of C-TEC since April 1994. Mr Godfrey has also been
Executive Vice President and Chief Financial Officer of Mercom since April
1994 and a Director of Mercom since May 1994. Mr. Godfrey was also Senior
Vice President and Principal of Daniels and Associates from January 1984-April
1994.
Raymond B. Ostroski will be a director of the Company as of the
Distribution. Mr. Ostroski has been Executive Vice President and General
Counsel of C-TEC since February 1995, Corporate Secretary of C-TEC since
October 1989, a director of Mercom since May 1994 and Executive Vice President
and General Counsel of Mercom since February 1995. Mr. Ostroski will continue
in these positions after the Distribution. Mr. Ostroski was also Vice
President and General Counsel of C-TEC from December 1990 to February 1995,
Vice President and General Counsel of Mercom from December 1991 to February
1995, Corporate Secretary of Mercom from December 1991 to December 1994,
Corporate Counsel of C-TEC from August 1988 to December 1990, Assistant
Corporate Secretary of C-TEC from April 1986 to October 1989 and Associate
Counsel of C-TEC from August 1985 to August 1988.
David C. Mitchell will be a director of the Company as of the
Distribution. Mr. Mitchell will also remain a director of C-TEC, a position
he has held since 1993. Mr. Mitchell served as President of Rochester
Telephone Corporation's Telephone Group as well as Corporate Executive Vice
President and Director of Rochester Telephone Corporation, now Frontier
Corporation. Since 1963, Mr. Mitchell held various positions throughout that
company, encompassing virtually all disciplines of the company.
Daniel E. Knowles will be a director of the Company as of the
Distribution. Mr. Knowles will remain a director of C-TEC, a position he has
held since 1995. Mr. Knowles has been Personnel Consultant of Cambridge Human
Resources since 1989. He served as President of Personnel and Administration,
Grumman Corporation, from 1963 to 1989.
Frank M. Henry will be a director of the Company as of the
Distribution. Mr. Henry will remain a director of C-TEC, a position he has
held since 1980. Mr. Henry has been Chairman, Frank Martz Coach Company, from
1964 to 1995. He has also been President, Gold Line, Inc., since 1975 and is
a member of the Board of Directors of First Union Corporation.
Executive Compensation
The executive officers who will be providing executive officer
services to Cable Michigan after the Distribution (collectively, the "Named
Executive Officers") are:
David C. McCourt, Chairman and Chief Executive Officer
Mark Haverkate, President and Chief Operating Officer
Timothy J. Stoklosa, Chief Financial Officer
John J. Gdovin, Executive Vice President of Operations
The Named Executive Officers will be compensated by RCN, and
will not receive any compensation from Cable Michigan other than pursuant to
stock options, as noted below.
Option Grants, Stock Related Plans. No stock options were
granted by C-TEC during the fiscal ending December 31, 1996, to any Named
Executive Officer. In addition to the adjusted C-TEC options described below,
the Company anticipates that, in connection with the Distribution, the Company
will adopt one or more compensation or stock purchase plans relating to Cable
Michigan Common Stock, consistent with the Company's total employee benefit
program, and that additional stock options relating to Cable Michigan Common
Stock may be granted in the future to certain executive officers and key
employees. See "Cable Michigan Stock Plans".
The following table sets forth the fiscal year-end value of
unexercised options covering C-TEC Common Stock held by each Named Executive
Officer.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End C-TEC Option Values(1)
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-Money
December 31, 1996(2) Options at December 31, 1996(2)(3)
--------------------------------------- --------------------------------------
Exercisable (#) Unexercisable (#) Exercisable($) Unexercisable($)
--------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
David C. McCourt......... 150,000 350,000 $331,250 $887,500
Mark Haverkate........... 17,000 43,000 4,813 19,250
Timothy J. Stoklosa...... 5,000 10,000 7,688 13,250
John J. Gdovin........... 4,000 6,000 7,000 10,500
<FN>
- --------------
(1) No C-TEC stock options were exercised by the Chief Executive Officer or
any Named Executive Officer during the fiscal year ended December 31, 1996.
(2) Denominated in shares of C-TEC Common Stock.
(3) The fair market value of C-TEC Common Stock at December 31, 1996 was
$24.25 per share.
</TABLE>
Effect of Distribution on Equity-Related Benefits
In connection with the Distribution, each C-TEC option held by
the Named Executive Officers and all other holders of such options, will be
adjusted so that following the Distribution each such executive officer and
other holder will hold options to purchase shares of C-TEC Common Stock, RCN
Common Stock and Cable Michigan Common Stock, respectively. The number of
shares subject to, and the exercise price of, such options will be adjusted to
take into account the Distribution and to ensure that the aggregate intrinsic
value of the resulting RCN, Cable Michigan and C-TEC options immediately after
the Distribution is equal to the aggregate intrinsic value of the C-TEC options
immediately prior to the Distribution. Shares of restricted C-TEC Common
Stock awarded under the C-TEC Executive Stock Purchase Plan ("ESPP") and share
units awarded under the ESPP that relate to C-TEC Common Stock will be
adjusted so that following the Distribution, each such participant will be
credited with an aggregate equivalent value of restricted shares of Common
Stock of C-TEC, RCN and the Company. See Note (4) to "Security Ownership of
Certain Beneficial Owners and Management."
Pension Benefits
C-TEC completed a comprehensive study of its employee benefit
plans in 1996. As a result of this study, effective after December 31, 1996,
in general, employees other than those of the C-TEC Group no longer accrue
benefits under the C-TEC defined benefit pension plan, but became fully vested
in their benefit accrued through that date. Such benefits, for the Chief
Executive Officer and the Named Executive Officers affected by this event,
computed as the present value at July 31, 1997 (the expected payout date) of a
life annuity beginning at age 65, are as follows: Mr. McCourt, $11,679; Mr.
Haverkate, $41,894; Mr. Stoklosa, $4,093 and Mr. Gdovin, $27,397.
Directors' Compensation
Non-employee Directors of the Company will receive an annual
retainer of $6,000 and will be paid $500 for each board meeting attended. The
Committee Chairmen and other committee members will be paid $1,000 and $500,
respectively, for each committee meeting attended. The Company anticipates
that it will adopt a stock option plan covering non-employee Directors of the
Company pursuant to which non-employee Directors may receive automatic grants
of stock options in lieu of or in addition to their normal director
compensation. The formula for the amount and timing of such stock options
will be established by the Company Board after the Distribution, in its
discretion.
Compensation Committee Interlocks and Insider Participation
The Company does not currently have a Compensation Committee.
Prior to the Distribution, compensation was determined by the C-TEC Board of
Directors. Following the Distribution, the Company expects to establish a
Compensation Committee, all the members of which will be non-employee
directors.
Cable Michigan Stock Plans
In connection with and prior to the Distribution, the Company
Board intends to adopt the Cable Michigan, Inc. 1997 Equity Incentive Plan
(the "1997 Plan"), designed to provide equity based compensation opportunities
to key employees when shareholders of the Company have received a
corresponding benefit through appreciation in the value of Cable Michigan
Common Stock. The following is a summary of the 1997 Plan.
The 1997 Plan contemplates the issuance of incentive stock
options within the meaning of Section 422 of the Code, as well as stock
options that are not designated as incentive stock options, performance-based
stock options, stock appreciation rights, performance share units, restricted
stock, phantom stock units and other stock-based awards (collectively,
"Awards"). Up to 300,000 shares of Common Stock may be issued pursuant to
Awards granted under the 1997 Plan. The 1997 Plan also provides that no
individual may be granted Awards representing more than 50,000 shares of Cable
Michigan Common Stock in any one year.
All employees and outside consultants to the Company and any of
its subsidiaries and all Directors of the Company who are not also employees
of the Company ("Eligible Persons") are eligible to receive discretionary
Awards under the 1997 Plan. The approximate number of Eligible Persons is 30.
The 1997 Plan may be administered by the Company Board, the
Compensation Committee of the Company Board or such other committee as the
Company Board may appoint to administer the 1997 Plan (as the case may be, the
"Committee"). Each member of the Committee must at all times be both a
"non-employee director" within the meaning of Rule 16b-3 of the Exchange Act
and an "outside director" within the meaning of Section 162(m) of the Code.
The Committee, in its sole discretion, has the authority, among other things,
to determine which Eligible Persons will receive Awards, the terms of Awards,
including any purchase or exercise price for Awards, the time or times at
which Awards will be granted, become exercisable and be forfeited, and the
number of shares covered by an Award. The Committee has exclusive authority
to interpret the 1997 Plan and to make all other determinations deemed
advisable for the administration of the 1997 Plan.
Unless earlier terminated by the Company Board, the 1997 Plan
will expire on the 10th anniversary of the Distribution. The Company Board or
the Committee may, at any time, or from time to time, amend or suspend and,
if suspended, reinstate, the 1997 Plan in whole or in part.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of Company Common Stock are, and
will be prior to the Distribution, held beneficially and of record by C-TEC.
Set forth in the table below is information as of September 2, 1997 (or as of
the dates specified in the explanatory footnote in the case of one of the
five-percent stockholders) with respect to the number of shares of C-TEC
Common Stock and C-TEC Class B Common Stock beneficially owned by (i) each
person or entity known by the Company to own more than five percent of the
outstanding C-TEC Common Stock or of the outstanding C-TEC Class B Common
Stock, (ii) each director of the Company, (iii) each of the Named Executive
Officers of the Company and (iv) all directors and officers of the Company as
a group. Also set forth below are the number of shares of Company Common
Stock that each such person or entity would own immediately after the
Distribution on a pro forma basis. To the Company's knowledge, unless
otherwise indicated, each person or entity has sole voting and investment
power with respect to the shares set forth opposite the person's or entity's
name.
<TABLE>
<CAPTION>
COMPANY COMMON
C-TEC CLASS B STOCK
C-TEC COMMON STOCK(1) COMMON STOCK PRO FORMA
--------------------------- -------------------------- --------------------------
Number of Number of Number of
Shares Percent of Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding Beneficially Outstanding
Name of Beneficial Owner Owned Shares(2) Owned Shares Owned Shares(3)
- ----------------------------------------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Directors and Named Executive Officers
Bruce C. Godfrey......................... 19,736 (4) * 0 0 4,934 *
Mark Haverkate........................... 23,168 (4) * 400 * 5,892 *
David C. McCourt......................... 44,676 (4)(5) * 6,000 * 12,669 *
Timothy J. Stoklosa...................... 428 (4) * 0 0 107 *
John J. Gdovin........................... 8,772 (4) * 0 0 2,193 *
Raymond B. Ostroski...................... 8,249 (4) * 1,000 * 2,312 *
David C. Mitchell........................ 2,726 * 0 0 681 *
Daniel Knowles........................... 937 * 0 0 234 *
Frank Henry.............................. 41,466 * 23,097 * 16,140 *
All Directors and Executive Officers as a
Group (9 persons) (4)(5) 150,158 * 30,497 * 45,162 *
5% Stockholders
Kiewit Telecom Holdings, Inc. (6)........ 11,226,262 48.4% 2,094,223 48.6% 3,330,121 48.5%
Mario J. Gabelli Group (7)............... 1,576,037 6.8% 681,195 15.8% 564,308 8.2%
<FN>
- --------------
* Less than 1% of outstanding shares.
(1) The C-TEC Class B Common Stock is convertible at the option of the
holder into shares of C-TEC Common Stock on a one-for-one basis at any
time and from time to time. The C-TEC Common Stock column has been
prepared assuming that no shares of C-TEC Class B Common Stock are
converted into C-TEC Common Stock.
(2) Includes forfeitable Matching Shares, but excludes Share Units.
(3) Includes shares of Company Common Stock acquired in respect of Matching
Shares, but excludes Cable Michigan Share Units.
(4) Under the ESPP, participating executive officers who forgo current
compensation are credited with C-TEC "Share Units", the value of which
is based on the value of a share of C-TEC Common Stock. ESPP
participants who elect to receive Share Units in lieu of current
compensation are also credited with restricted Matching Shares, which
vest over a period of 3 years from the grant date, subject to continued
employment. Matching Shares, unless forfeited, have voting and
dividend rights. In connection with the Distribution, Share Units and
Matching Shares will be adjusted in an equitable manner so that all
participants will be credited with an aggregate equivalent value of
restricted shares of the common stock of C-TEC, RCN and the Company.
The table below shows in respect of each executive officer the number
of shares of C-TEC Common Stock and C-TEC Class B Common Stock
purchased outright, Share Units relating to C-TEC Common Stock acquired
by each such executive officer in lieu of current compensation, and the
forfeitable Matching Shares of C-TEC Common Stock held by each such
executive officer:
</TABLE>
<TABLE>
<CAPTION>
Share Units Total Shares
Acquired Under the Purchased and
ESPP in Lieu of Total Shares Acquired and
Shares Purchased Current Purchased and Restricted Restricted
Outright Compensation Acquired Matching Shares Marketing Shares
---------------- ------------------ ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Bruce C. Godfrey... 5,756 6,990 12,746 6,990 19,736
Mark Haverkate..... 14,914 4,127 19,041 4,127 23,168
David C. McCourt... 8,636 18,020 26,656 18,020 44,676
John J. Gdovin..... 2,708 2,120 4,828 2,120 6,948
<FN>
(5) Includes 225 shares of C-TEC Common Stock which are owned by Mr. McCourt's
wife. Mr. McCourt disclaims beneficial ownership of such Shares.
(6) KDG owns 90% of the common stock and all of the preferred stock of Kiewit
Telecom. David C. McCourt, Chairman and Chief Executive Officer of C-TEC
and the Company, owns the remaining 10% of the common stock of Kiewit
Telecom. KDG is a wholly owned subsidiary of PKS. The address for Kiewit
Telecom, KDG and PKS is 1000 Kiewit Plaza, Omaha, Nebraska 18131.
(7) Based on information obtained from Schedule 13Ds and amendments
thereto for the C-TEC Common Stock and the C-TEC Class B Stock filed
through August 8, 1997, with the Securities and Exchange Commission
(the "SEC") by Mario J. Gabelli, together with GAMCO Investors, Inc.,
Gabelli Funds, Inc., Gabelli Performance Partnership, L.P., Gabelli
International Limited, Gabelli International II Limited and Gabelli &
Company, Inc., each of whose address is One Corporate Center, Rye, New
York 10580-1434. </TABLE>
Mercom
Set forth below is certain information regarding the beneficial
ownership of Common Stock of Mercom, a subsidiary of the Company, as of
September 2, 1997, by each director, the named executive officers and by
all persons, as a group, who will be directors or executive officers of the
Company as of the Distribution. Each director or executive officer has
sole investment and voting power over the shares listed opposite his name
except as set forth in the footnotes hereto:
<TABLE>
<CAPTION>
Number of
Shares
Beneficially Percent
Name of Beneficial Owner Owned of Class
------------------------ ------------ --------
<S> <C> <C> <C>
Bruce C. Godfrey.................................................. -- --
Mark Haverkate.................................................... 1,000 *
David C. McCourt.................................................. 50,000 (1) *
Timothy J. Stoklosa............................................... -- --
John J. Gdovin.................................................... --
Raymond B. Ostroski............................................... 4,000 *
David C. Mitchell................................................. -- --
Daniel Knowles.................................................... -- --
Frank Henry....................................................... -- --
All Directors and Executive Officers as a Group (9 persons)....... 55,000 (1) *
<FN>
- ---------------
* Less than 1% of the outstanding of the class.
(1) Includes 50,000 shares which are owned by Mr. McCourt's wife. Mr. McCourt
disclaims beneficial ownership of such shares.
</TABLE>
Peter Kiewit Sons' Inc.
Set forth below is certain information regarding the beneficial
ownership of equity securities of PKS as of September 2, 1997, by each
director, the executive officers and by all persons, as a group, who will
be directors or executive officers of the Company as of the Distribution,
of Class B Construction & Mining Group Nonvoting Restricted Redeemable
Convertible Exchangeable Common Stock (none of which is owned by
management), Class C Construction and Mining Group Restricted Redeemable
Convertible Exchangeable Common Stock ("Class C"), and Class D Diversified
Group Convertible Exchangeable Common Stock ("Class D").
<TABLE>
<CAPTION>
Number of Percent of Number of Percent of
Class C Class C Class D Class D
Name of Beneficial Owner Shares Shares Shares Shares
------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Bruce C. Godfrey..................................... -- -- -- --
Mark Haverkate....................................... -- --
David C. McCourt..................................... -- -- 1,500 *
Timothy J. Stoklosa.................................. -- -- 431 *
John J. Gdovin....................................... -- -- -- --
Raymond B. Ostroski.................................. -- -- -- --
David C. Mitchell.................................... -- -- -- --
Daniel Knowles....................................... -- -- -- --
Frank Henry.......................................... -- -- -- --
All Directors and Executive Officers as a Group
(9 persons)......................................... -- -- 1,931 *
<FN>
- ---------------
* Less than 1% of the outstanding of the class.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the
Company is based upon the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and its Amended and
Restated Bylaws (the "Bylaws") which are to be in effect as of the
Distribution, and by applicable provisions of law. The following
description is qualified in its entirety by reference to such Articles of
Incorporation and Bylaws, which are filed as exhibits to the Form 10.
The Company's Articles of Incorporation authorizes the
issuance of 25 million shares of Company Common Stock, par value $1.00 per
share, 50 million shares of Class B Non-Voting Common Stock, par value
$1.00 per share (the "Class B Stock" and, together with the Company Common
Stock, the "Company Common Equity") and 10 million shares of Preferred
Stock, par value $1.00 per share (the "Company Preferred Stock").
Company Common Stock
Subject to the rights of the holders of any Company
Preferred Stock which may be outstanding, each holder of Company Common
Stock on the applicable record date is entitled to receive such dividends
as may be declared by the Company Board out of funds legally available
therefor, and, in the event of liquidation, to share pro rata in any
distribution of the Company's assets after payment or providing for the
payment of liabilities and the liquidation preference of any outstanding
Company Preferred Stock. Each holder of Company Common Stock is entitled
to one vote for each share held of record on the applicable record date on
all matters presented to a vote of stockholders, including the election of
directors. Holders of Company Common Stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities and there are no conversion rights or redemption or sinking fund
provisions with respect to such stock. Based on the number of shares of C-
TEC Common Equity outstanding on September 5, 1997 and the distribution
ratio of one share of Company Common Stock for every four shares of C-TEC
Common Equity, it is anticipated that there will be approximately 6,871,157
shares of Company Common Stock outstanding upon consummation of the
Distribution.
The shares of the Company Common Stock distributed in the
Distribution will be fully paid and nonassessable. The Company's Articles
of Incorporation contains no restrictions on the alienability of the
Company Common Stock. For further information on the securities laws
restrictions, if any, on transferability of the Company Common Stock, see
"Trading Market." Except as disclosed in the section entitled "Certain
Statutory, Charter and Bylaw Provisions," no provision of the Articles of
Incorporation or Bylaws and no provision of any agreement or plan involving
the Company is in effect that would discriminate against any existing or
prospective holder of such securities as a result of such security holder
owning a substantial amount of securities.
Class B Stock
The Class B Stock is in all material respects identical to
the Company Common Stock except that (i) the Class B Stock is generally
non-voting, (ii) the Company Common Stock is convertible at the option of
the holder into Class B Stock and (iii) in certain mergers, distributions
and other transactions in which the holders of Company Common Equity are
entitled to receive equity interests of one or more corporations (including
the Company), the equity interests distributed in respect of the Company
Common Stock and the Class B Stock may have rights and privileges that are
substantially equivalent to the rights and privileges of the Company Common
Stock and the Class B Stock, respectively. As of the Distribution Date
there will be no outstanding shares of Class B Stock and the Company does
not have any current plan or intention to issue any Class B Stock.
Preferred Stock
Under the Articles of Incorporation, the Company Board will
have the authority to create one or more series of preferred stock, to issue
shares of preferred stock in such series up to the maximum number of shares of
preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of Company Preferred Stock, as well as
authorized but unissued shares of Company Common Equity, will be available for
issuance without further action by the Company's stockholders, unless
stockholder action is required by applicable law or by the rules of a stock
exchange or quotation system on which any series of the Company's stock may
then be listed or quoted. No shares of Company Preferred Stock will be issued
in connection with the Distribution.
Registrar and Transfer Agent
First Union National Bank will serve as the Registrar and
Transfer Agent for the Company Common Stock.
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS
Certain provisions of the Pennsylvania Business Corporation
Law ("PBCL"), the Articles of Incorporation and Bylaws of the Company
summarized in the following paragraphs may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders. The following is a summary of certain of these provisions. The
Articles of Incorporation and the Bylaws are filed as exhibits to the Form 10,
and the following summary is qualified in its entirety by reference to such
documents.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. The
Articles of Incorporation and the Bylaws provide for the Company Board to be
divided into three classes of directors. The term of office of the first
class expires at the 1998 annual meeting, the term of office of the second
class expires at the 1999 annual meeting, and the term of office of the third
class expires at the 2000 annual meeting. At each annual meeting held
thereafter, a class of directors will be elected to replace the class whose
term has then expired. As a result, approximately one-third of the members of
the Company Board will be elected each year and, except as described above,
each of the directors serves a staggered three-year term. See
"Management--Executive Officers and Directors." Moreover, as is permitted
under the Pennsylvania Business Corporation Law only in the case of a
corporation having a classified board, the Articles of Incorporation and
the Bylaws provide that directors may be removed only for cause.
These provisions could prevent a stockholder (or group of
stockholders) having majority voting power from obtaining control of the
Company Board until the second annual stockholders' meeting following the date
the acquiror obtains such voting power. Accordingly, these provisions could
have the effect of discouraging a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company.
Stockholder Action by Written Consent; Special Meetings. The
Articles of Incorporation and the Bylaws provide that no action required or
permitted to be taken at an annual or special meeting of stockholders may be
taken without a meeting, and that no action may be taken by the written
consent of stockholders in lieu of a meeting. The Articles of Incorporation
also provides that special meetings of the Company's stockholders may be
called only by the Company Board, the Chairman of the Company Board or the
Chief Executive Officer of the Company. These provisions may make it more
difficult for stockholders to take action opposed by the Company Board.
Advance Notice Provisions. The Bylaws establish an advance
written notice procedure for stockholders seeking to nominate candidates for
election as directors at an annual meeting of stockholders or to bring
business before an annual meeting of stockholders of the Company. The Bylaws
provide that only persons who are nominated by or at the direction of the
Company Board, or by a stockholder who has given timely written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. The
Bylaws also provide that at any meeting of stockholders only such business may
be conducted as has been brought before the meeting by or at the direction of
the Company Board or, in the case of an annual meeting of stockholders, by a
stockholder who has given timely written notice to the Secretary of the
Company of such stockholder's intention to bring such business before such
meeting. Under the Bylaws, for any such stockholder notice to be timely, such
notice must be received at the principal executive offices of the Company in
writing not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder must be received not later than the close of
business on the 10th day following the day on which such notice or public
disclosure was given or made. Under the Bylaws, a stockholder's notice must
also contain certain information specified in the Bylaws. These provisions
may preclude or deter some stockholders from bringing matters before, or making
nominations for directors at, an annual meeting.
Preferred Stock. Under the Articles of Incorporation, the
Company Board will have the authority, without further stockholder approval,
to amend the Articles of Incorporation by resolution or resolutions to create
one or more series of preferred stock, to issue shares of preferred stock in
such series up to the maximum number of shares of preferred stock authorized,
and to determine the preferences, rights, privileges and restrictions of any
series, including the dividend rights, voting rights, rights and terms of
redemption, liquidation preferences, the number of shares constituting any
such series and the designation of such series. Pursuant to this authority,
the Company Board could create and issue a series of preferred stock with
rights, privileges or restrictions having the effect of discriminating against
an existing or prospective holder of such securities as a result of such
security holder beneficially owning or commencing a tender offer for a
substantial amount of Company Common Stock. One of the effects of authorized
but unissued and unreserved shares of capital stock may be to render more
difficult or discourage an attempt by a potential acquiror to obtain control
of the Company by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of the Company's management. The issuance
of such shares of capital stock may have the effect of delaying, deferring or
preventing a change in control of the Company without any further action by
the stockholders of the Company.
Amendment of Certain Charter and Bylaw Provisions. The
Articles of Incorporation provide that the Company Board may adopt, amend or
repeal any provision of the Bylaws. The Articles of Incorporation and the
Bylaws also provide that Bylaw provisions may be adopted, amended or repealed
by the affirmative vote of stockholders holding not less than 66 2/3 percent
of the total number of votes entitled to be cast in the election of directors.
Any amendment, modification or repeal of the provisions of the
Articles of Incorporation relating to the election and removal of directors,
the right to call special meetings, the prohibition on action by written
consent, amendment of the Bylaws and the limitation of liability and
indemnification of officers and directors will require approval by the
affirmative vote of stockholders holding at least 66 2/3 percent of the total
number of votes entitled to vote generally in the election of directors.
Certain Provisions of the Pennsylvania Business Corporation Law
The Company is governed by a set of interrelated provisions of
the PBCL which are designed to support the validity of actions taken by the
Company Board in response to takeover bids, including specifically the Board's
authority to "accept, reject or take no action" with respect to a takeover
bid, and permitting the unfavorable disparate treatment of a takeover bidder.
Another provision of the PBCL gives the directors broad discretion in
considering the best interests of the corporation, including a provision which
permits the Company Board, in taking any action, to consider various corporate
interests, including employees, suppliers, clients and communities in which
the corporation is located, the short and long-term interests of the
corporation, and the resources, intent and conduct of any person seeking to
acquire control of the corporation. These provisions may have the effect of
making more difficult and thereby discouraging attempts to acquire control of
the Company in a transaction that the Company Board determines not to be in
the best interests of the Company.
The Company has elected to opt-out of certain antitakeover
provisions of the PBCL, including (i) a provision conditioning the approval of
certain transactions on the affirmative vote of the shareholders entitled to
cast at least a majority of the votes that all shareholders, other than the
"interested shareholder" (defined generally here as a shareholder who is a
party to the transaction or who is treated differently from other
shareholders), are entitled to cast with respect to the transaction, subject
to certain exceptions, (ii) provisions concerning a "control-share acquisition"
in which the voting rights of certain shareholders of the corporation
(specifically, a shareholder who acquires 20%, 33 1/3% or 50% or more of the
voting power of the corporation) are conditioned upon the consent of a
majority vote at a meeting of the independent shareholders of the corporation
after disclosure by such shareholder of certain information, and with respect
to which such shareholder is effectively deprived of voting rights if consent
is not obtained; (iii) provisions pursuant to which any profit realized by a
"controlling person or group," generally defined as a 20% beneficial owner,
from the disposition of any equity securities within twenty-four months prior
to, and eighteen months succeeding, the acquisition of such control is
recoverable by the corporation; (iv) provisions pursuant to which severance
payments are to be made by the corporation to any eligible employee of a
covered corporation whose employment is terminated, other than for willful
misconduct, within ninety days before, or twenty-four months after, a
control-share acquisition; and (iv) provisions pursuant to which any holder of
voting shares of a registered corporation who objects to a "control
transaction" (generally defined as the acquisition by a person or group (the
"controlling person or group") that would entitle the holders thereof to cast
at least 20% of the votes that all shareholders would be entitled to cast in
an election of the directors of the corporation) is entitled to make a written
demand on the controlling person or group for payment of the fair value of the
voting shares of the corporation held by the shareholder.
Under the PBCL, a corporation is also prohibited, subject to
certain exceptions, from engaging in any business combination with an
interested shareholder (generally defined in Pennsylvania as a beneficial
owner of 20% or more of the corporation's voting shares) unless (i) the
shareholder became interested after the date the board of directors approved
the business combination, (ii) the board of directors approved the transaction
which resulted in the shareholder becoming an interested shareholder prior to
the occurrence of such transaction, (iii) no earlier than three months after
the date the shareholder became interested, and its beneficial ownership
amounted to 80% of the corporation's voting shares, the business combination
is approved by a majority of the non-interested shareholders and it meets
certain other conditions concerning the amount of consideration, (iv) at any
time after the date the shareholder became interested, the business
combination is approved by unanimous vote of the shareholders, (v) no earlier
than five years after the date the shareholder became interested, the business
combination is approved by a majority of the non-interested shareholders, or
(vi) no earlier than five years after the date the shareholder became
interested, the business combination is approved by a majority of all
shareholders and meets certain conditions concerning the amount of
consideration. The Company has elected not to opt out of this provision. The
restrictions imposed by this provision will apply to the Company. Prior to
the Distribution, however, the Company Board will approve of Kiewit Telecom
becoming an interested shareholder and, consequently, this provision would not
apply to any business combination with Kiewit Telecom.
Liability and Indemnification of Directors and Officers
Certain provisions of the Pennsylvania Business Corporation Law
and the Company's Articles of Incorporation and Bylaws relate to the
limitation of liability and indemnification of directors and officers of the
Company. These various provisions are described below.
The Articles of Incorporation provides that the Company's
directors are not personally liable to the Company or its stockholders for
monetary damages for breach of their fiduciary duties as a director to the
fullest extent permitted by Pennsylvania law. Under existing Pennsylvania
law, directors cannot be relieved of personal liability for (i) breach of such
director's duties of care and good faith to the company if such breach or
omission constitutes self-dealing, willful misconduct or recklessness, (ii)
violation of criminal statutes, or (iii) nonpayment of federal, state or local
taxes. This exculpation provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or the Company from bringing a lawsuit against directors of
the Company for breach of their fiduciary duties as directors. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission.
The Articles of Incorporation also provides that each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director or officer of the Company or is or was serving at the request
of the Company as a director or officer of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust
or other enterprise, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by Pennsylvania Law. This
right to indemnification shall also include the right to be paid by the
Company the expenses incurred in connection with any such proceeding in
advance of its final disposition to the fullest extent authorized by
Pennsylvania Law. This right to indemnification shall be a contract right.
The Company may, by action of the Company Board, provide indemnification to
such of the employees and agents of the Company to such extent and to such
effect as the Company Board determines to be appropriate and authorized by
Pennsylvania law.
The Company intends to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
or arising out of his or her status as such, whether or not the Company would
have the power or the obligation to indemnify him or her against such
liability under the provisions of the Company's Articles of Incorporation.
INDEPENDENT AUDITORS
The Company Board has appointed Coopers & Lybrand L.L.P. as the
Company's independent accountants to audit the Company's financial statements
for fiscal year 1997. Coopers & Lybrand L.L.P. has served as C-TEC's auditors
throughout the periods covered by the financial statements included in this
Information Statement.
ADDITIONAL INFORMATION
The Company has filed the Form 10 with the Commission under the
Exchange Act with respect to the shares of Company Common Stock being received
by C-TEC stockholders in the Distribution. This Information Statement does
not contain all of the information set forth in the Form 10 and the exhibits
and schedules thereto, to which reference is hereby made. For additional
information, reference is made to the Form 10 and the exhibits thereto, which
are on file at the offices of the Commission and may be inspected and copied
as set forth below.
The Form 10 and the exhibits thereto filed by the Company with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
DC 20549, as well as at the Regional Offices of the Commission at Northwest
Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, 13th floor, New York, New York 10048. Copies of such
information can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants..........................................F-1
Consolidated Balance Sheets at December 31, 1996 and 1995..................F-2
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1995 and 1994..................................F-3
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1995 and 1994..................................F-4
Consolidated Statements of Changes in Stockholder's Equity
for the three years ended December 31, 1996, 1995 and 1994..............F-6
Notes to Consolidated Financial Statements.................................F-7
Consolidated Balance Sheet as of June 30, 1997 (unaudited).. .............F-21
Consolidated Statements of Operations for the Six and Three Months
Ended June 30, 1997 and 1996 (unaudited)...............................F-22
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 (unaudited)........................F-23
Notes to Consolidated Financial Statements................................F-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Cable Michigan, Inc.:
We have audited the consolidated financial statements of Cable Michigan, Inc.
and Subsidiaries (the "Company") at December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996, listed in the index on
page F-i of this Form 10. 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 consolidated financial position of Cable Michigan,
Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations, changes in their stockholder's equity and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
June 30, 1997
CABLE MICHIGAN, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31,
---------------------
1996 1995
------ ------
ASSETS
Cash and temporary cash investments................. $3,297 $3,029
Accounts receivable, net of reserve for doubtful
accounts of $579 in 1996 and $496 in 1995......... 3,884 3,502
Prepayments and other............................... 518 570
Accounts receivable - affiliates.................... 1,716 2,282
Deferred income taxes............................... 974 2,354
Property, plant and equipment, net of
accumulation of depreciation...................... 77,792 84,310
Intangible assets, net.............................. 60,956 76,650
Deferred charges and other assets................... 63 62
-------- --------
Total Assets...................................... $149,200 $172,759
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities:
Current maturities of long-term debt.............. $ 1,750 $1,500
Accounts payable.................................. 3,337 1,973
Advance billings and customer deposits............ 2,113 1,916
Accrued taxes..................................... 228 327
Accrued interest.................................. 104 123
Accrued cable programming expense................. 1,811 1,710
Accrued litigation costs.......................... 2,150 2,883
Accrued expenses.................................. 2,988 2,812
Accounts payable - affiliates..................... 9,861 8,570
Long-term debt...................................... 15,680 17,430
Notes payable - affiliates.......................... 147,567 164,377
Deferred income taxes............................... 26,656 27,048
Total liabilities................................... 214,245 230,669
Minority interest................................... 14,696 15,847
Commitments and contingencies.......................
Common shareholder's deficit..................... (79,741) (73,757)
-------- --------
Total Liabilities and Shareholder's Equity........ $149,200 $172,759
======== ========
See accompanying notes to consolidated financial statements.
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales.................................................................. $ 76,187 $ 60,675 $ 49,141
Costs and expenses, excluding depreciation and amortization............ 44,091 34,749 28,543
Depreciation and amortization.......................................... 31,427 25,154 28,685
-------- -------- --------
Operating Income (Loss)................................................ 669 772 (8,087)
-------- -------- --------
Interest income........................................................ 127 55 -
Interest expense....................................................... (15,179) (15,973) (15,767)
Other expense, net..................................................... (736) (363) (1,307)
-------- -------- --------
(Loss) Before Income Taxes............................................. (15,119) (15,509) (25,161)
(Benefit) provision for income taxes................................... (5,712) (5,590) 52
-------- -------- --------
(Loss) Before Minority Interest and Equity in Unconsolidated Entity.... (9,407) (9,919) (25,213)
Equity in (loss) of unconsolidated entity.............................. - (396) (1,013)
Minority interest in (income) loss of consolidated entity.............. 1,151 (186) -
-------- -------- --------
Net (Loss)............................................................. $ (8,256) $ (10,501) $ (26,226)
-------- -------- --------
Unaudited pro forma net (loss) per common share........................ $ (1.20) - -
</TABLE>
See accompanying notes to consolidated financial statements.
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss)..................................................................... $ (8,256) $(10,501) $ (26,226)
Gain on pension curtailment/settlement......................................... (855) - -
Depreciation and amortization.................................................. 31,427 25,154 28,685
Deferred income taxes and investment tax credits, net.......................... 988 (4,853) 14,102
Provision for losses on accounts receivable.................................... 843 747 590
Equity in loss of unconsolidated entities...................................... - 396 1,013
(Decrease) increase in minority interest....................................... (1,151) 186 -
Other non-cash items........................................................... 2,274 2,147 1,015
Net change in certain assets and liabilities, net of acquisitions of businesses:
Accounts receivable and unbilled revenues...................................... (1,226) (1,208) (649)
Accounts payable............................................................... 1,365 (1,682) 1,784
Accrued expenses............................................................... 125 (495) 919
Accrued taxes.................................................................. (99) (9,020) 8,725
Accounts receivable - affiliates............................................... 567 499 (2,473)
Accounts payable - affiliates.................................................. 1,314 (1,082) 1,979
Other, net..................................................................... 347 19 148
Other........................................................................... 154 4 (23)
-------- -------- -------
Net cash provided by operating activities....................................... 27,817 311 29,589
-------- -------- -------
Cash Flows from Investing Activities
Additions to property, plant and equipment..................................... (9,605) (11,207) (8,678)
Acquisitions, net of cash acquired............................................. - (2,445) -
Other.......................................................................... 390 307 (317)
-------- -------- -------
Net cash used in investing activities........................................... (9,215) (13,345) (8,995)
-------- -------- -------
Cash Flows from Financing Activities
Redemption of long-term debt................................................... (1,500) (5,763) -
Proceeds from the issuance of common stock..................................... - 8,256 -
Transfers from C-TEC........................................................... - 4,615 -
Change in affiliate notes, net................................................. (16,834) 7,885 (19,786)
-------- -------- -------
Net cash (used in) provided by financing activities............................. (18,334) 14,993 (19,786)
-------- -------- -------
Net increase in cash and temporary cash investments............................. 268 1,959 808
Cash and temporary cash investments at beginning of year........................ 3,029 1,070 262
-------- -------- -------
Cash and temporary cash investments at end of year.............................. $ 3,297 $ 3,029 $ 1,070
======== ======= =======
</TABLE>
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information cash paid during the year for:
Interest........................................................................ $15,199 $15,849 $15,768
Income taxes.................................................................... $ 29 $ - $ 10
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing
Activities:
In 1995, C-TEC acquired an additional 18.29% of the outstanding
Common Stock of Mercom, Inc. for cash of $6,912. The acquisition, along with
the Company's previous investment of 43.63% of Mercom's outstanding Common
Stock, was accounted for as a purchase. A summary of the acquisition is as
follows:
Capital contribution by stockholder.................. $6,912
Liabilities assumed.................................. 38,054
Deferred tax liability incurred...................... 16,044
Reduction of equity-method investment................ 2,511
Minority interest recognized......................... 15,680
Fair value of assets acquired........................ $79,201
See accompanying notes to consolidated financial statements.
Cable Michigan, Inc.
Consolidated Statements of Changes in Shareholder's Equity
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Shareholder's Net
-----------------------------------------------
Common Stock Investment Total
------------ ---------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993...... $ 1 $(60,420) $(60,419)
Net (Loss)..................... (26,226) (26,226)
Transfers from (to) C-TEC...... 9,713 9,713
------------ -------- --------
Balance, December 31, 1994...... 1 (76,933) (76,932)
Net (Loss)..................... (10,501) (10,501)
Transfers from (to) C-TEC...... 13,676 13,676
------------ -------- --------
Balance, December 31, 1995...... 1 (73,758) (73,757)
Net (Loss)..................... (8,256) (8,256)
Transfers from (to) C-TEC...... 2,272 2,272
------------ -------- --------
Balance, December 31, 1996...... $ 1 $(79,742) $(79,741)
============ ======== ========
See accompanying notes to consolidated financial statements.
CABLE MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
Cable Michigan, Inc. ("Cable Michigan") is currently a wholly
owned subsidiary of C-TEC Cable Systems, Inc., which is a wholly owned
subsidiary of C-TEC Corporation ("C-TEC"). Mercom, Inc. ("Mercom") is
currently a majority owned subsidiary of C-TEC. Cable Michigan owns, operates
and manages cable television systems which provide basic, premium and pay-per-
view programming services to subscribers in Michigan. Mercom, Inc. is a cable
television operator in the Michigan area which provides basic, premium and
pay-per-view cable programming services to subscribers in three cable systems
in southern Michigan and, through 1996, one cable system in Port St. Lucie,
Florida (Note 15.) On February 12, 1997, the C-TEC Board of Directors
approved a plan to restructure C-TEC (the "Restructuring"). Under the
Restructuring, C-TEC will be separated into three different, publicly traded
companies engaged, respectively, in the following businesses:
(i) the Cable Michigan Business, which will be owned by Cable
Michigan and will consist of C-TEC's Cable Michigan televison business,
including C-TEC's 61.92% interest in Mercom, Inc.;
(ii) the RCN Businesses, which will be owned by RCN and will
consist of the RCN Telecom Business, C-TEC's New Jersey, New York
(excluding New York City) and Pennsylvania cable television operations, C-
TEC's long distance business (other than the portion of such business that
consists of providing long distance services to customers in the franchise
area of Commonwealth Telephone Company and in the Pennsylvania communities
of Wilkes-Barre, Scranton and Harrisburg (the "Commonwealth Service
Territory Long Distance Business")) and C-TEC International, which owns a
40% interest in Megacable S.A. de C.V.; and
(iii) the Pennsylvania Telephone and Engineering Business, which
will be owned by C-TEC and will consist of C-TEC's Commonwealth Telephone
Company business (Pennsylvania rural LEC operations), C-TEC's CLEC operations,
Commonwealth Communications, Inc. (communications engineering) and the
Commonwealth Service Territory Long Distance Business.
C-TEC also announced its intention to distribute to its
shareholders by December 31,1997, subject to certain conditions, all of its
interest in Cable Michigan and Mercom (collectively, the "Company"). C-TEC
will effect the Distribution by the delivery of the shares of Company Common
Stock to the Distribution Agent for distribution to the holders of record of
C-TEC Common Stock and C-TEC Class B Common Stock on a record date to be
determined. The actual total number of shares of Company Common Stock to be
distributed will depend on the number of shares of C-TEC Common Equity
outstanding on the Record Date. As a result of the Distribution, 100% of the
outstanding shares of Company Common Stock will be distributed to holders of
C-TEC Common Equity. The shares of Company Common Stock will be fully paid
and nonassessable, and the holders thereof will not be entitled to preemptive
rights.
The consolidated financial statements of the Company include
the accounts of Cable Michigan and Mercom which, prior to their planned
distribution to the Company pursuant to the restructuring, were consolidated
with C-TEC. Pursuant to a common stock rights offering, C-TEC, through a
wholly-owned subsidiary, acquired majority voting control of Mercom, Inc.
("Mercom") through the exercise of stock rights and oversubscription
privileges. Immediately prior to the rights offering, C-TEC owned 43.63% of
the outstanding common stock of Mercom. C-TEC purchased a total of 1,920,000
shares of common stock through the rights offering for an aggregate
consideration of $6,912. The rights offering concluded on August 10, 1995.
Following the purchase, C-TEC owns 61.92% of the outstanding common stock of
Mercom and accordingly has consolidated Mercom in its financial statements
since August 1995. Prior to the rights offering, C-TEC accounted for its
43.63% ownership interest under the equity method of accounting. The
acquisition has been accounted for as a purchase. Mercom has been
consolidated with the Company since August 1995 and is reflected under the
equity method of accounting for periods prior to August 1995.
The following unaudited pro forma summary presents information
as if the acquisition of Mercom had occurred at the beginning of 1995. The
pro forma information is provided for informational purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the consolidated entities.
Year Ended December 31,
-----------------------
1995
-----------------------
Unaudited
Sales.................................... $ 68,781
(Loss) from continuing operations........ $(11,641)
Net (loss)............................... $(11,641)
Pro Forma Earnings Per Share:
(Loss) from continuing operations........ $ (0.42)
Net (loss)............................... $ (0.42)
The Company has historically depended upon C-TEC for
substantial support services such as finance, cash management, legal, human
resources, insurance and risk management. C-TEC allocates the cost for these
services pro rata among its businesses primarily based on assets; contribution
to consolidated earnings before interest, depreciation, amortization, and
income taxes; and number of employees. In the opinion of management, the
method of allocating these costs is reasonable; however, the costs of these
services charged to the Company are not necessarily indicative of the costs
that would have been incurred if the Company had performed these functions.
RCN has also agreed to provide or cause to be provided to the
Cable Michigan Group certain specified services for a transitional period
after the Distribution. The transitional services to be provided are the
following: (i) customer service, (ii) marketing, (iii) accounting, (iv)
payroll, (v) management supervision, (vi) cash management, (vii) human
resources and benefit plan administration, (viii) insurance administration,
(ix) legal, (x) tax, (xi) internal audit, (xii) programming administration,
(xiii) billing, (xiv) monthly cable guides and (xv) other miscellaneous
administrative services. The fee per year for services (ii)-(xii) and (xv)
will be 4.0% of the revenues of the Cable Michigan Group plus a direct
allocation of certain consolidated cable administration functions. Based on
the Cable Michigan Group's revenue for 1996 and the allocation of certain
consolidated cable administrative functions, the charge for such services for
that year would have been $4,418,000. The direct charge for customer service
listed in item (i) along with the billing service listed in item (xiii) and
the cable guide service listed in item (xiv) will be a pro rata share (based on
subscribers) of the expenses incurred by RCN to provide such customer service
and to provide such billing and cable guide service for all relevant members
of the RCN Group and all relevant members of the Cable Michigan Group.
C-TEC has agreed to provide or cause to be provided to the RCN
Group and the Cable Michigan Group certain financial data processing services
for a transitional period after the Distribution. The fees for such services
will be an allocated portion (based on relative usage) of the cost incurred by
C-TEC to provide such financial data processing services to all three groups.
Based on this allocation arrangement, the fee for such services to the Cable
Michigan Group would have been approximately $69,000 for 1996.
The nature, scope and timing of the foregoing services are to
be substantially consistent with the nature, scope and timing of the service
provider's services prior to the Distribution, provided that the service
provider shall not be obligated to hire additional or replacement employees,
or increase the compensation of its existing employees, in order to provide
the services. The services are to commence on the Distribution Date and will
terminate upon 60 days notice by either the service provider or the relevant
service recipient, except that the billing, customer service and programming
administration services provided by RCN to Cable Michigan may not be
terminated by RCN on less than one year advance notice to Cable Michigan. A
service recipient may also terminate individual services by giving 60 days
notice to the applicable service provider.
In addition, RCN has agreed to obtain programming from third
party suppliers for Cable Michigan, the costs of which will be reimbursed to
RCN by Cable Michigan. In those circumstances where RCN purchases third party
programming on behalf of both the RCN Group and the Cable Michigan Group, such
costs will be shared by each Group on a pro rata basis based on each Group's
number of subscribers. Such programming arrangements are to commence on the
Distribution Date and will terminate upon 60 days notice by Cable Michigan or
on not less than one year advance notice by RCN to Cable Michigan.
The Tax Sharing Agreement, by and among the Company, RCN and
C-TEC (the "Tax Sharing Agreement"), governs contingent tax liabilities and
benefits, tax contests and other tax matters with respect to tax returns filed
with respect to tax periods, in the case of the Company, ending or deemed to
end on or before the Distribution Date. Under the Tax Sharing Agreement,
Adjustments (as defined in the Tax Sharing Agreement) to taxes that are clearly
attributable to the Company Group, the RCN Group, or the C-TEC Group will be
borne solely by such group. Adjustments to all other tax liabilities will be
borne 50% by C-TEC, 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of
all or a portion of the capital stock or assets of the Company, the
Distribution or the RCN Distribution fails to qualify as a tax-free
distribution under Section 355 of the Code, then the Company will be liable
for any and all increases in tax attributable thereto.
The aforementioned arrangements will be entered into in
connection with the Distributions and are, therefore, not the result of arm's
length negotiation between unrelated parties as the Company, C-TEC and RCN
have certain common officers and directors. Nevertheless, the transitional
service arrangements in such agreements are designed to reflect arrangements
that would have been agreed upon by parties negotiating at arm's length.
Additional or modified agreements, arrangements and transactions may be
entered into between the Company and either or both of C-TEC and RCN after the
Distribution, which will be negotiated at arm's length.
The consolidated financial statements have been prepared using
the historical basis of assets and liabilities and historical results of
operations. Historical financial statement line items have been allocated to
the Company based on the historical stand-alone financial statements of the
separate legal entities which comprise the Company. All material intercompany
transactions and balances have been eliminated.
The financial information included herein may not necessarily
reflect the consolidated results of operations, financial position, and cash
flows of the Company in the future or what they would have been had it been a
separate, stand-alone entity during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make 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. Actual results could differ from those
estimates.
Cash and Temporary Cash Investments - For purposes of reporting
cash flows, the Company considers all highly liquid investments purchased with
an original maturity of three months or less to be temporary cash investments.
Temporary cash investments are stated at cost, which approximates market.
Property, Plant and Equipment and Depreciation - Property,
plant and equipment reflects the original cost of acquisition or construction,
including payroll and related costs such as taxes, pensions and other fringe
benefits, and certain general administrative costs.
Depreciation on cable plant is provided on the straight-line
method based on the useful lives of the various classes of depreciable
property. The average estimated lives of depreciable cable plant are:
Buildings......................................... 10 to 45 years
Cable Television Distribution Equipment........... 8 to 22.5 years
Vehicles.......................................... 5 years
Other Equipment................................... 4 to 12 years
Maintenance and repair costs are charged to expense as
incurred. Major replacements and betterments are capitalized. Gain or loss
is recognized on retirements and dispositions.
Intangible Assets - Intangible assets are amortized on a
straight-line basis over the expected period of benefit ranging from 5 to 19.3
years. Intangible assets include cable television franchises. The cable
televison systems owned or managed by the Company are constructed and operated
under fixed-term franchises or other types of operating authorities (referred
to collectively herein as "franchises") that are generally non-exclusive and
are granted by local governmental authorities. These franchises typically
contain many conditions, such as time limitations on commencement and
completion of construction, conditions of service, including the number of
channels, the provision of free service to schools and certain other public
institutions, and the maintenance of insurance and indemnity bonds. The
provisions of these local franchises are subject to federal regulation. Costs
incurred to obtain or renew franchises are capitalized and amortized over the
term of the applicable franchise agreement.
Accounting for Impairments - In 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of " ("SFAS 121").
SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the Company estimates the net future cash flows expected
net to result from the use of the asset and its eventual disposition. If the
sum of the expected net future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long- lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
SFAS 121 generally requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. No impairment losses have
been recognized by the Company pursuant to SFAS 121.
Revenue Recognition - Revenues from cable programming services
are recorded in the month the service is provided.
Advertising Expense - Advertising costs are expensed as
incurred. Advertising expense charged to operations was $514, $574 and $753 in
1996, 1995 and 1994, respectively.
Income Taxes - C-TEC and its subsidiaries report income for
federal tax purposes on a consolidated basis. Mercom files a separate
consolidated federal income tax return. Income tax expense is allocated to
subsidiaries on a separate return basis except that C-TEC's cable subsidiaries
receive benefit for the utilization of net operating losses and investment tax
credits included in the consolidated tax return even if such losses and
credits could not have been used on a separate return basis. The Company
accounts for income taxes using Statement of Financial Accounting Standards
No. 109 - "Accounting for Income Taxes". The statement requires the use of an
asset and liability approach for financial accounting and reporting for income
taxes. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
temporary differences between financial reporting basis and tax basis of
assets and liabilities. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Investment tax credits ("ITC") for the Company have been
deferred in prior years and are being amortized over the average lives of the
applicable property.
Earnings (Loss) per share - Cable Michigan has 1,000 shares of
common stock outstanding, all of which are owned by C-TEC Cable Systems, Inc.,
a wholly owned subsidiary of C-TEC. Mercom has 4,787,060 shares of common
stock outstanding, 2,964,250 of which are owned by C-TEC. In connection with
the restructuring, the Company will effect an additional issuance of shares.
At December 31, 1996, C-TEC has approximately 27,474,000 shares of common
equity outstanding. The unaudited pro forma earnings (loss) per common share
was calculated by dividing the 1996 net income/loss by the 6,868,500 shares
of common equity outstanding, based upon an assumed distribution of one share
of Company common equity for every four shares of C-TEC common equity owned.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at
December 31:
1996 1995
-------- --------
Cable plant.............................. $149,438 $141,965
Buildings and land....................... 2,802 2,697
Furniture, fixtures and vehicles......... 5,073 4,662
Other.................................... 804 421
-------- --------
Total property, plant and equipment...... 158,117 149,745
Less accumulated depreciation............ (80,325) (65,435)
-------- --------
Net...................................... $ 77,792 $ 84,310
======== ========
Depreciation expense was $15,728, $12,115 and $9,163 for the
years ended December 31, 1996, 1995 and 1994, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1996 1995
-------- ---------
Franchises..................... 5.0-19.3 years $ 91,547 $ 141,766
Subscriber lists............... 6.0-19.3 years 43,083 43,199
Noncompete agreements.......... 5 years 117 70,813
Goodwill....................... 6.9-10 years 5,564 5,704
Other.......................... 5.0-19.3 years 923 1,578
-------- ---------
Total.......................... 141,234 213,060
Less accumulated amortization.. (80,278) (136,410)
-------- ---------
Net............................ $ 60,956 $ 76,650
========= =========
Amortization expense charged to operations in 1996, 1995 and
1994 was $15,699, $13,039 and $19,522, respectively.
During 1996, Cable Michigan removed from its balance sheet
noncompete agreements which had an original cost of $70,696 and which were
fully amortized.
5. INCOME TAXES
The income tax provision (benefit) in the accompanying
consolidated financial statements of operations is comprised of the following:
1996 1995 1994
------- -------- --------
Current....................................
Federal.................................... $(6,700) $ (737) $(14,050)
State...................................... 0 0 0
------- ------- --------
Total current.............................. (6,700) (737) (14,050)
------- ------- --------
Deferred...................................
Federal.................................... 988 (4,853) 14,102
State...................................... 0 0 0
------- ------- --------
Total deferred............................. 988 (4,853) 14,102
------- ------- --------
Total (benefit) provision for income taxes. $(5,712) $(5,590) $ 52
======= ======= ========
The tax provision of Cable Michigan has been calculated on the
separate return basis. An amount of $8,697 of tax benefits realized by Cable
Michigan as a result of its inclusion in C-TEC's consolidated tax return,
which would not have been realized on a separate return basis, has been
credited to stockholder's equity as a capital contribution.
The benefit for income taxes is different from the amounts
computed by applying the U.S. statutory federal tax rate of 35%. The
differences are as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(Loss) before (benefit) provision for income taxes.......... $(15,119) $(15,509) $(25,161)
Federal tax provision at statutory rates.................... $ (5,307) $ (5,434) $ (8,806)
State income taxes.......................................... 0 0 0
Goodwill.................................................... 175 176 139
Increase (decrease) in valuation allowance.................. (518) (255) 0
IRS Audit Adjustment........................................ 0 (132) 0
Adjustment to prior year amortization....................... 0 28 0
Net operating losses reclassed.............................. 0 0 8,697
Other, net.................................................. (62) 27 22
-------- -------- --------
(Benefit) provision for income taxes........................ $ (5,712) $ (5,590) $ 52
======== ======== ========
</TABLE>
In 1995, C-TEC Corporation, the parent company, received
official notification of final settlement from the Internal Revenue Service
relating to the examination of C-TEC's consolidated federal income tax returns
for 1989, 1990 and 1991. The most significant adjustment relates to the
disallowance of the claimed amortization of certain intangible assets. As a
result of this disallowance, Cable Michigan's taxes payable for prior years
increased approximately $4,000, net operating loss carryforwards were reduced
by approximately $24,000 and AMT credits were increased by approximately
$5,000. Additionally, interest of $900 was payable. The amount accrued in
previous years was sufficient to satisfy the above adjustment. No additional
accrual during 1995 was required.
Mercom, which files a separate consolidated income tax return,
has the following net operating losses available:
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
1990 $2,537 2,005
1991 $3,220 2,006
1992 $1,628 2,007
1995 $2,713 2,010
In the past, Mercom was liable for Federal Alternative Minimum
Tax (AMT). At December 31, 1996, the cumulative minimum tax credits are $39.
This amount can be carried forward indefinitely to reduce regular tax
liabilities that exceed AMT in future years.
Temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at December 31 are as follows:
1996 1995
-------- --------
NOL carryforwards..................... $ 3,532 $ 3,629
Alternative minimum tax credits....... 39 5,001
Reserves.............................. 828 1,166
Other, net............................ 158 157
-------- --------
Total deferred assets................. 4,557 9,953
-------- --------
Property, plant and equipment......... (15,354) (16,270)
Intangible assets..................... (13,623) (16,597)
-------- --------
Total deferred liabilities............ (28,977) (32,867)
-------- --------
Sub total............................. (24,420) (22,914)
Valuation allowance................... (1,262) (1,780)
-------- --------
Total deferred taxes.................. $(25,682) $(24,694)
======== ========
A valuation allowance has been provided for the portion of
deferred tax assets which, in the opinion of management, is uncertain as to
their realization. The net change in valuation allowance was a decrease of
$518 in 1996.
6. DEBT
Debt consists of the following:
December 31
---------------------
1996 1995
------- -------
Term Credit Agreement........... $17,430 $18,930
Due within year................. (1,750) (1,500)
------- -------
Total long-term debt............ $15,680 $17,430
======= =======
Mercom entered into a $25,000 Credit Agreement (the "Credit
Agreement)" with a bank in November 1989. The Credit Agreement was amended in
April 1990 to provide borrowings up to $27,000. The Credit Agreement was
further amended in December 1992, December 1993, December 1994 and March 1995
to restructure the mandatory repayments due at December 31, 1992, December 31,
1993, December 31, 1994 and March 31, 1995, respectively. On August 16, 1995,
Mercom amended and restated the Credit Agreement.
The amended and restated Credit Agreement consists of a
7.5-year amortizing term loan with a final maturity of December 31, 2002 (the
"Term Credit Agreement). In addition, Mercom entered into a 364-day revolving
credit facility of $2,000 with an initial maturity of August 14, 1996 (the
"Revolving Credit Agreement") which has been amended and extended to August
12, 1997.
Under the terms of the agreement, the Company also made
scheduled principal payments of $346 in each of the third and fourth quarters
of 1995 and $375 in each of the four quarters of 1996.
Mercom is required to repay the remaining indebtedness under
the Term Credit Agreement in equal quarterly installments aggregating the
following amounts for each year ending December 31, 1997 through 200l:
Aggregate
Year Amounts
---- ---------
1997 $1,750
1998 $2,100
1999 $2,600
2000 $3,750
200l $4,300
The Term Credit Agreement and the Revolving Credit Agreement
(the "Credit Agreements") are collateralized by both a pledge of the stock of
Mercom's subsidiaries and a first lien on certain assets of Mercom and its
subsidiaries including inventory, equipment and receivables.
The Credit Agreements contain certain restrictive covenants,
including the maintenance of a specified debt to cash flow ratio, an interest
coverage ratio and restrictions on the payments of dividends. In addition,
Mercom may be required to amortize additional debt to the extent it generates
excess cash flow. The requirement for such additional amortization at
December 31, 1996 of approximately $492 was due and paid by March 31, 1997. At
December 31, 1996, Mercom was in compliance with all covenants associated with
its Credit Agreements. As noted, the Revolving Credit Agreement provides for
revolving credit borrowings up to $2,000 as of December 31, 1996 and 1995. A
fee of 3/8% per annum is required on the unused portion of the available
commitment. The Company had no borrowings under this agreement as of December
31, 1996 and 1995.
The weighted average effective interest rates for all debt at
December 31, 1996 and 1995 were 6.5% and 7.0%, respectively. Interest is paid
based on Prime, LIBOR or CD rates, depending on the type of loan and terms of
the agreement.
Mercom's estimated capital expenditures for 1997 to upgrade a
portion of its plant will require Mercom to restructure its debt. The Company
and C-TEC are currently determining the best alternative for such funding.
7. COMMON STOCK RIGHTS OFFERING
On August 10, 1995, Mercom completed the issuance of 2,393,530
shares of common stock through a rights offering, resulting in net proceeds,
after deducting issuance costs, of approximately $8,200. Shareholders of
record at the close of business on July 20,1995 were entitled to one
non-transferable right for every share of common stock held. Right holders
were able to purchase for a price of $3.60 per share, one share of common
stock for each right held.
Mercom utilized a portion of the proceeds received from the
rights offering to repay $5,070 of outstanding indebtedness to its lender and
repay $2,287 of outstanding indebtedness to C-TEC under two demand notes. The
remaining proceeds were used for general corporate purposes, including capital
expenditures.
8. PENSIONS AND EMPLOYEE BENEFITS
Cable Michigan's financial statements reflect the costs
experienced for its employees and retirees while included in the C-TEC plans.
Through December 31, 1996, substantially all employees of Cable
Michigan are included in a trusteed noncontributory defined benefit pension
plan, maintained by C-TEC. Upon retirement, employees are provided a monthly
pension based on length of service and compensation. C-TEC funds pension
costs to the extent necessary to meet the minimum funding requirements of
ERISA.
The information that follows relates to the entire C-TEC
noncontributory defined benefit plan. The components of C-TEC's pension cost
are as follows:
1996 1995 1994
------ ------- -------
Benefits earned during the year (service cost). $2,365 $ 1,656 $ 1,685
Interest cost on projected benefit obligation.. 3,412 3,083 2,734
Actual return on plan assets................... (3,880) (12,897) 5,635
Other components - net......................... (1,456) 8,482 (10,744)
------ ------- -------
Net periodic pension cost (credit)............. $ 441 $ 324 $ $(690)
====== ======= =======
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost
(credit):
December 31,
--------------------------
1996 1995 1994
---- ---- ----
Discount rate.................................. 7.5% 7.0% 8.0%
Expected long-term rate of return on plan
assets........................................ 8.0% 8.0% 8.0%
Weighted average long-term rate of
compensation increases...................... 6.0% 6.0% 6.0%
Cable Michigan's allocable share of the consolidated net
periodic pension cost (credit), based on its proportionate share of
consolidated annualized salaries as of the valuation date, was approximately
$10, $3 and $(21) for 1996, 1995, and 1994, respectively. These amounts are
reflected in operating expenses.
In connection with the restructuring, C-TEC completed a
comprehensive study of its employee benefit plans in 1996. As a result of
this study, effective December 31, 1996, in general, employees of Cable
Michigan will no longer accrue benefits under the defined benefit pension plan
and will become fully vested in their benefit accrued through that date.
C-TEC notified affected participants in December 1996. In December 1996,
C-TEC allocated pension plan assets of $6,984 and the related liabilities to a
separate plan for employees who no longer accrue benefits after December 31,
1996 (the "curtailed plan"). C-TEC anticipates that the majority of such
liabilities will be settled by lump sum distributions. The allocation of
assets and liabilities resulted in a curtailment/settlement gain of $4,292.
Cable Michigan's allocable share of this gain was $855. This gain results
primarily from the reduction of the related projected benefit obligation.
C-TEC's curtailed plan has assets in excess of the projected benefit
obligation. Such excess amounted to $3,917 which, along with unrecognized
items of $1,148 resulted in prepaid pension cost of $2,769.
The following table sets forth the plans' funded status and
amounts recognized in C-TEC's balance sheet at December 31:
1996 1995
------- -------
Plan assets at fair value $55,325 $60,108
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested 32,372 34,152
Nonvested 1,704 2,104
------- -------
Total 34,076 36,256
Effect of increases in compensation 6,042 8,687
------- -------
Plan assets in excess of projected benefit obligation 15,207 15,165
Unrecognized transition asset (3,463) (4,432)
Unrecognized prior service cost 2,438 2,969
Unrecognized net gain (11,215) (10,133)
------- -------
Prepaid pension cost $ 2,967 $ 3,569
======= =======
C-TEC's pension plan has assets in excess of the accumulated
benefit obligations. Plan assets include equity, fixed income securities and
pooled funds under management by an insurance company. Plan assets include
common stock of C-TEC with a fair value of approximately $5,835 and $11,195 at
December 31, 1996 and 1995, respectively.
C-TEC sponsors a 401(k) savings plan covering substantially all
employees of Cable Michigan who are not covered by collective bargaining
agreements. Additionally, Mercom adopted a 40l(k) savings plan on January 1,
1995 covering substantially all employees. Contributions made by the Company
to the 401(k) plans are based on a specific percentage of employee
contributions. Contributions charged to expense were $128, $107 and $66 in
1996, 1995 and 1994, respectively.
The Company provides certain post employment benefits to former
or inactive employees who are not retirees. These benefits are primarily
short-term disability salary continuance. The Company accounts for these
benefits under Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Post employment Benefits" ("SFAS 112"). SFAS 112
requires accrual of the cost of post employment benefits over employees'
service lives. C-TEC uses the services of an enrolled actuary to calculate
the expense. C-TEC allocates the cost of these benefits to the Company based
on the Company's proportionate share of consolidated annualized salaries. The
Company reimburses C-TEC for its allocable share of the consolidated post
employment benefit cost. The net periodic post employment benefit cost was
approximately $100, $98 and $23 in 1996, 1995 and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
a. Total rental expense, primarily for office space and pole
rental, was $984, $998 and $963 for 1996, 1995 and 1994, respectively. At
December 31, 1996, rental commitments under noncancelable leases, excluding
annual pole rental commitments of approximately $792 that are expected to
continue indefinitely, are as follows:
Aggregate
Year Amounts
---- ---------
1997 $ 173
1998 $ 147
1999 $ 117
2000 $ 96
2001 $ 39
Thereafter $ 305
b. Communications and Cablevision, Inc., ("CCV"), a subsidiary
of Mercom, was a party to a lawsuit commenced in 1988 in the Circuit Court of
the County of Ottawa, Michigan relating to the termination of Kenneth E. Lahey
as President of CCV. Mr. Lahey asserted that as a result of such termination,
he was entitled to an amount equal to the fair value of 10 percent of the
outstanding shares of CCV stock (the "Lahey Interest"). On April 19, 1995,
Mercom entered into a settlement agreement with Mr. Lahey whereby it agreed
to pay Mr. Lahey $4,300 over a four year time frame. Mercom paid Mr. Lahey
$100, $1,400 and $700 in April and June 1995 and June 1996, respectively. The
remaining $2,100 will be paid in equal installments over a three year period
beginning with the payment due on or before July 1, 1997.
c. The Company is subject to the provisions of the Cable
Television Consumer Protection and Competition Act of 1992, as amended and the
Telecommunications Act of 1996. The Company has either settled challenges or
accrued for anticipated exposures related to rate regulation; however, there
is no assurance that there will not be further additional challenges to its
rates. The 1996 and 1994 statements of operations include charges aggregating
approximately $833 and $1,092 relating to cable rate regulation liabilities.
Such charges were not significant in 1995.
d. The Company had various purchase commitments at December 31,
1996 related to its 1997 construction budget.
e. In the normal course of business, there are various legal
proceedings outstanding. In the opinion of management, these proceedings will
not have a material adverse effect on the financial condition or results of
operations of the Company.
f. The Company has agreed to indemnify RCN and C-TEC and their
respective subsidiaries against any and all liabilities which arise primarily
from or relate primarily to the management or conduct of the business of the
Company prior to the effective time of the Distribution. The Company has also
agreed to indemnify RCN and C-TEC and their respective subsidiaries against
20% of any liability which arises from or relates to the management or conduct
prior to the effective time of the Distribution of the businesses of C-TEC and
its subsidiaries and which is not a true C-TEC liability, a true RCN liability
or a true Company Liability.
This Tax Sharing Agreement, by and among the Company, RCN and
C-TEC (the "Tax Sharing Agreement"), governs contingent tax liabilities and
benefits, tax contests and other tax matters with respect to tax returns filed
with respect to tax periods, in the case of the Company, ending or deemed to
end on or before the Distribution Date. Under the Tax Sharing Agreement,
Adjustments (as defined in the Tax Sharing Agreement) to taxes that are clearly
attributable to the Company Group, the RCN Group, or the C-TEC Group will be
borne solely by such group. Adjustments to all other tax liabilities will be
borne 50% by C-TEC 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of
all or a portion of the Capital stock or assets of the Company, the
Distribution fails to qualify as a tax-free distribution under Section 355 of
the Code, then the Company will be liable for any and all increases in tax
attributable thereto.
10. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company has the following transactions with affiliates
during the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
------- ------- -------
Corporate office costs allocated to the Company. $ 3,498 $ 3,302 $ 1,562
Interest expense on affiliate notes............. 13,952 15,318 15,768
Royalty fees charged by C-TEC................... 585 486 494
Charges for engineering services................ 296 2,169 8
Other affiliate expenses........................ 189 153 83
In addition, in the first quarter of 1995, C-TEC loaned $887 to
Mercom to enable it to make a principal payment on its Credit Agreement of
$887 scheduled for March 31, 1995. C-TEC also loaned Mercom $1,400 in June
1995 to meet its scheduled payment under the Lahey settlement agreement (Note
9). Mercom paid interest in 1995 of $39 to C-TEC in connection with these two
demand notes. These demand notes were repaid in August 1995.
At December 31, 1996 and 1995, the Company has accounts
receivable from affiliates of $1,716 and $2,282 respectively, for these
transactions. At December 31, 1996 and 1995, the Company has accounts payable
to affiliates of $9,861 and $8,570 respectively, for these transactions.
The Company has notes payable to C-TEC of $147,567 and $164,377
at December 31, 1996 and 1995, respectively, primarily related to the
acquisition of the Michigan cable operations and its subsequent operations.
11. STOCK EXCHANGE LISTING
Mercom's Common Stock was traded on the Nasdaq Stock Market
("NASDAQ") from May 1989 through February 1992. Its Common Stock was delisted
from NASDAQ in February 1992 because the Company did not meet NASDAQ's minimum
capital surplus requirements. Currently, Mercom's Common Stock is quoted on
the National Quotation Bureau, Inc. and the OTC Bulletin Board which is owned
and operated by The Nasdaq Stock Market, Inc.
12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary investments with high
credit quality financial institutions. The Company also periodically
evaluates the creditworthiness of the institutions with which it invests. The
Company does, however, maintain unsecured cash and temporary cash investment
balances in excess of federally insured limits.
Concentrations of credit risk with risk to receivables are
limited due to large customer base primarily throughout Michigan and Florida.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable
to estimate that value:
a. The fair value of the revolving credit agreement is
considered to be equal to carrying value since the debt re-prices at least
every six months and the Company believes that its credit risk has not changed
from the time the floating rate debt was borrowed and therefore, would obtain
similar rates in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
The estimated fair value of the Company's financial instruments
are as follows at December 31:
1996 1995
-------------------- --------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and temporary cash
investments..................... $ 3,297 $3,297 $ 3,029 $ 3,029
Financial liabilities:
Floating rate long-term debt:
Term Credit Agreement.......... $17,430 $17,430 $18,930 $18,930
14. QUARTERLY INFORMATION (Unaudited)
The Company estimated the following quarterly data based on
assumptions which it believes are reasonable. The quarterly data may differ
from quarterly data subsequently presented in interim financial statements.
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Sales............................ $18,340 $19,004 $19,544 $19,299
Operating income before
depreciation and amortization.. $ 7,997 $ 7,512 $ 8,243 $ 8,344
Operating income (loss).......... $ 168 $ (372) $ 367 $ 506
1995
Sales............................ $12,764 $13,710 $16,427 $17,774
Operating income before
depreciation and amortization... $ 5,145 $ 6,341 $ 6,705 $ 7,735
Operating income (loss)........... $ 32 $ 1,030 $ 159 $ (449)
15. SUBSEQUENT EVENTS
a) In July 1997, Mercom sold its cable system in Port St.
Lucie, Florida for $3,650. The Company expects to realize a gain on the sale.
b) C-TEC expects to borrow $15,000 under a two-year term loan
secured by the stock of Mercom owned by C-TEC. It is anticipated that the
Company will assume this loan in connection with the restructuring and the
contribution of the Mercom stock to the Company. Until this loan is repaid,
the amount available under the Revolving Credit Facility (as defined below)
will be limited to to $30 million.
Effective July 1, 1997, the Company has in place two secured
credit facilities (the "Credit Facilities") pursuant to a single credit
agreement with a group of lenders for which First Union National Bank acts as
agent (the "Credit Agreement"). The first is a five-year revolving credit
facility in the amount of $45 million (the "Revolving Credit Facility"). The
second is an eight-year term credit facility in the amount of $100 million
(the "Term Credit Facility"). Borrowings under the Credit Facilities are
available for the following purposes: (i) to refinance all existing
indebtedness of the Company (including intercompany indebtedness owed to C-TEC
Cable Systems, Inc.), (ii) to finance permitted acquisitions, and (iii) for
capital expenditures, working capital and general corporate purposes.
Borrowings under the Credit Facilities are subject to the conditions that
there can be no default or event of default under the Credit Agreement and
that the representations and warranties of the Company contained in the Credit
Agreement must be true.
The interest rate on the Credit Facilities will be, at the
election of the Company, based on either a LIBOR or a Base Rate option (each
as defined in the Credit Agreement).
The Term Credit Facility is available in up to two
installments, and to the extent not borrowed during the ninety-day period
following July 1, 1997 will cease to be available. The entire amount of the
Revolving Credit Facility is available to the Company until June 30, 2002
(subject to the discussion in the last paragraph of this section). Revolving
loans may be repaid and reborrowed from time to time.
The term loan must be repaid over six years in quarterly
installments, at the end of September, December, March and June of each year
from September 30, 1999 through June 30, 2005. The aggregate annual
installments payable on the term loan are as follows (assuming the entire $100
million is drawn, and if less then pro rata to the amounts given below):
1999............ $ 5,000
2000............ $11,250
2001............ $13,750
2002............ $16,250
2003............ $20,000
2004............ $22,500
2005............ $11,250
The Company has the option to repay the term loan in whole or
in part at any time, without penalty, subject to customary "breakage" charges.
Any amount of the term loan that is repaid may not be reborrowed.
The Company is required to apply 100% of the net cash proceeds
realized from certain asset sales, certain payments under insurance policies
and certain incurrences of additional debt to repay the revolving loans. Any
excess amounts of such net cash proceeds not applied to repay revolving loans
are applied to reduce the scheduled installments of the term loan on a pro
rata basis.
All borrowings under the Credit Facilities will be pari passu,
and will be secured under a common collateral package including (i) a first
priority pledge by the Company of 100% of the stock in each other material
subsidiary created after the Closing Date; and (ii) if a holding company is
ever formed to hold the stock of the Company, a first priority pledge by such
holding company of the stock it owns of the Company. In addition, the Company
is subject to a negative pledge on the assets of the Company and a prohibition
on granting other negative pledges to other parties on the assets of the
Company and each of its subsidiaries. The stock and assets of Mercom are
excluded from the security arrangements. Mercom will not be treated as a
subsidiary of the Company until it is 100% owned by the Company.
The Credit Agreement contains customary covenants for
facilities of this nature, including covenants limiting debt, liens,
investments, consolidations, mergers, acquisitions and sales of assets,
payment of dividends and other distributions and transactions with affiliates
and requires the Company to maintain certain financial ratios.
CABLE MICHIGAN, INC.
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
June 30,
1997
----------
Unaudited
ASSETS
Cash and temporary cash investments $ 3,233
Accounts receivable, net of reserve for
doubtful accounts of $681 3,846
Prepayments and other 553
Accounts Receivable - affiliates 1,068
Deferred income taxes 1,019
Property, Plant and Equipment, net of
accumulation of depreciation 74,278
Intangible Assets, Net 53,135
Deferred Charges and Other Assets 164
--------
Total Assets $137,296
========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities
Current maturities of long-term debt $1,925
Accounts payable 2,813
Advance billings and customer deposits 2,295
Accrued taxes 245
Accrued interest 13
Accrued cable programming expense 2,158
Accrued litigation cost 2,150
Accrued expenses 2,379
Accounts payable - affiliates 10,083
Long-term Debt 14,138
Notes Payable - affiliates 142,347
Deferred Income Taxes 24,465
--------
Total liabilities 205,011
Minority Interest 14,269
Commitments and Contingencies
Common Shareholder's Deficit (81,984)
--------
Total Liabilities and Shareholder's Equity $137,296
========
See accompanying note to consolidated financial statements.
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
---------------------------- -----------------------------
1997 1996 1997 1996
---------------------------- ------------------------------
Unaudited Unaudited
<S> <C> <C> <C> <C>
Sales $ 40,230 $ 37,345 $ 20,674 $ 19,004
Costs and Expenses, excluding depreciation and
amortization 23,251 21,835 11,891 11,492
Depreciation and amortization 15,896 15,713 7,974 7,884
-------- -------- -------- --------
Operating Income 1,083 (203) 809 (372)
Interest income 79 55 37 29
Interest expense (6,893) (7,874) (3,546) (3,856)
Other expense, net (320) (266) (189) (197)
-------- -------- -------- --------
(Loss) Before Income Taxes (6,051) (8,288) (2,889) (4,396)
(Benefit) for Income Taxes (2,371) (3,056) (1,281) (1,641)
-------- -------- -------- --------
(Loss) Before Minority Interest (3,680) (5,232) (1,608) (2,755)
Minority interest in loss of consolidated entity 427 609 150 281
-------- -------- -------- --------
Net (Loss) $ (3,253) $ (4,623) $ (1,458) $ (2,474)
======== ======== ======== ========
Unaudited pro forma net (loss) per common share $ (0.12) $ (0.17) $ (0.05) $ (0.09)
</TABLE>
See accompanying note to consolidated financial statements.
CABLE MICHIGAN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------
1997 1996
------- -------
Unaudited
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. $11,082 $21,363
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment................... (4,503) (4,132)
Other...................................................... (57) (40)
------- -------
Net cash used in investing activities...................... (4,560) (4,172)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of long-term debt............................... (1,367) (750)
Change in affiliate notes, net............................. (5,219) (17,426)
------- -------
Net cash (used in) financing activities.................... (6,586) (18,176)
------- -------
Net (decrease) in cash and temporary cash investments...... (64) (985)
Cash and temporary cash investments at beginning of year... 3,297 3,029
------- -------
Cash and temporary cash investments at June 30............. $ 3,233 $ 2,044
======= =======
</TABLE>
See accompanying note to consolidated financial statements.
CABLE MICHIGAN, INC.
NOTES TO CONSOLIDATED STATEMENTS
The interim Consolidated Financial Statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, in the opinion of
the Management of the Company, the interim Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The interim
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto for the fiscal year ended December 31,
1996, included in this Form 10.
EXHIBIT 2.1
DISTRIBUTION AGREEMENT
among
C-TEC CORPORATION,
CABLE MICHIGAN, INC.
and
RCN CORPORATION
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions
Section 1.1. Definitions.................................................. 2
ARTICLE 2
Restructuring
Section 2.1. The Restructuring............................................ 10
Section 2.2. Transfers of Certain Other Assets............................ 12
Section 2.3. Agreement Relating to Consents............................... 13
Section 2.4. Post Distribution Actions.................................... 14
ARTICLE 3
The Distribution
Section 3.1. Cooperation Prior to the Distribution........................ 14
Section 3.2. C-TEC Board Action; Conditions Precedent..................... 15
Section 3.3. The Distribution............................................. 16
Section 3.4. Stock Dividends to C-TEC..................................... 17
Section 3.5. Fractional Shares............................................ 17
ARTICLE 4
Indemnification
Section 4.1. Cable Michigan Indemnification of the C-TEC
Group and the RCN Group.................................... 18
Section 4.2. RCN Indemnification of the C-TEC Group and the Cable Michigan
Group....................................................... 18
Section 4.3. C-TEC Indemnification of Cable Michigan Group and RCN
Group...................................................... 19
Section 4.4. Insurance; Third Party Obligations........................... 20
Section 4.5. Notice and Payment of Claims................................. 20
Section 4.6. Notice and Defense of Third-Party Claims Other
Than Those for Shared Liabilities.......................... 21
Section 4.7. Notice and Defense of Third-Party Claims for Shared
Liabilities................................................ 22
Section 4.8. Contribution................................................. 24
Section 4.9. Non-Exclusivity of Remedies.................................. 24
ARTICLE 5
Employee Matters
Section 5.1. Employee Matters Generally................................... 24
ARTICLE 6
Certain Transitional Services
Section 6.1. Provision of Services........................................ 24
Section 6.2. Duration of Provision and Purchase of
Services................................................... 24
Section 6.3. Nature and Scope of Provision of Services.................... 25
Section 6.4. Charges and Payment for Services............................. 26
Section 6.5. Status as Independent Contractor............................. 26
Section 6.6. Exculpation; Force Majeure................................... 26
Section 6.7. No Transfer of Proprietary Rights............................ 27
ARTICLE 7
Access to Information
Section 7.1. Provision of Corporate Records............................... 27
Section 7.2. Access to Information........................................ 27
Section 7.3. Litigation Cooperation....................................... 28
Section 7.4. Reimbursement................................................ 28
Section 7.5. Retention of Records......................................... 28
Section 7.6. Confidentiality.............................................. 28
Section 7.7. Inapplicability of Article VII to Tax Matters................ 29
ARTICLE 8
Certain Other Agreements
Section 8.1. Intercompany Accounts and Agreements......................... 29
Section 8.2. Further Assurances and Consents.............................. 29
Section 8.3. Intellectual Property Rights and Licenses.................... 30
Section 8.4. Insurance.................................................... 30
ARTICLE 9
Miscellaneous
Section 9.1. Notices...................................................... 31
Section 9.2. Amendments; No Waivers....................................... 32
Section 9.3. Expenses..................................................... 32
Section 9.4. Successors and Assigns....................................... 33
Section 9.5. Governing Law................................................ 33
Section 9.6. Entire Agreement............................................. 33
Section 9.7. Tax Sharing Agreement; Set-Off; Certain Transfer
Taxes....................................................... 34
Section 9.8. Existing Arrangements........................................ 34
Section 9.9. Termination Prior to the Distribution........................ 34
Section 9.10. Captions..................................................... 34
Section 9.11. Dispute Resolution; Jurisdiction............................. 34
Section 9.12. Severability................................................. 35
SCHEDULE 1.01 - Shared Liabilities
SCHEDULE 5.01 - Employee Matters
SCHEDULE 6.01(i) - Services Provided by RCN to C-TEC Group
SCHEDULE 6.01(ii) - Services Provided by RCN to Cable Michigan Group
SCHEDULE 6.01(iii) - Services Provided by C-TEC to RCN Group
SCHEDULE 6.01(iv) - Services Provided by C-TEC to Cable Michigan Group
SCHEDULE 9.08 - Surviving Agreements
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT dated as of September 5, 1997 (the
"Agreement") among C-TEC Corporation, a Pennsylvania corporation ("C-TEC"),
Cable Michigan, Inc., a Pennsylvania corporation ("Cable Michigan"), and RCN
Corporation, a Delaware corporation ("RCN").
W I T N E S S E T H:
WHEREAS, Cable Michigan and RCN are wholly owned Subsidiaries
of C-TEC;
WHEREAS, the Board of Directors of C-TEC has determined that it
is in the best interest of C-TEC, its shareholders, Cable Michigan and RCN to
distribute to the holders of shares of Common Stock, par value $1.00 per
share, of C-TEC (the "C-TEC Common Stock") and to the holders of shares of
Class B Common Stock, par value $1.00 per share, of C-TEC (the "C-TEC Class B
Common Stock", and together with the C-TEC Common Stock, the "C-TEC Common
Equity") all of the outstanding shares of Common Stock, par value $1.00 per
share, of Cable Michigan (the "Cable Michigan Common Stock") owned by C-TEC
and all of the outstanding shares of Common Stock, par value $1.00 per share,
of RCN (the "RCN Common Stock") owned by C-TEC;
WHEREAS, C-TEC, Cable Michigan and RCN are concurrently
herewith entering into the Tax Sharing Agreement; and
WHEREAS, the parties hereto desire to set forth herein the
principal corporate transactions to be effected in connection with the
Distribution and certain other matters relating to the relationship and the
respective rights and obligations of the parties following the Distribution;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.1. Definitions. The following terms, as used
herein, have the following meanings:
"Action" means any claim, suit, action, arbitration, inquiry,
investigation or other proceeding by or before any court, governmental or
other regulatory or administrative agency or commission or any other tribunal.
"Affiliate" means, with respect to any Person, any Person
directly or indirectly controlling, controlled by, or under common control
with, such other Person. For the purposes of this definition, "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of this Agreement, no member of one Group shall be treated as an
Affiliate of any member of either of the other Groups.
"Cable Michigan Business" means the business of providing cable
television services to customers in certain locations in Michigan conducted
primarily by Cable Michigan and Mercom.
"Cable Michigan Common Stock" has the meaning set forth in
the second recital hereto.
"Cable Michigan Form 10" means the registration statement on
Form 10 filed by Cable Michigan with the Commission on July 9, 1997 to effect
the registration of Cable Michigan Common Stock pursuant to the 1934 Act in
connection with the Distribution, as such registration statement may be
amended from time to time.
"Cable Michigan Group" means Cable Michigan and its Subsidiaries
as of (and, except where the context clearly indicates otherwise, after) the
Effective Time (including all predecessors to such Persons). The members of
the Cable Michigan Group are Cable Michigan, Mercom and Mercom's Subsidiaries.
"Cable Michigan Indemnitees" has the meaning set forth in
Section 4.02.
"Cable Michigan Information Statement" means the information
statement that forms a part of the Cable Michigan Form 10 and is to be sent to
each holder of C-TEC Common Stock in connection with the Distribution.
"Cable Michigan Balance Sheet Liabilities" has the meaning
set forth in this Section 1.01 in the definition of "Cable Michigan
Liabilities".
"Cable Michigan Liabilities" means all (i) Liabilities of the
Cable Michigan Group under this Agreement or the other Distribution Documents,
(ii) except as otherwise specifically provided herein or in any other
Distribution Document, other Liabilities, whether arising before, on or after
the Distribution Date, of the parties hereto (or their respective
Subsidiaries) to the extent such Liabilities arise primarily from or relate
primarily to the management or conduct of the Cable Michigan Business prior to
the Effective Time (the Liabilities listed in clauses (i) and (ii) are
collectively referred to as "True Cable Michigan Liabilities") and (iii) 20%
of the Shared Liabilities. The Cable Michigan Liabilities include all
Liabilities set forth on the balance sheet of Cable Michigan as of June 30,
1997 included in the Cable Michigan Information Statement (the "Cable Michigan
Balance Sheet Liabilities").
"CCI" means Commonwealth Communications, Inc., a Pennsylvania
corporation and a wholly owned Subsidiary of C-TEC.
"CCS" means C-TEC Cable Systems, Inc., a Delaware corporation.
"Chimes" means Commonwealth Telecom Services, Inc., a
Pennsylvania corporation and a wholly owned Subsidiary of CCI.
"CLD" means Commonwealth Long Distance Company, a
Pennsylvania corporation and a wholly owned Subsidiary of RLD.
"CLD Distribution" has the meaning set forth in
Section 2.01(l).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commonwealth Service Area" means the local telephone service
franchise area of CTCo as of the date of this Agreement together with the
Pennsylvania communities of Wilkes-Barre, Scranton and Harrisburg.
"Commonwealth Service Area Long Distance Business" means the
business of providing long distance telephone services to customers in the
Commonwealth Service Area conducted prior to the Restructuring primarily by
RLD and after the Restructuring primarily by CLD.
"Corporate Overhead Function" has the meaning defined in
this Section 1.01 in the definition of "RCN Business".
"CTCo" means Commonwealth Telephone Company, a Pennsylvania
corporation and a wholly owned Subsidiary of C-TEC.
"C-TEC Business" means, collectively, (i) the local telephone
service business conducted primarily by CTCo, (ii) the Commonwealth Service
Area Long Distance Business and (iii) the telecommunications, engineering and
technical services business conducted primarily by CCI.
"C-TEC Class B Common Stock" has the meaning set forth in
the second recital hereto.
"C-TEC Common Equity" has the meaning set forth in
the second recital hereto.
"C-TEC Common Stock" has the meaning set forth in
the second recital hereto.
"C-TEC Group" means C-TEC and its Subsidiaries (other than any
member of the Cable Michigan Group or the RCN Group). The members of the
C-TEC Group are C-TEC, CTCo, Commonwealth Long Distance Company, Commonwealth
Telecom Services, Inc., SRHC, Inc., TMH, Inc., Keystone Telecom Company, C-TEC
Cable Holdings, Inc., Mobile Plus, Inc., Mobile Plus of Iowa, Inc., Mobile
Plus Services, Inc., Mobilefone, Inc., Mobile Plus Services of Pennsylvania,
Inc. and C-TEC Cellular Centre County, Inc.
"C-TEC Indemnitees" has the meaning set forth in Section 4.01.
"C-TEC Liabilities" means all (i) Liabilities of the C-TEC Group
under this Agreement or the other Distribution Documents, (ii) except as
otherwise specifically provided herein or in any other Distribution Document,
other Liabilities, whether arising before, on or after the Distribution Date,
of the parties hereto (or their respective Subsidiaries) to the extent such
Liabilities arise primarily from or relate primarily to the management or
conduct of the C-TEC Business prior to the Effective Time (the Liabilities
listed in clauses (i) and (ii) are collectively referred to as "True C-TEC
Liabilities") and (iii) 50% of the Shared Liabilities. The C-TEC Liabilities
1997 included in C-TEC's quarterly report on Form 10-Q for the quarter ended
on such date other than the Cable Michigan Balance Sheet Liabilities and the
RCN Balance Sheet Liabilities.
"C-TEC Services" has the meaning set forth in Section 2.01(o).
"Distribution" means the distribution by C-TEC on the
Distribution Date of the Cable Michigan Common Stock and the RCN Common Stock
owned by C-TEC to the holders of C-TEC Common Equity as of the Record Date.
"Distribution Agent" means First Union National Bank.
"Distribution Date" means the business day as of which the
Distribution shall be effected.
"Distribution Documents" means all of the agreements and other
documents entered into in connection with the Restructuring, the Distribution
or the other transactions contemplated hereby, including, without limitation,
this Agreement and the Tax Sharing Agreement.
"Effective Time" means immediately prior to the close of
business on the Distribution Date.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, codes, plans, permits, licenses and governmental
restrictions, whether now or hereafter in effect, relating to the environment,
the effect of the environment on human health or to emissions, discharges,
releases, manufacturing, storage, processing, distribution, use, treatment,
disposal, transportation or handling of pollutants, contaminants, petroleum or
petroleum products, chemicals or industrial, toxic, radioactive or hazardous
substances or wastes or the clean-up or other remediation thereof.
"Fees" has the meaning set forth in Section 6.04.
"$15 Million Loan" has the meaning set forth in Section 2.01.
"Finally Determined" means, with respect to any Action or other
matter, that the outcome or resolution of such Action or matter has been
judicially determined by judgment or order not subject to further appeal or
discretionary review (or, in the case of any matter required to be resolved by
arbitration in accordance with Section 9.11(a), that the outcome or resolution
of such matter has been determined thereunder).
"Force Majeure" has the meaning set forth in Section 6.06(b).
"Form 10s" means, collectively, the Cable Michigan Form 10 and
the RCN Form 10.
"Group" means, as the context requires, the Cable Michigan
Group, the RCN Group or the C-TEC Group.
"Historical Services" has the meaning set forth in Schedule
6.01(ii).
"Indemnified Party" has the meaning set forth in Section 4.05.
"Indemnifying Party" has the meaning set forth in Section 4.05.
"Information Statements" means the RCN Information Statement and
the Cable Michigan Information Statement.
"Internal Cable Michigan Distribution" has the meaning set
forth in Section 2.01(j).
"International" means RCN International Holdings, Inc., a
Delaware corporation and a wholly owned Subsidiary of C-TEC.
"Letter Ruling" means the private letter ruling dated June 16,
1997, issued by the Internal Revenue Service with respect to the tax-free
nature of the Distribution.
"Liabilities" means any and all claims, debts, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under this
Agreement, any law (including Environmental Laws), rule, regulation, any
action, order, injunction or consent decree of any governmental agency or
entity, or any award of any arbitrator of any kind, and those arising under
any agreement, commitment or undertaking.
"Losses" means, with respect to any Person, any and all damage,
loss, liability and expense incurred or suffered by such Person (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any and all Actions or
threatened Actions).
"Managing Party" has the meaning set forth in Section 4.07.
"Mercom" means Mercom, Inc., a Delaware corporation and a
61.92% owned Subsidiary of C-TEC.
"Mercom Interest" has the meaning set forth in Section 2.01(a).
"Nasdaq" has the meaning set forth in Section 3.01(e).
"Nevada Finance" has the meaning set forth in Section 2.01(o).
"1933 Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Participating Party" has the meaning set forth in Section 4.07.
"Person" means an individual, corporation, limited liability
company, partnership, association, trust or other entity or organization,
including a governmental or political subdivision or an agency or
instrumentality thereof.
"Pre-Distribution Policy" has the meaning set forth in Section
8.04.
"RCN Balance Sheet Liabilities" has the meaning set forth in
this Section 1.01 in the definition of "RCN Liabilities".
"RCN Business" means, collectively, (i) the business of
providing cable television services in certain locations in New Jersey, New
York and Pennsylvania conducted primarily by C-TEC Cable Systems, Inc., RCN
Telecom Services of Pennsylvania, Inc., C-TEC Cable Systems of New York,
ComVideo Systems, Inc. and C-TEC Cable System Services, Inc., (ii) the
business of providing voice, video and data services primarily to customers in
New York, New York and Boston, Massachusetts conducted primarily by RCN
Telecom Services, Inc., RCN Telecom Services of New York, Inc., RCN Telecom
Services of Massachusetts, Inc. and RCN-BecoCom, L.L.C., (iii) the long
distance telephone services business conducted primarily by RLD excluding the
Commonwealth Service Area Long Distance Business, (iv) the business of owning
a 40% equity interest in Megacable, S.A. de C.V., a Mexican corporation,
conducted primarily by International and (v) the corporate overhead function
(the "Corporate Overhead Function") conducted primarily by C-TEC Services,
Inc., a Pennsylvania corporation.
"RCN Common Stock" has the meaning set forth in the second
recital hereto.
"RCN Form 10" means the registration statement on Form 10 filed
by RCN with the Commission on July 9, 1997 to effect the registration of RCN
Common Stock pursuant to the 1934 Act in connection with the Distribution, as
such registration statement may be amended from time to time.
"RCN Group" means RCN and its Subsidiaries as of (and, except
where the context clearly indicates otherwise, after) the Effective Time
(including all predecessors to such Persons). The members of the RCN Group are
RCN, RCN Telecom Services of Pennsylvania, Inc., RCN Long Distance Company,
RCN International Holdings, Inc., RCN Telecom Services, Inc., RCN Telecom
Services of California, Inc., RCN Telecom Services of Delaware, Inc., RCN
Telecom Services of Illinois, Inc., RCN Telecom Services of Massachusetts,
Inc., RCN Telecom Services of Maryland, Inc., RCN Telecom Services of
Michigan, Inc., RCN Telecom Services of New York, Inc., FNY Holding Company,
Inc., Freedom New York L.L.C. (a Delaware limited liability company), RCN
Financial Services, Inc., RCN Corporate Services, Inc., RCN Telecom Services
of New Jersey, Inc., RCN Telecom Services of Virginia, Inc., RCN Telecom
Services of Philadelphia, Inc., RCN Telecom Services of Washington, Inc., RCN
Operating Services, Inc., RCN-BecoCom, L.L.C. (a Massachusetts limited
liability company), RCN Telecom Services of Washington, D.C., Inc., C-TEC
Services, Inc., C-TEC Financial Services, Inc., C-TEC Cable Systems, Inc.,
C-TEC Cable Systems of New York, Inc., ComVideo Systems, Inc., C-TEC Cable
System Services, Inc., C-TEC Fiber Systems of New Jersey, Inc., Fiberfone of
New York, Inc., Fiberfone of Pennsylvania, Inc., Fiberfone of New Jersey, Inc.,
Fiberfone of Michigan, Inc., TEC Air, Inc. and Homelink Communications of
Princeton.
"RCN Indemnitees" has the meaning set forth in Section 4.01.
"RCN Information Statement" means the information statement that
forms a part of the RCN Form 10 and is to be sent to each holder of C-TEC
Common Stock in connection with the Distribution.
"RCN Liabilities" means all (i) Liabilities of the RCN Group
under this Agreement or the other Distribution Documents, (ii) except as
otherwise specifically provided herein or in any other Distribution Document,
other Liabilities, whether arising before, on or after the Distribution Date,
of the parties hereto (or their respective Subsidiaries) to the extent such
Liabilities arise primarily from or relate primarily to the management or
conduct of the RCN Business (other than Shared Corporate Liabilities) prior to
the Effective Time (the Liabilities listed in clauses (i) and (ii) are
collectively referred to as "True RCN Liabilities") and (iii) 30% of the
Shared Liabilities. The RCN Liabilities include all Liabilities set forth on
the balance sheet of RCN as of June 30, 1997 included in the RCN Information
Statement (the "RCN Balance Sheet Liabilities").
"RCN PA" has the meaning set forth in Section 2.01(f).
"RCN PA Distribution" has the meaning set forth in Section
2.01(h).
"RCN Telecom" has the meaning set forth in Section 2.01(c).
"Record Date" means the date determined by C-TEC's Board of
Directors (or determined by a committee of such Board of Directors or by any
person pursuant to authority delegated to such committee or such person) as
the record date for determining the holders of C-TEC Common Equity entitled
to receive Cable Michigan Common Stock and RCN Common Stock pursuant to the
Distribution.
"Representatives" has the meaning set forth in Section 7.06.
"Restructuring" has the meaning set forth in the introductory
paragraph of Article 2.
"RLD" means RCN Long Distance Company (formerly known as
Commonwealth Long Distance Company), a Pennsylvania corporation and a wholly
owned Subsidiary of C-TEC.
"Services" has the meaning set forth in Section 6.01.
"Service Package" has the meaning set forth in Section 6.01.
"Service Provider" has the meaning set forth in Section 6.01.
"Service Recipient" has the meaning set forth in Section 6.01.
"Shared Corporate Liabilities" means Liabilities arising from
the operation of the Corporate Overhead Function prior to the Distribution Date
except to the extent such Liabilities (i) were reflected on the balance sheet
of C-TEC and its consolidated Subsidiaries as of June 30, 1997, (ii) arose
in the ordinary course of business since that date or (iii) have prior to
the date hereof been allocated by C-TEC for purposes of preparing its
consolidated financial statements.
"Shared Liability" means any Liability (whether arising before,
on or after the Distribution Date) of the parties hereto or their respective
Subsidiaries which (i) arises from or relates to the management or conduct
prior to the Effective Time of the businesses of C-TEC and its Subsidiaries
and (ii) is not a True C-TEC Liability, a True Cable Michigan Liability or a
True RCN Liability. Shared Liabilities include, without limitation,
Liabilities listed on Schedule 1.01 hereto.
"Shared Liability Claim" has the meaning set forth in Section
4.07.
"Subsidiary" means, with respect to any Person, any other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"Tax" means Tax as such term is defined in the Tax Sharing
Agreement.
"Tax Sharing Agreement" means the Tax Sharing Agreement dated as
of the date hereof among C-TEC, Cable Michigan and RCN.
"Termination Notice" has the meaning set forth in Section
6.02(b).
"Third-Party Claim" has the meaning set forth in Section 4.06.
"Transition Period" has the meaning set forth in Section
6.02(a).
"True Cable Michigan Liabilities" has the meaning set forth
in this Section 1.01 in the definition of "Cable Michigan Liabilities".
"True C-Tec Liabilities" has the meaning set forth in this
Section 1.01 in the definition of "C-TEC Liabilities".
"True RCN Liabilities" has the meaning set forth in this
Section 1.01 in the definition of "RCN Liabilities".
ARTICLE 2
Restructuring
Prior to the date hereof, the parties have caused certain of
the transactions set forth in Sections 2.01(a) through Section 2.01( )
below to be completed substantially in the order set forth below, and prior
to the Effective Time, the parties will cause the remaining transactions
set forth in subsections (a) through (q) of Section 2.01 to be completed
substantially in the order set forth below. The transactions set forth in
subsections (a) through (q) of Section 2.01 and the transactions set forth
in Section 2.02 are referred to herein collectively as the "Restructuring."
The parties may revise or change the order of the steps constituting the
Restructuring by mutual consent.
Section 2.1. The Restructuring. (a) C-TEC will borrow $15
million (the "$15 Million Loan") from unrelated third party lenders (securing
the $15 Million Loan with its 61.92% interest in Mercom (the "Mercom
Interest")) and use the proceeds for general corporate purposes.
(b) Cable Michigan will borrow $110 million from unrelated
third party lenders and use the proceeds to repay $110 million of intercompany
indebtedness owed to CCS.
(c) CCS will borrow $110 million of new debt from unrelated
third party lenders and use $78.5 million of the proceeds plus $21.5
million of cash on hand to purchase common stock of RCN Telecom Services,
Inc. ("RCN Telecom") from RCN Telecom.
(d) CCS will use the $110 million received from Cable Michigan and
approximately $31.5 million from its own borrowing to retire existing third
party obligations with respect to long term indebtedness.
(e) C-TEC will borrow $75 million from unrelated third party
lenders and contribute the proceeds to RCN Telecom together with $14 million,
for a total of $89 million.
(f) CCS will contribute its common stock of RCN Telecom to RCN
Telecom Services of Pennsylvania, Inc., a Pennsylvania corporation ("RCN PA").
(g) CCS will capitalize all unpaid intercompany notes
receivable owed by its subsidiaries other than the amount repaid by Cable
Michigan described in Section 2.01(b).
(h) All other intercompany notes payable, and all accounts
payable, by a member of one Group to a member of another Group as of June
30, 1997 will be repaid through a series of transactions (including
dividends and contributions) that does not change the percentage ownership
or cash position of any of the entities involved, all as previously agreed
upon by the parties.
(i) CCS will distribute all of the stock of RCN PA to C-TEC (the
"RCN PA Distribution").
(j) CCS will distribute all of the stock of Cable Michigan to C-TEC
(the "Internal Cable Michigan Distribution").
(k) CCI will transfer property relating to the expansion of
CTCo's local telephone business beyond its current franchise area, as well
as any liabilities related to such property, to Chimes.
(l) RLD will transfer the Commonwealth Service Area Long
Distance Business (including all related liabilities) to CLD.
(m) RLD will distribute the stock of CLD to C-TEC (the "CLD
Distribution").
(n) CCI will merge with and into C-TEC pursuant to state corporate
law.
(o) C-TEC will contribute all of its stock in RCN Telecom and all
of the stock of RLD, RCN PA, CCS, C-TEC Financial Services Inc., a Nevada
Corporation ("Nevada Finance"), C-TEC Services, Inc., a Pennsylvania
corporation ("C-TEC Services"), TEC Air, Inc., a Delaware corporation, and
International and related liabilities, if any, to RCN in exchange for additional
stock of RCN.
(p) RCN will contribute all of its stock in RCN Telecom and all of
the stock of RLD and International to RCN PA.
(q) C-TEC will contribute the Mercom Interest to Cable Michigan,
subject to the encumbrance referred to in subsection (a) above and in
connection therewith Cable Michigan will assume the obligations of C-TEC under
the loan referred to in subsection (a) above.
Section 2.2. Transfers of Certain Other Assets. If and to the
referred to in S[20~Section 2.01, effective prior to or as of the
Distribution Date or as soon as practicable after the Distribution Date,
subject to receipt of any necessary consents or approvals of third parties
or of governmental or regulatory agencies or authorities and subject to
Section 8.02, (a) C-TEC shall, or shall cause the relevant member of the
C-TEC Group to, assign, contribute, convey, transfer and deliver to Cable
Michigan or to one or more members of the Cable Michigan Group all of the
right, title and interest of C-TEC or such member of the C-TEC Group in and
to all assets (including all agreements), if any, held by any member of the
C-TEC Group that relate predominantly to the Cable Michigan Business and
Cable Michigan shall, or shall cause such member or members of the Cable
Michigan Group to, assume and take transfer of all liabilities associated
with such assets; (b) C-TEC shall, or shall cause the relevant member of
the C-TEC Group to assign, contribute, convey, transfer and deliver to RCN
or to one or more members of the RCN Group all of the right, title and
interest of C-TEC or such member of the C-TEC Group in and to all assets
(including all agreements), if any, held by any member of the C-TEC Group
that relate predominantly to the RCN Business and RCN shall, or shall cause
such member or members of the RCN Group to, assume and take transfer of all
liabilities associated with such assets; (c) Cable Michigan shall, or
shall cause the relevant member of the Cable Michigan Group to, assign,
convey, transfer and deliver to C-TEC or to one or more members of the C-
TEC Group all of the right, title and interest of Cable Michigan or such
member of the Cable Michigan Group in and to all assets (including all
agreements), if any, held by any member of the Cable Michigan Group that
relate predominantly to the C-TEC Business and C-TEC shall, or shall cause
such member or members of the C-TEC Group to assume and take transfer of
all liabilities associated with such assets; (d) Cable Michigan shall, or
shall cause the relevant member of the Cable Michigan Group to, assign,
convey, transfer and deliver to RCN or to one or more members of the RCN
Group all of the right, title and interest of Cable Michigan or such member
of the Cable Michigan Group in and to all assets (including all
agreements), if any, held by any member of the Cable Michigan Group that
relate predominantly to the RCN Business and RCN shall, or shall cause such
member or members of the RCN Group to, assume and take transfer of all
liabilities associated with such assets; (e) RCN shall, or shall cause
the relevant member of the RCN Group to, assign, convey, transfer and
deliver to C-TEC or to one or more members of the C-TEC Group all of the
right, title and interest of RCN or such member of the RCN Group in and to
all assets (including all agreements), if any, held by any member of the
RCN Group that relate predominantly to the C-TEC Business and C-TEC shall,
or shall cause such member or members of the C-TEC Group to, assume and
take transfer of all liabilities associated with such assets; and (f) RCN
shall, or shall cause the relevant member of the RCN Group to, assign,
convey, transfer and deliver to Cable Michigan or to one or more members of
the Cable Michigan Group all of the right, title and interest of RCN or
such member of the RCN Group in and to all assets (including all
agreements), if any, held by any member of the RCN Group that relate
predominantly to the Cable Michigan Business and Cable Michigan shall, or
shall cause such member or members of the Cable Michigan Group to, assume
and take transfer of all liabilities associated with such assets. For the
avoidance of doubt, it is understood that (i) CTCo shall not transfer to
any member of the RCN Group the mainframe computer owned by CTCo and (ii)
C-TEC Services shall assign to C-TEC or to one or more members of the C-TEC
Group all of its right, title and interest in the Facilities Management
Agreement dated October 1, 1992, as amended, between C-TEC Services and
Alltel Telecom Information Services, Inc., and such member or members of
the C-TEC Group shall assume the obligations of C-TEC Services under that
agreement.
Section 2.3. Agreement Relating to Consents. The obligations
of the parties to effect (or cause to be effected) the Restructuring shall be
subject to the receipt of all necessary consents of any third party or any
governmental or regulatory agency or authority. Notwithstanding anything in
this Agreement to the contrary, this Agreement shall not constitute an
agreement to transfer or assign any asset (including any agreement) or any
claim or right or any benefit arising thereunder or resulting therefrom if an
attempted assignment thereof, without the necessary consent of a third party
or a governmental or regulatory agency or authority, would constitute a breach
or other contravention thereof or in any way adversely affect the rights of
the Cable Michigan Group, the RCN Group or the C-TEC Group thereunder. Each of
Cable Michigan, RCN and C-TEC will, subject to Section 8.02, use their
reasonable efforts to obtain, or cause to be obtained, the consent of any
third party or any governmental or regulatory agency or authority, if any,
required in connection with the Restructuring. If any such required consent
for an assignment in the Restructuring is not obtained, or if an attempted
assignment of any asset (including any agreement) or any claim or right or
benefit arising thereunder would be ineffective or would adversely affect the
rights of the transferor with respect thereto so that the intended transferee
would not in fact receive all such rights, the intended transferor and the
intended transferee will cooperate in a mutually agreeable arrangement under
which the intended transferee would obtain the benefits and assume the
obligations thereunder in accordance with this Agreement, including
sub-contracting, sub-licensing or sub-leasing to such transferee, or under
which the transferor would enforce for the benefit of the transferee, with the
transferee assuming the transferor's obligations, any and all rights of the
transferor against a third party thereto.
Section 2.4. Post Distribution Actions. Following the
Distribution, (i) C-TEC agrees to conduct an offering of equity or
equity-linked securities in accordance with the terms of the Letter Ruling,
(ii) RCN agrees to establish an employee stock ownership plan in accordance
with the terms of the Letter Ruling and (iii) the parties agree to comply with
the other applicable requirements of the Letter Ruling.
ARTICLE 3
The Distribution
Section 3.1. Cooperation Prior to the Distribution. (a)
C-TEC and Cable Michigan have prepared, and Cable Michigan has filed with
the Commission, the Cable Michigan Form 10, which includes or incorporates
by reference the Cable Michigan Information Statement setting forth
appropriate disclosure concerning Cable Michigan and the Distribution. C-TEC
and Cable Michigan shall use reasonable efforts to cause the Cable Michigan
Form 10 to become effective under the 1934 Act as soon as practicable.
After the Form 10 becomes effective, C-TEC will mail the Cable Michigan
Information Statement to the holders of C-TEC Common Equity as of the
Record Date.
(b) C-TEC and RCN have prepared, and RCN has filed with the
Commission, the RCN Form 10, which includes or incorporates by reference the
RCN Information Statement setting forth appropriate disclosure concerning RCN
and the Distribution. C-TEC and RCN shall use reasonable efforts to cause the
RCN Form 10 to become effective under the 1934 Act as soon as practicable.
After the RCN Form 10 becomes effective, C-TEC will mail the RCN Information
Statement to the holders of C-TEC Common Equity as of the Record Date.
(c) C-TEC, Cable Michigan and RCN shall cooperate in preparing,
filing with the Commission and causing to become effective any registration
statements or amendments thereto that are appropriate to reflect the
establishment of or amendments to any employee benefit and other plans
contemplated by this Agreement.
(d) C-TEC, Cable Michigan and RCN shall take all such action as
may be necessary or appropriate under the securities or blue sky laws of states
or other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement.
(e) Cable Michigan and RCN have each prepared, filed and will
pursue an application to permit trading of the Cable Michigan Common Stock
and the RCN Common Stock, respectively, on the Nasdaq Stock Market
("Nasdaq").
Section 3.2. C-TEC Board Action; Conditions Precedent. (a)
C-TEC's Board of Directors shall, in its discretion, establish (or delegate
authority to establish) the Record Date and the Distribution Date and any
appropriate procedures in connection with the Distribution. In no event shall
the Distribution occur unless the following conditions shall have been and
continue to be satisfied:
(i) the Cable Michigan Form 10 and the RCN Form 10 shall
each have become effective under the 1934 Act;
(ii) the Cable Michigan Common Stock and the RCN Common Stock
to be delivered in the Distribution shall, in each case, have been approved
for trading on Nasdaq, subject to official notice of issuance;
(iii) the Board of Directors of C-TEC shall be satisfied
that (a) at the time of the Distribution and after giving effect to the
Distribution and other related transactions constituting part of the
Restructuring, C-TEC will not be insolvent (in that, both before and
immediately following the Distribution, (i) the fair market value of C-
TEC's assets would exceed C-TEC's liabilities, (ii) C-TEC would be able to
pay its liabilities as they mature and become absolute and (iii) C-TEC
would not have unreasonably small capital with which to engage in its
business) and (b) the Distribution will be permitted under Section 1551 of
the Pennsylvania Business Corporations Act.
(iv) C-TEC's Board of Directors shall have approved the
Distribution and shall not have abandoned, deferred or modified the
Distribution at any time prior to the Distribution Date;
(v) (i) Cable Michigan's Board of Directors, as named in the
Cable Michigan Information Statement, shall have been elected by C-TEC, as
sole stockholder of Cable Michigan, and Cable Michigan's certificate of
incorporation and bylaws, in substantially the forms filed as exhibits to the
Cable Michigan Form 10, shall be in effect and (ii) RCN's Board of Directors,
as named in the RCN Information Statement, shall have been elected by C-TEC,
as sole stockholder of RCN, and RCN's certificate of incorporation and bylaws,
in substantially the forms filed as exhibits to the RCN Form 10, shall be in
effect;
(vi) the Tax Sharing Agreement shall have been duly executed
and delivered by the parties thereto;
(vii) the Internal Revenue Service shall not have withdrawn the
Letter Ruling; and
(viii) the Restructuring shall have been consummated in all
material respects.
(b) In no event shall either the RCN PA Distribution or the
Internal Cable Michigan Distribution occur unless the Board of Directors of
CCS shall be satisfied that (a) at the time of the RCN PA Distribution or
the Internal Cable Michigan Distribution, as the case may be, and after
giving effect to the RCN PA Distribution or the Internal Cable Michigan
Distribution, as the case may be, CCS will not be insolvent (in that, both
before and immediately following the RCN PA Distribution or the Internal
Cable Michigan Distribution, as the case may be, (i) the fair market value
of CCS's assets would exceed CCS's liabilities, (ii) CCS would be able to
pay its liabilities as they mature and become absolute and (iii) CCS would
not have unreasonably small capital with which to engage in its business)
and (b) the RCN PA Distribution or the Internal Cable Michigan
Distribution, as the case may be, will be permitted under Section 170 of
the Delaware General Corporation Law.
(c) In no event shall the CLD Distribution occur unless the
Board of Directors of RLD shall be satisfied that (a) at the time of the
CLD Distribution and after giving effect to the CLD Distribution, RLD will
not be insolvent (in that, both before and immediately following the CLD
Distribution, (i) the Fair Market Value of RLD's Assets would exceed RLD's
liabilities, (ii) RLD would be able to pay its liabilities as they mature
and become absolute and (iii) RLD would not have unreasonably small
capital with which to engage in its business and (b) the CLD Distribution
will be permitted under Section 1551 of the Pennsylvania Business
Corporations Act.
Section 3.3. The Distribution. Subject to the terms and
conditions set forth in this Agreement, (i) prior to the Distribution Date,
C-TEC shall deliver to the Distribution Agent for the benefit of holders of
record of C-TEC Common Equity on the Record Date, stock certificates, endorsed
by C-TEC in blank, representing all of the then outstanding shares of Cable
Michigan Common Stock owned by C-TEC and all of the then outstanding shares of
RCN Common Stock owned by C-TEC, (ii) the Distribution shall be effective as
of the close of business, New York City time, on the Distribution Date and
(iii) C-TEC shall instruct the Distribution Agent to distribute, on or as soon
as practicable after the Distribution Date, to each holder of record of C-TEC
Common Equity as of the Record Date one share of Cable Michigan Common Stock
for each four shares of C-TEC Common Equity so held and one share of RCN
Common Stock for each one share of C-TEC Common Equity so held. Cable
Michigan and RCN each agree to provide all certificates for shares of Cable
Michigan Common Stock and RCN Common Stock, respectively, that C-TEC shall
require (after giving effect to Section 3.04) in order to effect the
Distribution.
Section 3.4. Stock Dividends to C-TEC. On or prior to the
Distribution Date:
(i) Cable Michigan shall issue to C-TEC as a stock dividend
the number of shares of Cable Michigan Common Stock as required to effect the
Distribution, as certified by the Distribution Agent. In connection therewith,
C-TEC shall deliver to Cable Michigan for cancellation the share certificate
currently held by it representing Cable Michigan Common Stock.
(ii) RCN shall issue to C-TEC as a stock dividend the number
of shares of RCN Common Stock as required to effect the Distribution, as
certified by the Distribution Agent. In connection therewith, C-TEC shall
deliver to RCN for cancellation the share certificate currently held by it
representing RCN Common Stock.
Section 3.5. Fractional Shares. No certificates representing
fractional shares of Cable Michigan Common Stock or RCN Common Stock will be
distributed in the Distribution. The Distribution Agent will be directed to
determine the number of whole shares and fractional shares of Cable Michigan
Common Stock and RCN Common Stock allocable to each holder of C-TEC Common
Stock as of the Record Date. Upon the determination by the Distribution Agent
of such number of fractional shares, as soon as practicable after the
Distribution Date, the Distribution Agent, acting on behalf of the holders
thereof, shall sell such fractional shares for cash on the open market and
shall disburse the appropriate portion of the resulting cash proceeds (net of
any costs of selling the fractional shares) to each holder entitled thereto.
ARTICLE 4
Indemnification
Section 4.1. Cable Michigan Indemnification of the C-TEC Group
and the RCN Group. (a) Subject to Section 4.04, on and after the Distribution
Date, Cable Michigan shall indemnify, defend and hold harmless the C-TEC Group
and the respective directors, officers, employees and Affiliates of each
Person in the C-TEC Group (the "C-TEC Indemnitees") and the RCN Group and the
respective directors, officers, employees and Affiliates of each Person in the
RCN Group (the "RCN Indemnitees") from and against any and all Losses incurred
or suffered by any of the C-TEC Indemnitees or the RCN Indemnitees,
respectively, (1) arising out of, or due to the failure of any Person in the
Cable Michigan Group to pay, perform or otherwise discharge, any of the Cable
Michigan Liabilities, (2) arising out of the breach by any member of the Cable
Michigan Group of any obligation under this Agreement or any of the other
Distribution Documents, (3) in the case of the C-TEC Indemnitees, arising out
of the performance of the Services under clause (iv) of Section 6.01 except to
the extent such Losses result from the gross negligence or willful misconduct
of a C-TEC Indemnitee or (4) in the case of the RCN Indemnitees, arising out
of the performance of Services under clause (ii) of Section 6.01 except to the
extent such Losses result from the gross negligence or willful misconduct of a
RCN Indemnitee.
(b) Subject to Section 4.04, Cable Michigan shall indemnify, defend
and hold harmless each of the C-TEC Indemnitees, each of the RCN Indemnitees
and each Person, if any, who controls any C-TEC Indemnitee or any RCN
Indemnitee within the meaning of either Section 15 of the 1933 Act or Section
20 of the 1934 Act from and against any and all Losses caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Cable Michigan Form 10 or any amendment thereof or the Cable Michigan
Information Statement (as amended or supplemented), or caused by any omission
or alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such Losses are caused by any such
untrue statement or omission or alleged untrue statement or omission based
upon information furnished to Cable Michigan in writing by C-TEC expressly for
use therein.
Section 4.2. RCN Indemnification of the C-TEC Group and the
Cable Michigan Group. (a) Subject to Section 4.04, on and after the
Distribution Date, RCN shall indemnify, defend and hold harmless the C-TEC
Indemnitees and the Cable Michigan Group and the respective directors,
officers, employees and Affiliates of each Person in the Cable Michigan Group
(the "Cable Michigan Indemnitees") from and against any and all Losses incurred
or suffered by any of the C-TEC Indemnitees or the Cable Michigan Indemnitees,
respectively, (1) arising out of, or due to the failure of any Person in the
RCN Group to pay, perform or otherwise discharge, any of the RCN Liabilities,
(2) arising out of the breach by any member of the RCN Group of any obligation
under this Agreement or any of the other Distribution Documents or (3) in the
case of the C-TEC Indemnitees, arising out of the performance of the Services
under clause (iii) of Section 6.01 except to the extent such Losses result
from the gross negligence or willful misconduct of a C-TEC Indemnitee.
(b) Subject to Section 4.04, RCN shall indemnify, defend and hold
harmless each of the C-TEC Indemnitees, each of the Cable Michigan Indemnitees
and each Person, if any, who controls any C-TEC Indemnitee or any Cable
Michigan Indemnitee within the meaning of either Section 15 of the 1933 Act or
Section 20 of the 1934 Act from and against any and all Losses caused by any
untrue statement or alleged untrue statement of a material fact contained in
the RCN Form 10 or any amendment thereof or the RCN Information Statement (as
amended or supplemented), or caused by any omission or alleged omission to
state therein a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, except
insofar as such Losses are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information furnished to RCN
in writing by C-TEC expressly for use therein.
Section 4.3. C-TEC Indemnification of Cable Michigan Group and
RCN Group. (a) Subject to Section 4.04, on and after the Distribution Date,
C-TEC shall indemnify, defend and hold harmless the Cable Michigan
Indemnitees and the RCN Indemnitees from and against any and all Losses
incurred or suffered by any of the Cable Michigan Indemnitees or the RCN
Indemnitees, respectively, (1) arising out of, or due to the failure of any
Person in the C-TEC Group to pay, perform or otherwise discharge, any of the
C-TEC Liabilities, (2) arising from any breach by any member of the C-TEC
Group of any obligation made under this Agreement or any of the other
Distribution Documents, or (3) in the case of the RCN Indemnitees, arising out
of the performance of the Services under clause (i) of Section 6.01 except to
the extent such Losses result from the gross negligence or willful misconduct
of a RCN Indemnitee.
(b) Subject to Section 4.04, C-TEC shall indemnify, defend and hold
harmless each of the Cable Michigan Indemnitees, each of the RCN Indemnitees
and each Person, if any, who controls any Cable Michigan Indemnitee or any RCN
Indemnitee within the meaning of either Section 15 of the 1933 Act or Section
20 of the 1934 Act from and against any and all Losses caused by any untrue
statement or alleged untrue statement of a material fact contained in either
of the Form 10s or any amendment thereof or either of the Information
Statements (as amended or supplemented), or caused by any omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in each case to the extent, but only to the extent, that such
Losses are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information furnished to Cable Michigan or
RCN, as the case may be, in writing by C-TEC expressly for use therein.
Section 4.4. Insurance; Third Party Obligations. Any
indemnification pursuant to Section 4.01, 4.02 or 4.03 shall be paid net of the
amount of any insurance or other amounts that would be payable by any third
party to the Indemnified Party (as defined below) in the absence of this
Agreement (irrespective of time of receipt of such insurance or other amounts)
and net of any Tax Benefit (as defined in the Tax Sharing Agreement) to the
Indemnified Party attributable to the relevant payment or Liability. It is
expressly agreed that no insurer or any other third party shall be (i)
entitled to a benefit it would not be entitled to receive in the absence of
the foregoing indemnification provisions, (ii) relieved of the responsibility
to pay any claims to which it is obligated or (iii) entitled to any
subrogation rights with respect to any obligation hereunder.
Section 4.5. Notice and Payment of Claims. If any C-TEC
Indemnitee, Cable Michigan Indemnitee or RCN Indemnitee (the "Indemnified
Party") determines that it is or may be entitled to indemnification by any
party (the "Indemnifying Party") under Article IV (other than in connection
with any Action subject to Section 4.06 or 4.07), the Indemnified Party shall
deliver to the Indemnifying Party a written notice specifying, to the extent
reasonably practicable, the basis for its claim for indemnification and the
amount for which the Indemnified Party reasonably believes it is entitled to
be indemnified. Within 30 days after receipt of such notice, the Indemnifying
Party shall pay the Indemnified Party such amount in cash or other immediately
available funds unless the Indemnifying Party objects to the claim for
indemnification or the amount thereof. If the Indemnifying Party does not give
the Indemnified Party written notice objecting to such indemnity claim and
setting forth the grounds therefor within such 30-day period, the Indemnifying
Party shall be deemed to have acknowledged its liability for such claim and
the Indemnified Party may exercise any and all of its rights under applicable
law to collect such amount. In the event of such a timely objection by the
Indemnifying Party, the amount, if any, that is Finally Determined to be
required to be paid by the Indemnifying Party in respect of such indemnity
claim shall be paid by the Indemnifying Party to the Indemnified Party in cash
within 15 days after such indemnity claim has been so Finally Determined.
Section 4.6. Notice and Defense of Third-Party Claims Other
Than Those for Shared Liabilities. Promptly following the earlier of (i)
receipt of notice of the commencement by a third party of any Action against or
otherwise involving any Indemnified Party or (ii) receipt of information from a
third party alleging the existence of a claim against an Indemnified Party, in
either case, with respect to which indemnification may be sought pursuant to
this Agreement (a "Third-Party Claim"), the Indemnified Party shall give the
Indemnifying Party written notice thereof. The failure of the Indemnified Party
to give notice as provided in this Section 4.05 shall not relieve the
Indemnifying Party of its obligations under this Agreement, except to the
extent that the Indemnifying Party is prejudiced by such failure to give
notice. Within 30 days after receipt of such notice, the Indemnifying Party
may (i) by giving written notice thereof to the Indemnified Party, acknowledge
liability for such indemnification claim and at its option elect to assume the
defense of such Third-Party Claim at its sole cost and expense or (ii) object
to the claim for indemnification set forth in the notice delivered by the
Indemnified Party pursuant to the first sentence of this Section 4.06;
provided that if the Indemnifying Party does not within such 30-day period
give the Indemnified Party written notice objecting to such indemnification
claim and setting forth the grounds therefor, the Indemnifying Party shall be
deemed to have acknowledged its liability for such indemnification claim. If
the Indemnifying Party has acknowledged liability and elected to assume the
defense of a Third-Party Claim, (x) the defense shall be conducted by counsel
retained by the Indemnifying Party and reasonably satisfactory to the
Indemnified Party, provided that the Indemnified Party shall have the right to
participate in such proceedings and to be represented by counsel of its own
choosing at the Indemnified Party's sole cost and expense; and (y) the
Indemnifying Party may settle or compromise the Third Party Claim without the
prior written consent of the Indemnified Party so long as such settlement
includes an unconditional release of the Indemnified Party from all claims
that are the subject of such Third Party Claim, provided that the Indemnifying
Party may not agree to any such settlement pursuant to which any remedy or
relief, other than monetary damages for which the Indemnifying Party shall be
responsible hereunder, shall be applied to or against the Indemnified Party,
without the prior written consent of the Indemnified Party, which consent
shall not be unreasonably withheld. If the Indemnifying Party does not assume
the defense of a Third-Party Claim for which it has acknowledged liability for
indemnification hereunder, the Indemnified Party will act in good faith with
respect thereto and may require the Indemnifying Party to reimburse it on a
current basis for its reasonable expenses of investigation, reasonable
attorneys' fees and reasonable out-of-pocket expenses incurred in defending
against such Third-Party Claim and the Indemnifying Party shall be bound by
the result obtained with respect thereto by the Indemnified Party; provided
that the Indemnifying Party shall not be liable for any settlement effected
without its consent, which consent shall not be unreasonably withheld. If the
Indemnifying Party objects to a claim for indemnification, (a) the
Indemnifying Party shall not be entitled to assume the defense of the related
Third-Party Claim, (b) the Indemnified Party shall act in good faith with
respect to such Third-Party Claim, (c) the dispute as to whether the
Indemnified Party is entitled to indemnification hereunder shall be resolved
in accordance with Section 9.11(a) hereof and (d) if it is determined that the
Indemnified Party is entitled to indemnification hereunder, the Indemnifying
Party will be responsible for all Losses of the Indemnified Party arising from
such Third-Party Claim. The Indemnifying Party shall pay to the Indemnified
Party in cash the amount, if any, for which the Indemnified Party is entitled
to be indemnified hereunder within 15 days after such Third-Party Claim has
been Finally Determined, in the case of a Third-Party Claim as to which the
Indemnifying Party has acknowledged liability or, in the case of any
Third-Party Claim as to which the Indemnifying Party has not acknowledged
liability, within 15 days after such Indemnifying Party's objection to
liability hereunder has been Finally Determined to be unfounded. This Section
4.06 shall govern all claims under this Article IV for indemnification against
Third-Party Claims except Third-Party Claims in respect of Shared Liabilities,
as to which Section 4.07 shall govern.
Section 4.7. Notice and Defense of Third-Party Claims for
Shared Liabilities. Promptly following the earlier of (i) receipt of notice
of the commencement of a Third-Party Claim in respect of a Shared Liability (a
"Shared Liability Claim") or (ii) receipt of information from a third party
alleging the existence of a Shared Liability Claim, the party receiving such
notice or information shall give the other parties written notice thereof. The
failure of the party receiving notice or information with respect to a Shared
Liability Claim in respect to give notice as provided in this Section 4.07
shall not relieve another party of its indemnification obligations under this
Agreement with respect thereto, except to the extent that such party is
prejudiced by such failure to give notice.
Each party hereto shall be entitled to participate in the
defense of such Shared Liability Claim if either the Shared Liability Claim
has been asserted or threatened against such party or such party has
acknowledged in writing its obligation to bear a portion of the potential
liability in respect of such Shared Liability Claim. (Each party that is so
entitled to participate in the defense of such Shared Liability Claim is
referred to herein as a "Participating Party".) Without limiting the terms of
Sections 4.01(a), 4.02(a) and 4.03(a), the party against whom the Shared
Liability Claim is made shall have management and administrative
responsibility in respect thereof; provided that if RCN is a Participating
Party it shall have management and administrative responsibility in respect
thereof. The party responsible for the management and administration of a
Shared Liability Claim is referred to herein as the "Managing Party" and such
management and administrative responsibility shall entail the defense of such
Shared Liability Claim, negotiation with claimants and potential claimants
(subject to the limitations in the following paragraph) and other reasonably
related activities. The Managing Party shall retain counsel selected by it
and reasonably satisfactory to the other Participating Parties, provided that
the other Participating Parties shall have the right to participate in such
proceedings and to be represented by counsel of its or their own choosing at
its or their sole cost and expense. The legal or other expenses in respect of
a Shared Liability Claim incurred by or on behalf of any person other than the
Managing Party shall not be Losses for purposes of this Agreement. All
parties hereto shall cooperate with the Managing Party and each other in the
defense or prosecution of such Shared Liability Claim.
In no event will the party against which the claim was made
admit any liability with respect to, or settle, compromise or discharge, any
Shared Liability Claim without the prior written consent of each other
Participating Party; provided, however, that the party against which the claim
was made may settle or compromise the Shared Liability Claim without the prior
written consent of the other Participating Parties if such party releases each
of the other Participating Parties from their respective indemnification
obligations hereunder with respect to such Shared Liability Claim and such
settlement, compromise or discharge would not otherwise adversely affect the
other Participating Parties. The Managing Party shall act in good faith with
respect to the Shared Liability Claim and may require the other parties to
reimburse it on a current basis for its reasonable expenses of investigation,
reasonable attorneys' fees and reasonable out-of-pocket expenses incurred in
defending against such Shared Liability Claim, and the other parties shall be
bound by the result obtained with respect thereto; provided that a
Participating Party shall not be liable for any settlement effected without
its consent, which consent shall not be unreasonably withheld. If a party
objects to, or does not within 30 days of notice acknowledge in writing its
indemnification obligations hereunder in respect of a portion of the liability
for a Shared Liability Claim, (a) such party shall not be entitled to
participate in the defense of such Shared Liability Claim, and (b) the dispute
as to whether such party is required to provide indemnification hereunder with
respect thereto shall be resolved in accordance with Section 9.11(a) hereof.
Each Indemnifying Party in respect of a Shared Liability Claim shall pay to
the Indemnified Party in cash the amount, if any, for which the Indemnified
Party is entitled to be indemnified hereunder by such Indemnifying Party
within 15 days after such Shared Liability Claim has been Finally Determined,
in the case of a Shared Liability Claim as to which the Indemnifying Party has
acknowledged liability or, in the case of any Shared Liability Claim as to
which the Indemnifying Party has not acknowledged liability, within 15 days
after such Indemnifying Party's objection to liability hereunder has been
Finally Determined to be unfounded.
Section 4.8. Contribution. If for any reason the
indemnification provided for in Section 4.01, 4.02 or 4.03 is unavailable to
any Indemnified Party, or insufficient to hold it harmless, then the
Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses in such proportion as is
appropriate to reflect all relevant equitable considerations.
Section 4.9. Non-Exclusivity of Remedies. The remedies
provided for in this Article IV are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any Indemnified Party
at law or in equity.
ARTICLE 5
Employee Matters
Section 5.1. Employee Matters Generally. With respect to
employee matters and employee benefits arrangements, the parties hereto agree
as set forth in Schedule 5.01. In the event of any conflict between the
provisions of this Agreement and Schedule 5.01 with respect to employee or
employee benefit matters, the provisions of Schedule 5.01 shall prevail.
ARTICLE 6
Certain Transitional Services
Section 6.1. Provision of Services. On the terms and
conditions set forth herein, and in order to assist in effecting an orderly
transition following the Distribution, (i) RCN will provide or cause to be
provided to the C-TEC Group, and C-TEC will purchase or cause to be purchased
from RCN (or the appropriate member of the RCN Group), the services set forth
on Schedule 6.01(i); (ii) RCN will provide or cause to be provided to the
Cable Michigan Group, and Cable Michigan will purchase or cause to be
purchased from RCN (or the appropriate member of the RCN Group), the services
set forth on Schedule 6.01(ii); (iii) C-TEC will provide or cause to be
provided to the RCN Group, and RCN will purchase or cause to be purchased from
C-TEC (or the appropriate member of the C-TEC Group), the services set forth on
Schedule 6.01(iii); and (iv) C-TEC will provide or cause to be provided to the
Cable Michigan Group, and Cable Michigan will purchase or cause to be
purchased from C-TEC (or the appropriate member of the C-TEC Group), the
services set forth on Schedule 6.01(iv). The services referred to in the
preceding sentence are referred to collectively as the "Services." As used
herein, (1) the term "Service Recipient" means, with respect to any given
Service, the recipient of such Service and for purposes of enforcing this
Agreement with C-TEC, RCN or Cable Michigan, as the case may be, shall be
treated as the recipient of all Services provided to its Group; (2) the term
"Service Provider" means, with respect to any given Service, the provider of
such Service and for purposes of such definition, C-TEC and RCN, as the case
may be, shall be treated as the provider of all Services provided by its Group;
and (3) the Services provided by a given Service Provider to a given Service
Recipient are referred to herein collectively as a "Service Package".
Section 6.2. Duration of Provision and Purchase of Services.
(a) The Services shall be provided and purchased in accordance with Section
6.01 for a period (the "Transition Period") (i) commencing on the Distribution
Date and (ii) ending, in the case of each Service Package, on the date that is
sixty (60) days after the date that either the relevant Service Provider or
the relevant Service Recipient gives notice that it is terminating this
Agreement with respect to the provision of that Service Package; provided that
RCN may not terminate this Agreement with respect to any of the Services set
forth in items 1 (customer service), 12 (programming administration), 13
(billing) and 16 (provision of third party programming) of Schedule 6.01(ii)
on less than one year advance notice to Cable Michigan.
(b) At any time during the Transition Period, the Service Recipient
may, at its election, terminate the provision of any Service that is being
provided to it by delivery of a notice to the applicable Service Provider (a
"Termination Notice"), which termination shall become effective with respect
to such Service sixty (60) days after the date of delivery of a Termination
Notice. If a Service ceases to be provided during the Transition Period, the
parties concerned will negotiate in good faith regarding a reduction in the
amount charged by the Service Provider to the Service Recipient for Services
under this Agreement.
Section 6.3. Nature and Scope of Provision of Services. The
nature, scope and timing of provision of the Services to be provided hereunder
shall be substantially consistent with the nature, scope and timing of the
comparable services provided to the Service Recipient (or its predecessor) by
the Service Provider (or its predecessor) prior to the Distribution; provided
that no Person shall be obligated to hire additional or replacement employees,
or increase the compensation of its existing employees, in order to provide
the Services hereunder. The Service Provider shall cause the employees
providing Services to use the same skill and care in the provision of the
Services as they exercise in performing such services for members of their own
Group.
Section 6.4. Charges and Payment for Services. The Service
Recipient shall (or shall cause the appropriate member of its Group to) pay the
Service Provider (or the appropriate member of its Group) fees in respect of
the Services set forth hereunder in Schedules 6.01(i), (ii), (iii) or (iv), as
applicable (the "Fees"). All Fees required to be paid hereunder shall be
invoiced monthly, and invoiced amounts shall be due and payable individually
by the Service Recipients in cash within thirty (30) days from date of receipt
of such invoice therefor. The parties agree to enter into good faith
negotiations to reduce the applicable Fees payable hereunder if the level or
quantity of any given Service provided hereunder is reduced at the request of
the Service Recipient.
Section 6.5. Status as Independent Contractor. C-TEC, Cable
Michigan and RCN agree that the relationship between any employee of one
company providing Services to another shall be that of an employee of an
independent contractor and not that of an employee, agent, partner or joint
venturer of the Service Recipient. C-TEC, Cable Michigan and RCN agree that
any individual providing services hereunder will not be treated as employees
of the Service Recipient for any purpose, including, without limitation, the
Federal Insurance Contributions Act, the Social Security Act, the Federal
Unemployment Tax Act, federal and state income tax withholding, state worker's
compensation insurance and similar laws covering the employer/employee
relationship.
Section 6.6. Exculpation; Force Majeure. (a) Neither C-TEC
(nor any C-TEC Indemnitee) nor RCN (nor any RCN Indemnitee) shall be liable to
any other Person for any Losses directly or indirectly arising out of, relating
to or in connection with the performance or non-performance by the C-TEC Group
or the RCN Group, respectively, of the Services hereunder, except to the
extent such Losses are attributable to gross negligence or willful misconduct
of the C-TEC Group or the RCN Group, respectively.
(b) Without limiting the provisions of Section 6.06(a), no Service
Provider hereunder shall be liable to any Service Recipient hereunder for any
delay or default in performance of the Services where occasioned by any cause
of any kind or extent beyond the Service Provider's control including, by way
of example, but not limitation, any act of God, any act, regulation or law of
any government, war, civil commotion, destruction of production facilities or
materials by fire, earthquake or storm, labor disturbance, epidemic, equipment
breakdown or failure, failure to obtain any consent or approval of a third
party necessary to provide the Services, or failure of suppliers, public
utilities or common carriers ("Force Majeure"). In claiming relief hereunder
the Service Provider shall promptly notify the Service Recipient in writing of
the Force Majeure causing delay or default in performance, the probable extent
to which it will be unable to perform, and the actions it intends to take to
remove such Force Majeure, to the extent reasonably possible to do so. The
Service Provider shall take reasonable action within its control to alleviate
the Force Majeure causing delay or default in performance.
Section 6.7. No Transfer of Proprietary Rights. No assignment
or transfer by a Group of any right or license in or to any technology,
software, intellectual property, know-how or other proprietary right owned,
licensed or held for use by such Group shall occur or be deemed to occur by
virtue of or in connection with the provision or purchase of Services by
either Group hereunder.
ARTICLE 7
Access to Information
Section 7.1. Provision of Corporate Records. Immediately
prior to or as soon as practicable following the Distribution Date, each Group
shall provide to each other Group all documents, contracts, books, records and
data (including but not limited to minute books, stock registers, stock
certificates and documents of title) in its possession relating to such other
Group or such other Group's business and affairs; provided that if any such
documents, contracts, books, records or data relate to all or to two of the
Groups or the business and operations of all Groups or to two of the Groups,
each such Group shall provide to the other Group or Groups true and complete
copies of such documents, contracts, books, records or data.
Section 7.2. Access to Information. From and after the
Distribution Date, each Group shall afford promptly to each other Group and its
accountants, counsel and other designated representatives reasonable access
during normal business hours to all documents, contracts, books, records,
computer data and other data in such Group's possession relating to such other
Group or the business and affairs of such other Group (other than data and
information subject to an attorney/client or other privilege), insofar as such
access is reasonably required by such other Group, including, without
limitation, for audit, accounting, litigation and disclosure and reporting
purposes.
Section 7.3. Litigation Cooperation. Each Group shall use
reasonable efforts to make available, upon written request, its directors,
officers, employees and representatives as witnesses to each other Group and
its accountants, counsel, and other designated representatives, and shall
otherwise cooperate with each other Group, to the extent reasonably required
in connection with any legal, administrative or other proceedings arising out
of any Group's business and operations prior to the Distribution Date in which
the requesting party may from time to time be involved.
Section 7.4. Reimbursement. Each Group providing information
or witnesses to any other Group, or otherwise incurring any expense in
connection with cooperating, under Sections 7.01, 7.02 or 7.03 shall be
entitled to receive from the recipient thereof, upon the presentation of
invoices therefor, payment for all costs and expenses as may be reasonably
incurred in providing such information, witnesses or cooperation.
Section 7.5. Retention of Records. Except as otherwise
required by law or agreed to in writing, each party shall, and shall cause the
members of its respective Group to, retain all information relating to any
other Group's business and operations in accordance with the past practice of
such party. Notwithstanding the foregoing, any party may destroy or otherwise
dispose of any such information at any time, provided that, prior to such
destruction or disposal, (i) such party shall provide not less than 90 days'
prior written notice to the other parties, specifying the information proposed
to be destroyed or disposed of, and (ii) if a recipient of such notice shall
request in writing prior to the scheduled date for such destruction or
disposal that any of the information proposed to be destroyed or disposed of
be delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for the delivery of such of the information as
was requested at the expense of the requesting party or parties.
Section 7.6. Confidentiality. Each party shall hold and shall
cause its Affiliates and its and their respective directors, officers,
employees, agents, consultants and advisors ("Representatives") to hold in
strict confidence all information concerning any other party or its Affiliates
unless (i) such person is compelled to disclose such information by judicial
or administrative process or, in the opinion of its counsel, by other
requirements of law or (ii) such information can be shown to have been (A) in
the public domain through no fault of such party or its Representatives or (B)
lawfully acquired after the Distribution Date on a non-confidential basis from
other sources. Notwithstanding the foregoing, such party may disclose such
information to its Representatives so long as such Persons are informed by
such party of the confidential nature of such information and are directed by
such party to treat such information confidentially. If a party or any of its
Representatives becomes legally compelled to disclose any documents or
information subject to this Section, such party will promptly notify the other
applicable party so that such other party may seek a protective order or other
remedy or waive compliance with this Section. If no such protective order or
other remedy is obtained or waiver granted, the party subject to compulsion
will furnish only that portion of the information which it is advised by
counsel is legally required and will exercise its reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded such
information. Each party agrees to be responsible for any breach of this
Section by its Representatives.
Section 7.7. Inapplicability of Article VII to Tax Matters.
Notwithstanding anything to the contrary in Article VII, Article VII shall not
apply with respect to information, records and other matters relating to Taxes,
all of which shall be governed by the Tax Sharing Agreement.
ARTICLE 8
Certain Other Agreements
Section 8.1. Intercompany Accounts and Agreements. Except as
otherwise provided in the Tax Sharing Agreement, Section 2.01 or Section 9.08,
all intercompany receivable, payable and loan balances in existence as of the
Distribution Date between the C-TEC Group, the Cable Michigan Group and the
RCN Group will be eliminated prior to the Effective Time by payment in full by
the party or parties owing any such obligation; provided that with respect to
all accounts receivable and accounts payable which arise between any member of
one such Group and any member of another such Group after August 31, 1997 and
before the Effective Time, if the amounts thereof cannot be determined prior
to the Distribution Date, then such balances shall be paid, in full, by the
party or parties owing such obligations as soon as practicable (but in no
event more than 30 days) after the Distribution Date other than
Distribution Dates. All transactions after June 30, 1997 and prior to the
close of business on the Distribution Date resulting in amounts payable by
a member of one Group to a member of another Group will be accounted for as
previously agreed by the parties.
Section 8.2. Further Assurances and Consents. In addition to
the actions specifically provided for elsewhere in this Agreement, each of the
parties hereto shall use its reasonable efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by
this Agreement, including but not limited to using its reasonable efforts to
obtain any consents and approvals and to make any filings and applications
necessary or desirable in order to consummate the transactions contemplated
by this Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to
any third party from whom such consents or approvals are requested or to take
any action or omit to take any action if the taking of or the omission to take
such action would be unreasonably burdensome to the party, its Group or its
Group's business.
Section 8.3. Intellectual Property Rights and Licenses. None
of the Groups shall have any right or license in or to any technology,
software, intellectual property (including any trademark, service mark, patent
or copyright), know-how or other proprietary right owned, licensed or held for
use by another Group.
Section 8.4. Insurance. Notwithstanding anything contained
herein or in any Distribution Document to the contrary, nothing contained
herein or in any Distribution Document shall constitute an assignment or
transfer of any insurance policy or the rights thereunder to the extent any
such assignment or transfer would cause the coverage under such policy to be
reduced. If any such assignment or transfer would result in such a reduction,
the party that would have assigned or transferred such rights will enforce the
rights thereunder for the benefit of the party to whom such assignment or
transfer would have been made but for the effect of the preceding sentence and
shall hold any payment received in respect thereof in trust for such party.
Each party hereunder hereby appoints RCN Operating Services, Inc. as its agent
to administer any claim it or any member of its Group may have under any
insurance policy held by C-TEC or any of its Subsidiaries prior to the
Distribution Date (each, a "Pre-Distribution Policy") with respect to any
claim or occurrence arising prior to the Distribution Date. If, as a result of
any retrospective loss adjustment, stop loss, deductible, coverage limit or
other similar arrangement, any party (or any member of its Group) is required
to make any payment in respect of, or is not paid the full amount it may claim
under, any Pre-Distribution Policy, the amount of any such payment or
shortfall shall be allocated among the parties hereto in an equitable manner as
determined in good faith by RCN, and each party hereto shall make such
payments to the other parties hereto as shall be required in order to effect
such equitable allocation.
ARTICLE 9
Miscellaneous
Section 9.1. Notices. All notices and other communications to
any party hereunder shall be in writing (including telex, telecopy or similar
writing) and shall be deemed given when received addressed as follows:
If to C-TEC, to:
C-TEC Corporation
800 Route 309
P.O. Box 800
Dallas, PA 18612-9799
Telecopy: 717-675-0900
Attention: Michael I. Gottdenker, President
Copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Telecopy: 212-450-4800
Attention: William L. Taylor
If to Cable Michigan, to:
Cable Michigan, Inc.
105 Carnegie Center
Princeton, NJ 08540
Telecopy: 609-734-7551
Attention: Mark Haverkate, President
Copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Telecopy: 212-450-4800
Attention: William L. Taylor
If to RCN, to:
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540
Telecopy: 609-951-8632
Attention: Michael J. Mahoney, President
Copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Telecopy: 212-450-4800
Attention: William L. Taylor
Any party may, by written notice so delivered to the other
parties, change the address to which delivery of any notice shall thereafter
be made. All such notices shall be deemed received on the date of receipt by
the recipient thereof if received prior to 5 p.m. in the place of receipt and
such day is a business day in the place of receipt. Otherwise, any such notice
shall be deemed not to have been received until the next succeeding business
day in the place of receipt.
Section 9.2. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived if, and only if, such amendment or waiver
is in writing and signed, in the case of an amendment, by C-TEC, Cable
Michigan and RCN, or in the case of a waiver, by the party against whom the
waiver is to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights
or remedies provided by law.
Section 9.3. Expenses. Except as specifically provided
otherwise in this Agreement or the Tax Sharing Agreement (including, without
limitation, in Articles IV and VI, Sections 7.04, 7.05, 8.01 and 9.07(c) and
Schedules 5.01 and 6.01 of this Agreement), all costs and expenses incurred
after the date hereof in connection with the preparation, execution and
delivery of the Distribution Documents and the consummation of the
Distribution and the other transactions contemplated hereby (including the
fees and expenses of all counsel, accountants and financial and other advisors
of each Group in connection therewith, and all expenses in connection with
preparation, filing and printing of the Form 10s and the Information
Statements) shall be Shared Liabilities; provided (i) that C-TEC shall be
responsible for and pay the fees, expenses and other amounts payable to the
lenders in respect of C-TEC's credit facilities (including the $15 Million
Loan) and all other fees and expenses incurred in connection therewith
(including the fees and expenses of C-TEC's counsel in connection with the
preparation and negotiation of all documentation relating to such credit
facilities), (ii) that Cable Michigan shall be responsible for and pay the
fees, expenses and other amounts payable to the lenders under Cable Michigan's
and Mercom's respective credit facilities and all other fees and expenses
incurred in connection therewith (including the fees and expenses of Cable
Michigan's and Mercom's counsel in connection with the preparation and
negotiation of all documentation relating to such credit facilities) and (iii)
that the RCN Group shall be responsible for and pay the fees, expenses and
other amounts payable to the lenders under the RCN Group's credit facilities
and all other fees and expenses incurred in connection therewith (including
the fees and expenses of counsel to the RCN Group in connection with the
preparation and negotiation of all documentation relating to such credit
facilities).
Section 9.4. Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto.
Section 9.5. Governing Law. This Agreement shall be construed
in accordance with and governed by the law of the State of New York, without
regard to the conflicts of laws rules of such State.
Section 9.6. Entire Agreement. This Agreement and the other
Distribution Documents constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersede all prior
agreements, understandings and negotiations, both written and oral, between
the parties with respect to the subject matter hereof and thereof. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein or in the other Distribution Documents has been made or
relied upon by any party hereto. Neither this Agreement nor any provision
hereof is intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder. To the extent that the provisions of this
Agreement are inconsistent with the provisions of any other Distribution
Document, the provisions of such other Distribution Document shall prevail.
Section 9.7. Tax Sharing Agreement; Set-Off; Certain Transfer
Taxes. (a) Except as otherwise provided herein, this Agreement shall not
govern any Tax, and any and all claims, losses, damages, demands, costs,
expenses or liabilities relating to Taxes shall be exclusively governed by the
Tax Sharing Agreement.
(b) If, at the time any party hereto is required to make any
payment to any other party under this Agreement, the party entitled to the
payment owes the obligor any amount under this Agreement or the Tax Sharing
Agreement, then such amounts shall be offset and the excess shall be paid by
the party liable for such excess.
(c) All transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees (including any penalties and interest) incurred in
connection with Section 2.02 of this Agreement shall be borne and paid by the
Person who is receiving the property being transferred. The party or parties
that is or are required by applicable law to file any Return (as defined in the
Tax Sharing Agreement) or make any payment with respect to any such Tax shall
do so, and the other party or parties shall cooperate with respect thereto as
necessary. The non-paying party or parties shall reimburse the paying party
in accordance with this Section 9.07 within 5 business days after it or they
receive notice of the payment of such Tax.
Section 9.8. Existing Arrangements. Except as otherwise
contemplated hereby or as set forth on Schedule 9.08, all prior agreements and
arrangements, including those relating to goods, rights or services provided or
licensed, between any member of one Group and any member of another Group
shall be terminated effective as of the Distribution Date, if not theretofore
terminated. No such agreements or arrangements shall be in effect after the
Distribution Date unless embodied in the Distribution Documents or set forth
in Schedule 9.08.
Section 9.9. Termination Prior to the Distribution. The C-TEC
Board of Directors may at any time prior to the Distribution abandon the
Distribution and, by notice to Cable Michigan and RCN, terminate this
Agreement (whether or not the C-TEC Board of Directors has theretofore
approved this Agreement and/or the Distribution).
Section 9.10. Captions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
Section 9.11. Dispute Resolution; Jurisdiction. (a) Any
dispute between or among the parties arising out of or in connection with this
Agreement shall be submitted to arbitration. The arbitration shall be conducted
according to the Commercial Arbitration Rules of the American Arbitration
Association. The place of arbitration shall be New York, New York or such
other place as may be agreed upon by the parties to the dispute. In the case of
a dispute involving two parties, the parties to the dispute shall attempt to
agree upon one arbitrator, but if they are unable to agree, each shall appoint
an arbitrator, and the two arbitrators so appointed shall appoint a third
arbitrator. In the case of a dispute among three parties, each party to the
dispute shall appoint an arbitrator, and the three arbitrators shall select
from among themselves the chairman of the arbitration panel. Expenses of the
arbitrator(s) shall be divided equally between or among the parties.
(b) Judgment upon the award rendered by the arbitrator(s) under
Section 9.11(a) may be entered in any court having jurisdiction thereof, and
shall be enforceable against the parties. Without limiting the foregoing, any
suit, action or proceeding seeking to enforce any arbitration award rendered
under Section 9.11(a) may be brought in the United States District Court for
the Southern District of New York or any New York state court sitting in New
York City, Borough of Manhattan, and each of the parties hereby consents to
the jurisdiction of such courts (and of the appropriate appellate courts
therefrom) in any such suit, action or proceeding and irrevocably waives, to
the fullest extent permitted by law, any objection which it may now or
hereafter have to the laying of the venue of any such suit, action or
proceeding in any such court or that any such suit, action or proceeding which
is brought in any such court has been brought in an inconvenient forum.
Process in any such suit, action or proceeding may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party agrees that service of
process on such party as provided in Section 9.01 shall be deemed effective
service of process on such party.
Section 9.12. Severability. In the event any one or more of
the provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions, the
economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
IN WITNESS WHEREOF the parties hereto have caused this
Distribution Agreement to be duly executed by these respective authorized
officers as of the date first above written.
C-TEC CORPORATION
By:
-----------------------
Name:
Title:
CABLE MICHIGAN, INC.
By:
-----------------------
Name:
Title:
RCN CORPORATION
By:
-----------------------
Name:
Title:
SCHEDULE 1.01
SHARED LIABILITIES
1. Shared Corporate Liabilities.
2. Liabilities under the 1933 Act or the 1934 Act arising from
acts or omissions of C-TEC prior to the Distribution Date, other than
Liabilities arising from the filing by C-TEC of a Current Report on Form 8-K
containing information on the C-TEC Group.
3. Certain fees and expenses in connection with the Restructuring
as provided in Section 9.03 of the Distribution Agreement.
SCHEDULE 5.01
EMPLOYEE MATTERS
ARTICLE 1
Definitions
Section 1.1. Definitions. (a) Capitalized terms used but not
defined in this Schedule 5.01 shall have the meaning given those terms in the
Distribution Agreement to which this Schedule 5.01 is attached. The following
terms, as used herein, shall have the following meaning:
"Cable Michigan Employees" means those individuals listed on the
payroll records of any member of the Cable Michigan Group immediately after
the Distribution Date.
"Cable Michigan Employee Group" means all Cable Michigan
Employees and Cable Michigan Retiree, including their respective
beneficiaries.
"Cable Michigan Retiree" means each individual who was
employed by any member of the Cable Michigan Group immediately prior to
such individual's retirement or other termination of employment from the
Companies or is otherwise listed on Exhibit 3 as a Cable Michigan Retiree.
"Companies" means the C-TEC Group, RCN Group and Cable Michigan
Group.
"C-TEC Employees" means those individuals listed on the payroll
records of any member of the C-TEC Group immediately after the Distribution
Date.
"C-TEC Equity-Based Plans" means the plans identified as such on
exhibit 2 hereto.
"C-TEC Employee Group" means all C-TEC Employees and C-TEC
Retirees, including their respective beneficiaries.
"C-TEC Retiree" means each individual who was employed by any
member of the C-TEC Group immediately prior to such individual's retirement
or other termination of employment from the Companies and who is not otherwise
a member of the Cable Michigan Employee Group or RCN Employee Group.
"Employee Benefit Plan" means any "employee benefit plan" (as
defined in Section 3(3) of ERISA) maintained at any time by any of the
Companies or their Subsidiaries.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations thereunder.
"Health and Welfare Benefit Plans" means the plans as
identified in exhibit 4 hereto.
"RCN Employees" means those individuals listed on the payroll
records of any member of the RCN Group immediately after the Distribution Date.
"RCN Employee Group" means all RCN Employees and RCN Retirees,
including their respective beneficiaries.
"RCN Retiree" means all individuals who were employed by any
member of the RCN Group immediately prior to such individual's retirement or
other termination of employment from the Companies or is otherwise listed on
Exhibit 1 as a RCN Retiree.
"Shared Employee-Related Liabilities" means the liabilities or
classes of liabilities set forth on Exhibit 5 hereto.
(b) Each of the following terms is defined in the Section set
forth opposite such term:
Terms Sections
----- --------
Cable Michigan Assumed Liabilities 3.05
Cable Michigan DC Plan 3.01
Cable Michigan H&W Liabilities 3.04
C-TEC DB Plan 3.02
C-TEC DC Plan 3.01
C-TEC H&W Liabilities 3.04
C-TEC Retained Liabilities 3.05
CTERP 3.02
ESPP 3.03
IRS 3.01
Loss 5.02
RCN Assumed Liabilities 3.05
RCN DC Plan 3.01
RCN H&W Liabilities 3.04
Retained DC Assets and Liabilities 3.01
ARTICLE 2
Employees, Certain Agreements
Section 2.1. Employees. Subject to the terms and conditions
of this Agreement, effective at the time of the Distribution Date, C-TEC, Cable
Michigan and RCN or their respective Subsidiaries shall employ each C-TEC
Employee, Cable Michigan Employee or RCN Employee, respectively. No provision
of this Agreement, however, shall require any such entity to continue the
employment of any of their respective employees following the Distribution
Date.
Section 2.2. Certain Agreements; Shared Liabilities. (a)
Except as provided in this Section 2.02, this Agreement shall not apply or be
deemed to apply to any supplemental benefit arrangements accrued or reflected
on the books and accounts of C-TEC immediately prior to the Distribution Date,
the liability for which shall be assumed by C-TEC.
(b) C-TEC, RCN and Cable Michigan shall be 50%, 30% and 20%
liable, respectively, for the Shared Employee-Related Liabilities.
ARTICLE 3
Allocation of Assets and Liabilities
Section 3.1. C-TEC DC Plan. (a) (i) Effective not later than
the Distribution Date, Cable Michigan shall adopt or designate a profit-sharing
plan with a salary reduction arrangement that covers the Cable Michigan
Employee Group and meets the requirements of Sections 401(a) and 401(k) of the
Code ("Cable Michigan DC Plan"). Cable Michigan agrees that all service
credited under the C-TEC Corporation Common-Wealth Builder Savings Plan
("C-TEC DC Plan") as of the Distribution Date with respect to the Cable
Michigan Employee Group shall be credited under the Cable Michigan DC Plan for
all plan purposes, including eligibility and vesting.
(ii) Within 30 days after the adoption or designation of the
Cable Michigan DC Plan by Cable Michigan or as soon as practicable thereafter,
C-TEC shall cause an amount, in cash or in kind as C-TEC and Cable Michigan
shall agree, equivalent to the account balances of all members of the Cable
Michigan Employee Group under the C-TEC DC Plan as of the date of the
transfer, to be transferred from the trust maintained under the C-TEC DC Plan
to the trust maintained under the Cable Michigan DC Plan. Such transfer shall
include the number of any shares of Cable Michigan Common Stock, C-TEC Common
Stock and RCN Common Stock allocable or attributable to the account balances
of all members of the Cable Michigan Employee Group. Such transfer of assets
shall be made only after Cable Michigan has furnished to C-TEC, and C-TEC has
furnished to Cable Michigan, either (A) a copy of an Internal Revenue Service
("IRS") determination letter finding the Cable Michigan DC Plan or the C-TEC
DC Plan, as the case may be, to be a qualified plan meeting the requirements of
Sections 401(a) and 401(k) of the Code or (B) an opinion of counsel or written
representation from Cable Michigan or C-TEC, as the case may be, (with
appropriate indemnities), in either case, to the effect that the Cable
Michigan DC Plan or the C-TEC DC Plan, as the case may be, has been
established in accordance with the Code and ERISA, and an agreement that Cable
Michigan or C-TEC, as the case may be, will request a determination letter
from the IRS and make any and all changes to the Cable Michigan DC Plan or the
C-TEC DC Plan, as the case may be, necessary to receive a favorable
determination letter. Cable Michigan and C-TEC shall cooperate with each
other during the period beginning on the date hereof and ending on the date
the assets are transferred to the trust maintained under the Cable Michigan DC
Plan to ensure the ongoing operation and administration of the Cable Michigan
DC Plan and the C-TEC DC Plan with respect to the Cable Michigan Employee
Group.
(iii) Effective not later than the Distribution Date, RCN shall
adopt or designate a profit-sharing plan with a salary reduction arrangement
that covers the RCN Employee Group and meets the requirements of Sections
401(a) and 401(k) of the Code and which may also qualify as an "Employee Stock
Ownership Plan" within the meaning of Section 4975(e)(7) of the Code ("RCN DC
Plan"). RCN agrees that all service credited under the C-TEC DC Plan as of
such adoption or designation with respect to the RCN Employee Group shall be
credited under the RCN DC Plan for all plan purposes, including eligibility
and vesting.
(iv) Within 30 days after the adoption or designation of the
RCN DC Plan by RCN or as soon as practicable thereafter, C-TEC shall cause an
amount, in cash or in kind as C-TEC and RCN shall agree, equivalent to the
account balances of all members of the RCN Employee Group under the C-TEC DC
Plan as of the date of transfer to be transferred from the trust maintained
under the C-TEC DC Plan to the trust maintained under the RCN DC Plan. Such
transfer shall include the number of shares of any RCN Common Stock, C-TEC
Common Stock and Cable Michigan Common Stock allocable or attributable to the
account balances of all members of the RCN Employee Group. Such transfer of
assets shall be made only after RCN has furnished to C-TEC, and C-TEC has
furnished to RCN, either (A) a copy of an IRS determination letter finding the
RCN DC Plan or the C-TEC DC Plan, as the case may be, to be a qualified plan
meeting the requirements of Sections 401(a) and 401(k) of the Code or (B) an
opinion of counsel or written representation from RCN or C-TEC, as the case
may be, (with appropriate indemnities), in either case, to the effect that the
RCN DC Plan or the C-TEC DC Plan, as the case may be, has been established in
accordance with the Code and ERISA, and an agreement that RCN or C-TEC, as the
case may be, will request a determination letter from the IRS and make any and
all changes to the RCN DC Plan or the C-TEC DC Plan, as the case may be,
necessary to receive a favorable determination letter. RCN and C-TEC shall
cooperate with each other during the period beginning on the date hereof and
ending on the date the assets are transferred to the trust maintained under
the RCN DC Plan to ensure the ongoing operation and administration of the RCN
DC Plan and the C-TEC DC Plan with respect to the RCN Employee Group.
(v) Notwithstanding anything herein to the contrary, the
parties hereto agree that, during the one-year period following the
Distribution each such party shall endeavor to cause each Employee Benefit
Plan sponsored by such party that holds shares of C-TEC Common Stock, RCN
Common Stock or Cable Michigan Common Stock to enter into a customary form of
lock-up agreement in connection with any underwritten public offering of any
of such shares.
(b) C-TEC shall retain all assets and liabilities under the C-TEC
DC Plan except as otherwise provided in Section 3.01(a) ("Retained DC Assets
and Liabilities").
Section 3.2. C-TEC DB Plan and the CTERP. RCN shall retain all
assets and liabilities under the C-TEC Corporation Employees' Retirement Plan
(the "C-TEC DB Plan") and C-TEC shall retain all assets and liabilities under
the Commonwealth Telephone Employees' Retirement Plan (the "CTERP").
Section 3.3. C-TEC Equity-Based Plans. (a) Stock options
outstanding under the C-TEC Equity-Based Plans will be adjusted so that
following the Distribution each holder thereof will hold options to purchase
shares of C-TEC Common Stock, RCN Common Stock and Cable Michigan Common
Stock, respectively. The number of shares subject to, and the exercise price
of, such options shall be adjusted to take into account the Distribution and
to ensure that the aggregate intrinsic value of the adjusted RCN, Cable
Michigan and C-TEC options after the record date in respect of the
Distribution is equal to, and not greater or less than, the aggregate intrinsic
value of the related C-TEC option prior to the record date in respect of the
Distribution.
(b) Each holder of Share Units and Restricted Stock (each as used
in the C-TEC Corporation Executive Stock Purchase Plan ("ESPP")) held by
Persons who are participants in the ESPP immediately prior to the Distribution
Date will be adjusted in an equitable manner in connection with the
Distribution.
(c) In partial consideration for all Services provided or to be
provided (including by any member of the RCN Group to any member of the C-TEC
Group or Cable Michigan Group or by any member of the C-TEC Group to
any member of the RCN Group or the Cable Michigan Group) and other
consideration provided pursuant to this Agreement (including the transfers
of assets and assumptions of liabilities as provided herein), RCN, C-TEC
and Cable Michigan shall use their best efforts to accomplish the foregoing
including, but not limited to, making such grants of options and issuing
such shares of C-TEC Common Stock, RCN Common Stock and Cable Michigan
Common Stock as may be required hereunder.
Section 3.4. Health and Welfare Plans. (a) C-TEC shall
assume and/or retain all assets and liabilities with respect to the C-TEC
Employee Group under the C-TEC health and welfare benefit plans listed on
Exhibit 4 hereto ("C-TEC H&W Liabilities").
(b) Cable Michigan shall assume and/or retain all assets and
liabilities with respect to the Cable Michigan Employee Group under the Cable
Michigan health and welfare benefit plans listed on Exhibit 4 hereto ("Cable
Michigan H&W Liabilities").
(c) RCN shall assume and/or retain all assets and liabilities
with respect to the RCN Employee Group under the RCN health and welfare
benefit plans listed on Exhibit 4 hereto ("RCN H&W Liabilities").
Section 3.5. Assumption of Liabilities Generally. (a) Except
as otherwise provided in, and subject to the terms and conditions of, this
Agreement, effective as of the Distribution Date Cable Michigan shall assume
and agree to pay when due, honor and discharge, the following ("Cable Michigan
Assumed Liabilities"):
(i) all obligations and liabilities arising under any
employment, separation or retirement agreement or arrangement to the extent
applicable to any member of the Cable Michigan Employee Group which has been
established or entered into by any of the Companies, whether or not listed on
any Exhibit attached hereto;
(ii) all obligations and liabilities arising under the Cable
Michigan DC Plan and the C-TEC Cable Systems of MI, Inc. Bargaining Unit
401(k) Plan;
(iii) all Cable Michigan H&W Liabilities;
(iv) all obligations and liabilities to any member of the
Cable Michigan Employee Group in respect of the continuation of coverage rules
under Sections 601 through 608 of ERISA and Section 4980B of the Code,
including all liabilities and obligations relating to qualifying events that
have occurred on or prior to the Distribution Date;
(v) all obligations and liabilities arising under any
federal, state, local or foreign law, order or regulation (including, without
limitation, ERISA and the Code) to the extent they relate to participation by
any member of the Cable Michigan Employee Group in any Employee Benefit Plan,
whether relating to events occurring on or prior to the Distribution Date or
arising by reason of the transactions contemplated by this Agreement or
otherwise; and
(vi) all statutory obligations and liabilities to any member
of the Cable Michigan Employee Group, which arise, directly or indirectly, by
reason of the transactions contemplated by this Agreement.
(b) Except as otherwise provided in, and subject to the terms and
conditions of, this Agreement, effective as of the Distribution Date RCN shall
assume and agree to pay when due, honor and discharge, the following ("RCN
Assumed Liabilities"):
(i) all obligations and liabilities arising under any
employment, separation or retirement agreement or arrangement to the extent
applicable to any member of the RCN Employee Group which has been established
or entered into by any of the Companies, whether or not listed on any Exhibit
attached hereto;
(ii) all obligations and liabilities arising under the RCN DC
Plan and the C-TEC DB Plan;
(iii) all obligations and liabilities to any member of the RCN
Employee Group in respect of the continuation of coverage rules under Sections
601 through 608 of ERISA and Section 4980B of the Code, including all
liabilities and obligations relating to qualifying events that have occurred
on or prior to the Distribution;
(iv) all obligations and liabilities arising under any
federal, state, local or foreign law, order or regulation (including, without
limitation, ERISA and the Code) to the extent they relate to participation by
any member of the RCN Employee Group in any Employee Benefit Plan, whether
relating to events occurring on or prior to the Distribution or arising by
reason of the transactions contemplated by this Agreement or otherwise; and
(v) all statutory obligations and liabilities to any member
of the RCN Employee Group which arises, directly or indirectly, by reason of
the transactions contemplated by this Agreement.
(c) Except as otherwise provided in, and subject to the terms and
conditions of, this Agreement, effective as of the Distribution Date C-TEC
shall retain and agree to pay when due, honor and discharge, the following
("C-TEC Retained Liabilities"):
(i) all obligations and liabilities arising under any
employment, separation or retirement agreement or arrangement to the extent
applicable to any member of the C-TEC Employee Group which has been
established or entered into by any of the Companies, whether or not listed on
any Exhibit attached hereto;
(ii) obligations and liabilities arising under the Retained DC
Assets and Liabilities and the CTERP;
(iii) all obligations and liabilities arising under any other
employee benefit plan or arrangement maintained at any time by any of the
Companies or any of their Subsidiaries to the extent applicable to any member
of the C-TEC Employee Group;
(iv) all obligations and liabilities to any member of the
C-TEC Employee Group in respect of the continuation of coverage rules under
Sections 601 through 608 of ERISA and Section 4980B of the Code, including all
liabilities and obligations relating to qualifying events that have occurred
on or prior to the Distribution Date;
(v) all obligations and liabilities arising under any
federal, state, local or foreign law, order or regulation (including, without
limitation, ERISA and the Code) to the extent they relate to participation by
any member of the C-TEC Employee Group in any Employee Benefit Plan, whether
relating to events occurring on or prior to the Distribution Date or arising
by reason of the transactions contemplated by this Agreement or otherwise; and
(vi) all statutory obligations and liabilities to any member
of the C-TEC Employee Group, which arise, directly or indirectly, by reason of
the transactions contemplated by this Agreement.
Section 3.6. Further Assurances. (a) On and after the date
hereof, C-TEC will, at the reasonable request of Cable Michigan, execute,
acknowledge and deliver all such endorsements, assurances, consents,
assignments, transfers, conveyances, powers of attorney and other instruments
and documents, and take such other actions necessary (i) to assign, transfer,
convey and deliver to Cable Michigan, acting in its fiduciary capacity, all the
assets to be transferred to Cable Michigan pursuant to Article III hereof and
(ii) to assist Cable Michigan in obtaining the consent and approval of all
governmental bodies and other Persons required to be obtained by Cable
Michigan to effect the transfer thereof and the assumption of the Cable
Michigan Assumed Liabilities by Cable Michigan or otherwise appropriate to
carry out the transactions contemplated hereby.
(b) On and after the date hereof, C-TEC will, at the reasonable
request of RCN, execute, acknowledge and deliver all such endorsements,
assurances, consents, assignments, transfers, conveyances, powers of attorney
and other instruments and documents, and take such other actions necessary (i)
to assign, transfer, convey and deliver to RCN, acting in its fiduciary
capacity, all the assets to be transferred to RCN pursuant to Article III
hereof, and (ii) to assist RCN in obtaining the consent and approval of all
governmental bodies and other Persons required to be obtained by RCN to effect
the transfer thereof and the assumption of the RCN Assumed Liabilities by RCN
or otherwise appropriate to carry out the transactions contemplated hereby.
(c) On and after the date hereof, each of Cable Michigan and RCN
will, at the reasonable request of C-TEC, execute, acknowledge and deliver all
such assumptions, endorsements and other instruments and documents, and take
such other actions necessary (i) to assume, pay, honor and discharge the Cable
Michigan Assumed Liabilities and RCN Assumed Liabilities, respectively, and
(ii) to assist C-TEC in obtaining the consent and approval of all governmental
bodies and other Persons required to be obtained by C-TEC to effect the
transfer of the assets to be transferred to Cable Michigan or RCN pursuant to
Article III hereof, respectively, and the assumption of the Cable Michigan
Assumed Liabilities and RCN Assumed Liabilities by Cable Michigan and RCN,
respectively, or otherwise appropriate to carry out the transactions
contemplated hereby.
ARTICLE 4
Representations and Warranties
Section 4.1. Certain C-TEC Representations. C-TEC hereby
represents and warrants to Cable Michigan and RCN on the date hereof, that the
C-TEC DC Plan has been established in accordance with the Code and ERISA, is
qualified under Section 401(a) of the Code, has been so qualified during the
period from its adoption to the date hereof and will be so qualified as of the
date of the transfers referred to in Section 3.01 and that the trust forming a
part thereof is exempt from tax pursuant to Section 501(a) of the Code.
ARTICLE 5
Indemnification
Section 5.1. Indemnification by Cable Michigan. Cable Michigan
agrees to indemnify and hold harmless each RCN Indemnitee and each C-TEC
Indemnitee from any and all damage, loss, liability and expense (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any action, suit or proceeding)
(collectively, "Loss") incurred or suffered by each such RCN Indemnitee or
C-TEC Indemnitee, as the case may be, arising out of or related to the Cable
Michigan Assumed Liabilities.
Section 5.2. Indemnification by RCN. RCN agrees to indemnify
and hold harmless each Cable Michigan Indemnitee and each C-TEC Indemnitee
from any and all Losses, incurred or suffered by each such Cable Michigan
Indemnitee or C-TEC Indemnitee, as the case may be, arising out of or related
to the RCN Assumed Liabilities.
Section 5.3. Indemnification by C-TEC. C-TEC agrees to
indemnify and hold harmless each RCN Indemnitee and each Cable Michigan
Indemnitee from any and all Losses, incurred or suffered by each such Cable
Michigan Indemnitee or C-TEC Indemnitee, as the case may be, arising out of or
related to the C-TEC Retained Liabilities.
EXHIBIT 1
TO SCHEDULE 5.01
RCN RETIREES
None
EXHIBIT 2
TO SCHEDULE 5.01
C-TEC EQUITY-BASED PLANS
C-TEC Corporation 1994 Stock Option Plan, as amended
C-TEC Corporation 1996 Equity Incentive Plan
C-TEC Corporation Executive Stock Purchase Plan
EXHIBIT 3
TO SCHEDULE 5.01
CABLE MICHIGAN RETIREES
None
EXHIBIT 4
TO SCHEDULE 5.01
HEALTH AND WELFARE BENEFIT PLANS
C-TEC Health and Welfare Benefit Plans*
Health Care Plan
CFlex
Basic Life Insurance
Basic Accidental Death and Dismemberment
Long-Term Disability
Supplemental Life Insurance
Supplemental Accidental Death and Dismemberment
Supplemental Death Benefit
Employee Assistance Program
RCN Health and Welfare Benefit Plans*
Health Care Plan
CFlex
Basic Life Insurance
Basic Accidental Death and Dismemberment
Long-Term Disability
Supplemental Life Insurance
Supplemental Accidental Death and Dismemberment
Supplemental Death Benefit
Employee Assistance Program
- ---------------
* Benefits are made available to members of any collective bargaining unit
only to the extent provided for in an applicable collective bargaining
agreement.
Cable Michigan Health and Welfare Benefit Plans*
Health Care Plan
CFlex
Basic Life Insurance
Basic Accidental Death and Dismemberment
Long-Term Disability
Supplemental Life Insurance
Supplemental Accidental Death and Dismemberment
Supplemental Death Benefit
Employee Assistance Program
- ---------------
* Benefits are made available to members of any collective bargaining unit
only to the extent provided for in an applicable collective bargaining
agreement.
EXHIBIT 5
TO SCHEDULE 5.01
SHARED EMPLOYEE-RELATED LIABILITIES
Any or all liabilities arising out of or relating to the
actions or inaction of the employees and former employees of C-TEC Services,
occurring prior to the Distribution, but excluding any assets or liabilities
allocated pursuant to Article 3 of this Schedule 5.01.
SCHEDULE 6.01(i)
SERVICES PROVIDED BY RCN TO C-TEC GROUP
RCN will provide, or cause to be provided, the following
management and administrative services to the C-TEC Group:
1. Accounting
2. Payroll
3. Management supervision
4. Cash management
5. Human resources services and benefit plan administration
6. Insurance administration
7. Legal
8. Tax
9. Internal audit
10. Investor and public relations
11. Other miscellaneous administrative services
The Fee per year for these services will be 3.5% of the first
$175 million of revenue of the C-TEC Group and 1.75% of any additional revenue.
SCHEDULE 6.01(ii)
SERVICES PROVIDED BY RCN TO CABLE MICHIGAN GROUP
RCN will provide, or cause to be provided, the following
management and administrative services to the Cable Michigan Group:
1. Customer service
2. Marketing
3. Accounting
4. Payroll
5. Management supervision
6 Cash management
7. Human resources services and benefit plan administration
8. Insurance administration
9. Legal
10. Tax
11. Internal audit
12. Programming administration
13. Billing
14. Monthly cable guide
15. Investor and public relations
16. Provision of third party programming
17. Other miscellaneous administrative services
The total Fee per year for services listed in items 2-12, 15
and 17 will be 4.0% of the revenues of the Cable Michigan Group plus a direct
allocation of certain consolidated cable administrative functions consistent
with past practice prior to the date hereof.
The Fee for the customer service listed in item 1 and the
billing service listed in item 13 will be a pro rata share (based on the
relative number of subscribers) of the fees and expenses incurred by the RCN
Group to provide such customer and billing services for all relevant members
of the RCN Group and all relevant members of the Cable Michigan Group.
The Fee for the provision of monthly cable guides set forth in
item 14 and the third party programming set forth in item 16 shall be an
amount equal to the third party costs incurred by the RCN Group to provide
such guides and programming to the Cable Michigan Group.
The aggregate amount paid by the Cable Michigan Group to the RCN
Group and the C-TEC Group for the provision of administration and management
services of substantially the same nature, scope and timing as those provided
prior to the Distribution Date ("Historical Services") shall not exceed the
greater of (i) 6% of the consolidated gross revenues of the Cable Michigan
Group or (ii) such higher amount as is permitted under the applicable credit
facilities of the Cable Michigan Group. If, as a result of the effect of the
preceding sentence, the amount provided by Cable Michigan Group for Historical
Services is reduced, the amount of such reduction shall be borne by RCN
Companies and the C-TEC Group pro rata based on the relative amounts such
Groups would have charged the Michigan Group but for the effect of the
preceding sentence.
SCHEDULE 6.01(iii)
SERVICES PROVIDED BY C-TEC TO RCN GROUP
C-TEC will provide, or cause to be provided, the following
administrative service to the RCN Group:
1. Financial data processing applications
2. Lockbox services
3. Storage facilities
4. LAN and WAN support services
5. Building maintenance
6. Other miscellaneous administrative services
The fees for such services will be an allocated portion (based
on relative usage) of the cost incurred by the C-TEC Group to provide such
services to all three Groups).
SCHEDULE 6.01(iv)
SERVICES PROVIDED BY C-TEC TO CABLE MICHIGAN GROUP
C-TEC will provide, or cause to be provided, the following
administrative services to the Cable Michigan Group:
1. Financial data processing applications
2. Lockbox services
3. Storage facilities
4. LAN and WAN support services
5. Other miscellaneous administrative services
The fees for such services will be an allocated portion (based
on relative usage) of the cost incurred by the C-TEC Group to provide such
services to all three Groups).
The aggregate amount paid by the Cable Michigan Group to the RCN
Group and the C-TEC Group for the provision of Historical Services shall not
exceed the greater of (i) 6% of the consolidated gross revenues of the Cable
Michigan Group or (ii) such higher amount as is permitted under the applicable
credit facilities of the Cable Michigan Group. If, as a result of the effect
of the preceding sentence, the amount provided by Cable Michigan Group for
Historical Services is reduced, the amount of such reduction shall be borne by
RCN Companies and the C-TEC Group pro rata basis on the relative amounts such
Groups would have charged the Michigan Group but for the effect of the
preceding sentence.
SCHEDULE 9.08
SURVIVING AGREEMENTS
1. Distribution Documents
2. Communications Equipment Lease Agreement dated August 1,
1997 by and between CLD and CTCo (Switch Lease).
3. Communications Equipment Lease Agreement dated August 1,
1997 by and between RLD and CTCo (Switch Lease).
4. Commercial Lease Agreement dated December 17, 1997 by and
between RLD and CTCo and Amendment dated May 24, 1994
(Clarks Summit Switch Space Lease).
5. Reseller Agreement for Internet Access Service dated July
31, 1996 by and between RCN Operating Services, Inc. and
CTCo (epix Services).
6. Lease Agreement dated March 1, 1994 by and between CLD and
CTCo (DS-3 Lease from Clarks Summit to Elizabethville).
7. Interim Carrier Services Agreement dated August 1, 1997 by and
between RLD and CLD.
8. Communications Equipment Lease Agreement dated March 1,
1996 by and between C-TEC Cable Systems Services, Inc.
and CTCo.
9. Communications Equipment Lease Agreement dated March 1,
1996 by and between C-TEC Cable Systems of Pennsylvania,
Inc. (now known as RCN Telcom Services of Pennsylvania,
Inc.) and CTCo.
10. Service Agreement dated October 9, 1996 by and between CCI
and C-TEC Services Inc. (Maintenance of Princeton, NJ
Office Phone System).
11. Service Agreement dated March 12, 1996 by and between CCI
and RCN Operating Services, Inc. (Switch Monitoring and
Traffic Capacity Services).
12. Service Agreement dated March 12, 1996 by and between CCI
and CLD (Switch Monitoring and Traffic Capacity Services).
Subsequently, on August 1, 1997, this Service Agreement was
assigned by CLD to RLD.
<PAGE>
EXHIBIT 10.1
TAX SHARING AGREEMENT
BY AND AMONG
C-TEC CORPORATION
RCN CORPORATION
AND
CABLE MICHIGAN INC.
DATED AS OF
September 5, 1997
THIS TAX SHARING AGREEMENT, dated as of September 5, 1997,
is by and among C-TEC Corporation, a Pennsylvania corporation
("C-TEC"), RCN Corporation, a Delaware corporation ("RCN"), and Cable
Michigan, Inc., a Pennsylvania corporation ("Cable Michigan"). Capitalized
terms used herein shall have the respective meanings assigned to them in the
Distribution Agreement unless otherwise defined herein.
WHEREAS, C-TEC, RCN and Cable Michigan have executed the
Distribution Agreement pursuant to which C-TEC's existing businesses will be
separated into three independent public companies; and
WHEREAS, it is appropriate and desirable to set forth the
principles and responsibilities of the parties to this Agreement regarding
future Adjustments with respect to Taxes, Tax Contests and other related Tax
matters.
NOW, THEREFORE, the parties, intending to be legally bound,
agree as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement the following terms shall
have the following meanings:
1.1. "Adjustment" means the deemed increase or decrease in
a Tax, determined on an issue-by-issue or transaction-by-transaction basis, as
appropriate, and using the assumptions set forth in the next sentence,
resulting from an adjustment made or proposed by a Taxing Authority with
respect to any amount reflected or required to be reflected on any Return
relating to such Tax. For purposes of determining such deemed increase or
decrease in a Tax, the following assumptions will be used: (a) in the case of
any income Tax, the highest marginal Tax rate or, in the case of any other
Tax, the highest applicable Tax rate, in each case in effect with respect to
that Tax for the Taxable period or any portion of the Taxable period to which
the adjustment relates; and (b) such determination shall be made without
regard to whether any actual increase or decrease in such Tax will in fact be
realized with respect to the Return to which such adjustment relates.
1.2. "Agreement" means this Tax Sharing Agreement,
including any schedules, exhibits and appendices attached hereto.
1.3. "Cable Michigan Tax Benefit" means, with respect to any
Taxable period or portion of a Taxable period, and as computed separately with
respect to each Tax, the net decrease in each such Tax equal to the sum of all
Adjustments made pursuant to a Final Determination with respect to each such
Tax for each such Taxable period or portion of a Taxable period that are
clearly attributable to the Cable Michigan Group.
1.4. "Cable Michigan Tax Detriment" means, with respect to
any Taxable period or portion of a Taxable period, and as computed separately
with respect to each Tax, the net increase in each such Tax equal to the sum
of all Adjustments made pursuant to a Final Determination with respect to each
such Tax for each such Taxable period or portion of a Taxable period that are
clearly attributable to the Cable Michigan Group.
1.5. "Consolidation" means, as appropriate, any Taxable
period or any portion of a Taxable period during which one or more members of
the RCN Group and/or the Cable Michigan Group are members of a C-TEC
Consolidated Return.
1.6. "Consolidated Return" means, as appropriate, for any
Taxable period or any portion of a Taxable period ending or deemed to end on
or prior to the Distribution Date, any consolidated or combined Return that
includes one or more members of the C-TEC Group and/or one or more members of
the RCN Group and/or one or more members of the Cable Michigan Group.
1.7. "Controlling Party" means C-TEC or any other member of
the C-TEC Group, RCN or any other member of the RCN Group or Cable Michigan
or any other member of the Cable Michigan Group, as the case may be, that filed
or, if no such Return has been filed, was required to file, a Return that is
the subject of any Tax Contest, or any successor and/or assign of any of the
foregoing; provided, however, that in the case of any Consolidated Return, the
Person that actually filed such Consolidated Return (or any successor and/or
assign of such Person) will be the Controlling Party, unless such Tax Contest
arises from the business activities of only (a) RCN or any other member of the
RCN Group, in which case RCN will be the Controlling Party, or (b) Cable
Michigan or any other member of the Cable Michigan Group, in which case Cable
Michigan will be the Controlling Party.
1.8. "Correlative Adjustment" means, in the case of an
Adjustment comprising a Non-Line of Business Adjustment, the net present value
of any future increases or decreases in a Tax that would be realized, using
the assumptions set forth in the next sentence, by either C-TEC or any other
member of the C-TEC Group, RCN or any other member of the RCN Group or Cable
Michigan or any other member of the Cable Michigan Group, as the case may be,
in one or more Taxable periods (or any portion of a Taxable period) but only
if such increases or decreases (a) are a direct result of the Non-Line of
Business Adjustment and (b) will take effect or begin to take effect in the
Taxable period or portion of a Taxable period of or immediately following the
Taxable period or portion of a Taxable period in which the Non-Line of
Business Adjustment to such Tax is made. For purposes of determining the net
present value of any such future increases or decreases in a tax, the
following assumptions will be used: (i) a discount rate equal to the sum of
the Federal Short-Term Rate as of the date of the Final Determination relating
to such Non-Line of Business Adjustment plus 3.5%; (ii) in the case of any
income Tax, the highest marginal Tax rate or, in the case of any other Tax, the
highest applicable Tax rate, in each case in effect with respect to that Tax
for the Taxable period, or portion of the Taxable period, in which the
Non-Line of Business Adjustment was made; (iii) the depreciation, amortization
or credit rate or lives, if applicable, in effect for the Taxable period, or
portion of the Taxable period, in which the Non-Line of Business Adjustment
was made; and (iv) such determination shall be made without regard to whether
any actual increases or decreases in such Tax will in fact be realized with
respect to the future Returns to which such Correlative Adjustment relates.
1.9. "C-TEC Tax Detriment" means, with respect to any
Taxable period or portion of a Taxable period, and as computed separately with
respect to each Tax, the net increase in each such Tax equal to the sum of all
Adjustments made pursuant to a Final Determination with respect to each such
Tax for each such Taxable period or portion of a Taxable period that are
clearly attributable to the C-TEC Group, including, but not limited to, any
Adjustments attributable to or resulting from any of the following: the sale
of (x) stock of Iowa City Cellular Telephone Company, Inc. or Commonwealth
Cellular Telephone Services, Inc.; and (y) the sale of the assets of Mobile
Plus, Inc. (formerly Cellular Plus, Inc.), C-TEC Cellular Centre County, Inc.,
Mobile Plus of Iowa, Inc. (formerly Cellular Plus of Iowa, Inc.), or Mobile
Plus Service of Pennsylvania, Inc. (formerly Paging Plus, Inc.).
1.10. "C-TEC Tax Benefit" means, with respect to any Taxable
period or portion of a Taxable period, and as computed separately with respect
to each Tax, the net decrease in each such Tax equal to the sum of all
Adjustments made pursuant to a Final Determination with respect to each such
Tax for each such Taxable period or portion of a Taxable period that are
clearly attributable to the C-TEC Group, including, but not limited to, any
Adjustments attributable to or resulting from any of the following: the sale
of (x) stock of Iowa City Cellular Telephone Company, Inc. or Commonwealth
Cellular Telephone Services, Inc.; and (y) the sale of the assets of Mobile
Plus, Inc. (formerly Cellular Plus, Inc.), C-TEC Cellular Centre County, Inc.,
Mobile Plus of Iowa, Inc. (formerly Cellular Plus of Iowa, Inc.), or Mobile
Plus Service of Pennsylvania, Inc. (formerly Paging Plus, Inc.)
1.11. "Disputed Adjustment" has the meaning set forth in
Section 3.4(b) hereof.
1.12. "Federal Short-Term Rate" means the applicable federal
short-term rate as determined under Section 1274(d) of the Code.
1.13. "Final Determination" means (a) a decision, judgment,
decree or other order by any court of competent jurisdiction, which has become
final and is either no longer subject to appeal or for which a determination
not to appeal has been made; (b) a closing agreement made under Section 7121
of the Code or any comparable foreign, state, local, municipal or other Taxing
statute; (c) a final disposition by any Taxing Authority of a claim for
refund; or (d) any other written agreement relating to an Adjustment between
any Taxing Authority and any Controlling Party the execution of which is
formal and prohibits such Taxing Authority or the Controlling Party from
seeking any further legal or administrative remedies with respect to such
Adjustment.
1.14. "Independent Third Party" means a nationally
recognized law firm or any of the following accounting firms or their
successors: Arthur Andersen & Co.; Ernst & Young; KPMG Peat Marwick; Deloitte
& Touche; Coopers & Lybrand; and Price Waterhouse & Co.
1.15. "Indemnified Party" has the meaning set forth in
Section 4.1 hereof.
1.16. "Indemnifying Party" has the meaning set forth in
Section 4.1 hereof.
1.17. "Interested Party" means C-TEC or any other member of
the C-TEC Group, RCN or any other member of the RCN Group or Cable Michigan
or any other member of the Cable Michigan Group (including any successor and/or
assign of any of each of the foregoing), as the case may be, to the extent (a)
such Person is not the Controlling Party with respect to a Tax Contest; and
(b) such Person (i) may be liable for, or required to make, any indemnity
payment, reimbursement or other payment pursuant to the provisions of this
Agreement with respect to such Tax Contest; or (ii) may be entitled to receive
any indemnity payment, reimbursement or other payment pursuant to the
provisions of this Agreement with respect to such Tax Contest.
1.18. "Interested Party Notice" has the meaning set forth in
Section 3.4(b) hereof.
1.19. "Non-Line of Business Adjustment" means, with respect
to any Taxable period or portion of a Taxable period, and as computed
separately with respect to each Tax, the net increase or decrease in each such
Tax, as the case may be, equal to the sum of all Adjustments made pursuant to
a Final Determination with respect to each such Tax for each such Taxable
period or portion of a Taxable period other than (a) any Tax Detriments or (b)
any Tax Benefits. Notwithstanding any other provisions of this Agreement
(except Section 2.3(f)) or the Distribution Agreement to the contrary,
Non-Line of Business Adjustments shall include, but not be limited to,
Restructuring Adjustments.
1.20. "RCN ESOP" means the employee stock ownership plan to
be established by RCN after the Distribution.
1.21. "RCN Tax Detriment" means, with respect to any Taxable
period or portion of a Taxable period, and as computed separately with respect
to each Tax, the net increase in each such Tax equal to the sum of all
Adjustments made pursuant to a Final Determination with respect to each such
Tax for each such Taxable period or portion of a Taxable period that are
clearly attributable to the RCN Group.
1.22. "RCN Tax Benefit" means, with respect to any Taxable
period or portion of a Taxable period, and as computed separately with respect
to each Tax, the net decrease in each such Tax equal to the sum of all
Adjustments made pursuant to a Final Determination with respect to each such
Tax for each such Taxable period or portion of a Taxable period that are
clearly attributable to the RCN Group.
1.23. "Restructuring Adjustment" means, with respect to any
Taxable period or portion of a Taxable period, and as computed separately with
respect to each Tax, the net increase or decrease in each such Tax, as the
case may be, equal to the sum of all Adjustments made pursuant to a Final
Determination with respect to each such Tax for each Taxable period or portion
of a Taxable period that are attributable to, or as a result of, any
transactions undertaken to effectuate the separation of C-TEC's existing
businesses into three independent businesses as contemplated under the
Distribution Agreement including, but not limited to, any transactions
undertaken pursuant to or relating to the Distribution, the formation of the
RCN ESOP, and any offering of equity or equity-linked instruments by C-TEC
within one year of the Distribution Date.
1.24. "Return" means any return, report, form or similar
statement or document (including, without limitation, any related or
supporting information or schedule attached thereto and any information
return, claim for refund, amended return and declaration of estimated tax)
that has been or is required to be filed with any Taxing Authority or that has
been or is required to be furnished to any Taxing Authority in connection with
the determination, assessment or collection of any Taxes or the administration
of any laws, regulations or administrative requirements relating to any Taxes.
1.25. "Separate Return" means any Return other than a
Consolidated Return.
1.26. the "Shared Cable Michigan Percentage" shall be 20%.
1.27. the "Shared C-TEC Percentage" shall be 50%.
1.28. the "Shared RCN Percentage" shall be 30%.
1.29. "Significant Obligation" means, in the case of an
Interested Party, and with respect to any Adjustment, an obligation to make or
right to receive any indemnity payment, reimbursement or other payment with
respect to any such Adjustment (including the effect of any Correlative
Adjustment relating thereto) pursuant to the terms of this Agreement that is
greater than $10,000.
1.30. "Tax" (and, with correlative meanings, "Taxes" and
"Taxable") means, without limitation, and as determined on a
jurisdiction-by-jurisdiction basis, each foreign or U.S. federal, state, local
or municipal income, alternative or add-on minimum, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property or any
other tax, custom, tariff, impost, levy, duty, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest or
penalty, addition to tax or additional amount related thereto, imposed by any
Taxing Authority.
1.31. "Tax Detriments" means any C-TEC Tax Detriment, any
Cable Michigan Tax Detriment or any RCN Tax Detriment, as the case may be.
1.32. "Tax Benefits" means any C-TEC Tax Benefit, any Cable
Michigan Tax Benefit or any RCN Tax Benefit, as the case may be.
1.33. "Tax Contest" means, without limitation, any audit,
examination, claim, suit, action or other proceeding relating to Taxes in
which an Adjustment may be proposed, collected or assessed and in respect of
which an indemnity payment, reimbursement or other payment may be sought under
this Agreement.
1.34. "Taxing Authority" means any governmental authority or
any subdivision, agency, commission or authority thereof, or any
quasi-governmental or private body having jurisdiction over the assessment,
determination, collection or other imposition of Taxes.
1.35. "Ultimate Determination" has the meaning set forth in
Section 3.5(b)(i) hereof.
ARTICLE II
ADJUSTMENTS
2.1. IN GENERAL. In determining any liability and/or
obligation to make, or right to receive, any indemnity payment, reimbursement
or other payment to or from any party to this Agreement pursuant to this
Agreement, any Taxable period or portion of a Taxable period that includes the
Distribution Date shall be deemed to include and end on such Distribution Date
and no party to this Agreement shall have any liability and/or obligation to
make, or right to receive, any such indemnity payment, reimbursement or other
payment with respect to any Taxable period or portion of a Taxable period that
begins or is deemed to begin after the Distribution Date.
2.2. TAX DETRIMENTS AND BENEFITS. (a) RCN shall be liable
for, and shall indemnify and hold harmless, subject to Section 3.4 and Section
3.5 hereof, any member of the C-TEC Group or Cable Michigan Group against any
and all RCN Tax Detriments for any Taxable period or portion of a Taxable
period ending or deemed to end on or before the Distribution Date with respect
to any Return of any member of the RCN Group, the C-TEC Group or the Cable
Michigan Group. RCN shall be entitled to receive, and shall be paid, subject
to Section 3.4 and Section 3.5 hereof, (i) by C-TEC, the amount of any RCN Tax
Benefits for any Taxable period or portion of a Taxable period ending or
deemed to end on or before the Distribution Date with respect to any Return of
any member of the C-TEC Group; and/or (ii) by Cable Michigan, the amount of
any RCN Tax Benefits for any Taxable period or portion of a Taxable period
ending or deemed to end on or before the Distribution Date with respect to any
Return of any member of the Cable Michigan Group.
(b) C-TEC shall be liable for, and shall indemnify
and hold harmless, as appropriate, and subject to Section 3.4 and Section 3.5
hereof, any member of the RCN Group or Cable Michigan Group against any and
all C-TEC Tax Detriments for any Taxable period or portion of a Taxable period
ending or deemed to end on or before the Distribution Date with respect to any
Return of any member of the RCN Group, the C-TEC Group or the Cable Michigan
Group. C-TEC shall be entitled to receive, and shall be paid, subject to
Section 3.4 and Section 3.5 hereof, (i) by RCN, the amount of any C-TEC Tax
Benefits for any Taxable period or portion of a Taxable period ending or
deemed to end on or before the Distribution Date with respect to any Return of
any member of the RCN Group; and/or (ii) by Cable Michigan, the amount of any
C-TEC Tax Benefits for any Taxable period or any portion of a Taxable period
ending or deemed to end on or before the Distribution Date with respect to any
Return of any member of the Cable Michigan Group.
(c) Cable Michigan shall be liable for, and shall
indemnify and hold harmless, as appropriate, and subject to Section 3.4 and
Section 3.5 hereof, any member of the C-TEC Group or the RCN Group against any
and all Cable Michigan Tax Detriments for any Taxable period or portion of a
Taxable period ending or deemed to end on or before the Distribution Date with
respect to any Return of any member of the RCN Group, the C-TEC Group or the
Cable Michigan Group. Cable Michigan shall be entitled to receive, and shall
be paid, subject to Section 3.4 and Section 3.5 hereof, (i) by C-TEC, the
amount of any Cable Michigan Tax Benefits for any Taxable period or portion of
a Taxable period ending or deemed to end on the Distribution Date with respect
to any Return of any member of the C-TEC Group; and/or (ii) by RCN, the amount
of any Cable Michigan Tax Benefits for any Taxable period or portion of a
Taxable period ending or deemed to end on the Distribution Date with respect
to any Return of any member of the RCN Group.
2.3. NON-LINE OF BUSINESS ADJUSTMENTS. (a) RCN shall be
liable for, and shall indemnify and hold harmless, as appropriate, any member
of the C-TEC Group or Cable Michigan Group against RCN's share, as determined
in Section 2.3(d) below, of any Non-Line of Business Adjustment the amount of
which increases a Tax for any Taxable period or portion of a Taxable period
ending or deemed to end on or before the Distribution Date; with respect to
any Return of any member of the RCN Group, the C-TEC Group or the Cable
Michigan Group. RCN shall be entitled to receive, and shall be paid (i) by
C-TEC, RCN's share, as determined in Section 2.3(d) below, of any Non-Line of
Business Adjustment the amount of which decreases a Tax for any Taxable period
or portion of a Taxable period ending or deemed to end on or before the
Distribution Date with respect to any Return of any member of the C-TEC Group;
and/or (ii) by Cable Michigan, RCN's share, as determined in Section 2.3(d)
below, of any Non-Line of Business Adjustment the amount of which decreases a
Tax for any Taxable period or portion of a Taxable period ending or deemed to
end on or before the Distribution Date with respect to any Return of any
member of the Cable Michigan Group.
(b) C-TEC shall be liable for, and shall indemnify
and hold harmless, as appropriate, any member of the RCN Group or the Cable
Michigan Group against C-TEC's share, as determined in Section 2.3(d) below,
of any Non-Line of Business Adjustment the amount of which increases a Tax for
any Taxable period or portion of a Taxable period ending or deemed to end on
or before the Distribution Date with respect to any Return of any member of
the RCN Group, the C-TEC Group or the Cable Michigan Group. C-TEC shall be
entitled to receive, and shall be paid (i) by RCN, C-TEC's share, as
determined in Section 2.3(d) below, of any Non-Line of Business Adjustment the
amount of which decreases a Tax for any Taxable period or portion of a Taxable
period ending or deemed to end on or before the Distribution Date with respect
to any Return of any member of the RCN Group; and/or (ii) by Cable Michigan,
C-TEC's share, as determined in Section 2.3(d) below, of any Non-Line of
Business Adjustment the amount of which decreases a Tax for any Taxable period
or portion of a Taxable period ending or deemed to end on or before the
Distribution Date with respect to any Return of any member of the Cable
Michigan Group.
(c) Cable Michigan shall be liable for, and shall
indemnify and hold harmless, as appropriate, any member of the RCN Group or
the C-TEC Group against Cable Michigan's share, as determined in Section
2.3(d) below, of any Non-Line of Business Adjustment the amount of which
increases a Tax for any Taxable period or portion of a Taxable period ending
or deemed to end on or before the Distribution Date with respect to any
Return of any member of the RCN Group, the C-TEC Group or the Cable Michigan
Group. Cable Michigan shall be entitled to receive, and shall be paid (i) by
RCN, Cable Michigan's share, as determined in Section 2.3(d) below, of any
Non-Line of Business Adjustment the amount of which decreases a Tax for any
Taxable period or portion of a Taxable period ending or deemed to end on or
before the Distribution Date with respect to any Return of any member of the
RCN Group; and/or (ii) by C-TEC, Cable Michigan's share, as determined in
Section 2.3(d) below, of any Non-Line of Business Adjustment the amount of
which decreases a Tax for any Taxable period or portion of a Taxable period
ending or deemed to end on or before the date of the Cable Michigan
Distribution Date with respect to any Return of any member of the C-TEC Group.
(d) C-TEC, RCN and Cable Michigan shall share the
amount of any Non-Line of Business Adjustment to the extent each such party is
liable for and/or has an obligation to make, or has the right to receive, as
the case may be, any indemnity payment, reimbursement or other payment with
respect to such Non-Line of Business Adjustment under this Agreement, in
proportion to the Shared C-TEC Percentage, the Shared RCN Percentage and the
Shared Cable Michigan Percentage, respectively; provided, however, that in the
event that there is any Correlative Adjustment with respect to any such
Non-Line of Business Adjustment, then C-TEC, RCN and Cable Michigan shall
share such Non-Line of Business Adjustment in the following manner in order to
ensure that the party or parties that will bear the burden or inure to the
benefit of the Correlative Adjustment in the future will share the Non-Line of
Business Adjustment in proportion to each of their respective Shared
Percentages after giving effect to such Correlative Adjustment:
(i) first, the amount of any such Non-Line of
Business Adjustment shall be increased or decreased, as appropriate, by the
amount of the Correlative Adjustment, the net amount resulting from such
increase or decrease being hereinafter referred to as the "Net Non-Line of
Business Adjustment" for purposes of this Section 2.3(d);
(ii) second, the Net Non-Line of Business
Adjustment shall be allocated among C-TEC, RCN and Cable Michigan in
proportion to the Shared C-TEC Percentage, the Shared RCN Percentage and the
Shared Cable Michigan Percentage, respectively, to the extent each such party
is liable for and/or has an obligation to make, or has the right to receive,
as the case may be, any indemnity payment, reimbursement or other payment with
respect to such Non-Line of Business Adjustment under this Agreement; and
(iii) finally, with respect to a party to which a
Correlative Adjustment is attributable, that party's share of the Net Non-Line
of Business Adjustment as allocated pursuant to paragraph (ii) of this Section
2.3(d) will be increased or decreased, as appropriate, by the amount, if any,
of the Correlative Adjustment that is attributable to such party in order to
arrive at such party's share of the Non-Line of Business Adjustment.
(e) Following the determination of a party's share
of a Non-Line of Business Adjustment pursuant to Section 2.3(d) above, and
subject to Section 3.4 and 3.5 hereof, the Controlling Party that controls the
Tax Contest to which such Non-Line of Business Adjustment relates shall (i) be
entitled to reimbursement from C-TEC, RCN and/or Cable Michigan, as the case
may be, for each of their respective shares, if any, of any Non-Line of
Business Adjustment the amount of which increases a Tax; and (ii) reimburse
C-TEC, RCN or Cable Michigan, as the case may be, for each of their respective
shares, if any, of any Non-Line of Business Adjustment the amount of which
decreases a Tax.
(f) Notwithstanding any other provision of this
Agreement or the Distribution Agreement to the contrary, if after the
Distribution Date C-TEC, RCN or Cable Michigan takes any action or fails to
take any action that results in the Distribution not qualifying as a tax-
free distribution under Section 355 of the Code, then C-TEC, RCN or Cable
Michigan, as the case may be, will be liable for any increased tax
liability of C-TEC, RCN and Cable Michigan arising therefrom.
ARTICLE III
TAX CONTESTS
3.1. NOTIFICATION OF TAX CONTESTS. The Controlling Party
shall promptly notify all Interested Parties of (a) the commencement of any
Tax Contest pursuant to which such Interested Parties may be required to make
or entitled to receive an indemnity payment, reimbursement or other payment
under this Agreement; and (b) as required and specified in Section 3.4 hereof,
any Final Determination made with respect to any Tax Contest pursuant to which
such Interested Parties may be required to make or entitled to receive any
indemnity payment, reimbursement or other payment under this Agreement. The
failure of a Controlling Party to promptly notify any Interested Party as
specified in the preceding sentence shall not relieve any such Interested
Party of any liability and/or obligation which it may have to the Controlling
Party under this Agreement except to the extent that the Interested Party was
prejudiced by such failure, and in no event shall such failure relieve the
Interested Party from any other liability or obligation which it may have to
such Controlling Party.
3.2. TAX CONTEST SETTLEMENT RIGHTS. The Controlling Party
shall have the sole right to contest, litigate, compromise and settle any
Adjustment that is made or proposed in a Tax Contest without obtaining the
prior consent of any Interested Party; provided, however, that, unless the
parties provide notice of the waiver of such right, the Controlling Party
shall, in connection with any proposed or assessed Adjustment in a Tax Contest
for which an Interested Party may be required to make or entitled to receive
an indemnity payment, reimbursement or other payment under this Agreement (a)
keep all such Interested Parties informed in a timely manner of all actions
taken or proposed to be taken by the Controlling Party; and (b) provide all
such Interested Parties with copies of any correspondence or filings submitted
to any Taxing Authority or judicial authority, in each case in connection with
any contest, litigation, compromise or settlement relating to any such
Adjustment in a Tax Contest. The failure of a Controlling Party to take any
action as specified in the preceding sentence with respect to an Interested
Party shall not relieve any such Interested Party of any liability and/or
obligation which it may have to the Controlling Party under this Agreement
except to the extent that the Interested Party was prejudiced by such failure,
and in no event shall such failure relieve the Interested Party from any other
liability or obligation which it may have to such Controlling Party. The
Controlling Party may, in its sole discretion, take into account any
suggestions made by an Interested Party with respect to any such contest,
litigation, compromise or settlement of any Adjustment in a Tax Contest. All
costs of any Tax Contest are to be borne by the Controlling Party and all
Interested Parties in proportion to their respective liability to make
indemnity payments, reimbursements or other payments under this Agreement with
respect to an Adjustment made in such Tax Contest; provided, however, that
(x) any costs related to an Interested Party's attendance at any meeting with
a Taxing Authority or hearing or proceeding before any judicial authority
pursuant to Section 3.3 hereof, and (y) the costs of any legal or other
representatives retained by an Interested Party in connection with any Tax
Contest that is subject to the provisions of this Agreement, shall be borne by
such Interested Party.
3.3. TAX CONTEST PARTICIPATION. Unless waived by the
parties in writing, the Controlling Party shall provide an Interested Party
with notice reasonably in advance of, and such Interested Party shall have the
right to attend, any formally scheduled meetings with Taxing Authorities or
hearings or proceedings before any judicial authorities in connection with any
contest, litigation, compromise or settlement of any proposed or assessed
Adjustment that is the subject of any Tax Contest pursuant to which such
Interested Party may be required to make or entitled to receive an indemnity
payment, reimbursement or other payment under this Agreement, but only if the
Interested Party bears, or in the good faith judgment of the Controlling
Party, may bear, a Significant Obligation with respect to such Adjustment;
provided, however, that the Controlling Party may, in its sole discretion,
permit an Interested Party that does not bear, or potentially bear, such a
Significant Obligation with respect to such an Adjustment, to attend any such
meetings, hearings or proceedings that relate to such Adjustment. In
addition, unless waived by the parties in writing, the Controlling Party shall
provide each Interested Party with draft copies of any correspondence or
filings to be submitted to any Taxing Authority or judicial authority with
respect to such Adjustments for such Interested Party's review and comment.
The Controlling Party shall provide such draft copies reasonably in advance of
the date that they are to be submitted to the Taxing Authority or judicial
authority and the Interested Party shall provide its comments, if any, with
respect thereto within a reasonable time before such submission. The failure
of a Controlling Party to provide any notice, correspondence or filing as
specified in this Section 3.3 to an Interested Party shall not relieve any
such Interested Party of any liability and/or obligation which it may have to
the Controlling Party under this Agreement except to the extent that the
Interested Party was prejudiced by such failure, and in no event shall such
failure relieve the Interested Party from any other liability or obligation
which it may have to such Controlling Party.
3.4. TAX CONTEST WAIVER. (a) The Controlling Party shall
promptly provide notice to all Interested Parties in a Tax Contest (i) that a
Final Determination has been made with respect to such Tax Contest; and (ii)
enumerating the amount of the Interested Party's share of each Adjustment
reflected in such Final Determination of the Tax Contest for which such
Interested Party may be required to make or entitled to receive an indemnity
payment, reimbursement or other payment under this Agreement.
(b) Within thirty (30) days after an Interested
Party receives the notice described in Section 3.4(a) hereof from the
Controlling Party, such Interested Party shall give notice to the Controlling
Party (i) that the Interested Party agrees with each Adjustment (and its share
thereof) enumerated in the notice described in Section 3.4(a) hereof except
with respect to those Adjustments (and/or its shares thereof) that, in the
good faith judgment of the Interested Party, it disagrees with and has
specifically enumerated its disagreement with, including the amount of such
disagreement, in the statement (each such disagreed Adjustment (and/or share
thereof) hereinafter referred to as a "Disputed Adjustment"); and (ii) that
the Interested Party thereby waives its right to a determination by an
Independent Third Party pursuant to the provisions of Section 3.5 hereof with
respect to all Adjustments to which it agrees with its share (this statement
hereinafter referred to as the "Interested Party Notice"). The failure of an
Interested Party to provide the Interested Party Notice to the Controlling
Party within the thirty (30) day period specified in the preceding sentence
shall be deemed to indicate that such Interested Party agrees with its share
of all Adjustments enumerated in the notice described in Section 3.4(a) hereof
and that such Interested Party waives it right to a determination by an
Independent Third Party with respect to all such Adjustments (and its shares
thereof) pursuant to Section 3.5 hereof.
(c) During the thirty (30) day period immediately
following the Controlling Party's receipt of the Interested Party Notice
described in Section 3.4(b) above, the Controlling Party and the Interested
Party shall in good faith confer with each other to resolve any disagreement
over each Disputed Adjustment that was specifically enumerated in such
Interested Party Notice. At the end of the thirty (30) day period specified
in the preceding sentence, unless notice is provided of the mutual consent of
the parties to the extension of such time period, the Interested Party shall
be deemed to agree with all Disputed Adjustments that were specifically
enumerated in the Interested Party Notice and waive its right to a
determination by an Independent Third Party pursuant to Section 3.5 hereof with
respect to all such Disputed Adjustments unless, and to the extent, that at
any time during such thirty (30) day (or extended) period, the Interested
Party has given the Controlling Party notice that it is seeking a
determination by an Independent Third Party pursuant to Section 3.5 hereof
regarding the propriety of any such Disputed Adjustment.
(d) Notwithstanding anything in this Agreement to the
contrary, an Interested Party that does not have a Significant Obligation with
respect to an Adjustment has no right to a determination by an Independent
Third Party under section 3.5 hereof with respect to any such Adjustment.
3.5. TAX CONTEST DISPUTE RESOLUTION. (a) In the event that
an Interested Party has given the Controlling Party notice as required in
Section 3.4(c) hereof that it is seeking a determination by an Independent
Third Party pursuant to this Section 3.5 with respect to any Disputed
Adjustment that was enumerated in an Interested Party Notice, then the parties
shall, within ten (10) days after the Controlling Party has received such
notice, jointly select an Independent Third Party to make such determination.
In the event that the parties cannot jointly agree on an Independent Third
Party to make such determination within such ten (10) day period, then the
Controlling Party and the Interested Party shall each immediately select an
Independent Third Party and the Independent Third Parties so selected by the
parties shall jointly select, within ten (10) days of their selection, another
Independent Third Party to make such determination.
(b) In making its determination as to the propriety
of any Disputed Adjustment, the Independent Third Party selected pursuant to
Section 3.5(a) above shall assume that the Interested Party is not required or
entitled under applicable law to be a member of any Consolidated Return. In
addition, the Independent Third Party shall make its determination according
to the following procedure:
(i) The Independent Third Party shall analyze
each Disputed Adjustment for which a determination is sought pursuant to this
Section 3.5 to determine what is a fair and appropriate outcome (hereinafter
referred to as the "Ultimate Determination") with respect to any such Disputed
Amount, taking into account the following exclusive criteria: (A) the facts
relating to such Adjustment; (B) the applicable law, if any, with respect to
such Adjustment; (C) the position of the applicable Taxing Authority with
respect to compromise, settlement or litigation of such Adjustment; (D) the
strength of the factual and legal arguments made by the Controlling Party in
reaching the outcome with respect to such Adjustment as reflected in the Final
Determination of the Tax Contest; (E) the strength of the factual and legal
arguments being made by the Interested Party for the alternative outcome being
asserted by such Interested Party (including the availability of facts,
information and documentation to support such alternative outcome); (F) the
strength of the legal and factual support for other potential, non-frivolous
Adjustments with respect to matters that were actually raised and contested by
the applicable Taxing Authority in the Tax Contest for which the Interested
Party could have been liable under this Agreement but which were eliminated or
reduced as a result of the Controlling Party agreeing to the Disputed
Adjustment as reflected in the Final Determination of the Tax Contest; (G) the
effect of the actual outcome reached with respect to the Disputed Adjustment
on other Taxable periods and on other positions taken or proposed to be taken
in Returns filed or proposed to be filed by the Interested Party; (H) the
realistic possibility of avoiding examination of potential, non-frivolous
issues for which the Interested Party could be liable under this Agreement and
that were contemporaneously identified in writings by the party or parties
during the course of the Tax Contest but which had not been raised and
contested by the applicable Taxing Authority in the Tax Contest; and (I) the
benefits to the Interested Party in reaching a Final Determination, and the
strategy and rationale with respect to the Interested Party's Disputed
Adjustment that the Controlling Party had for agreeing to such Disputed
Adjustment in reaching the Final Determination, in each case that were
contemporaneously identified in writings by the party or parties during the
course of the Tax Contest.
(ii) The Interested Party shall only be
entitled to modification of its share of a Disputed Adjustment under this
Section 3.5 if, as the case may be, either (A) the amount that would be paid
by the Interested Party under the Ultimate Determination with respect to such
Disputed Adjustment is less than 80% of the amount that would be paid by the
Interested Party with respect to such Disputed Adjustment under the actual
outcome reached with respect to such Disputed Adjustment; or (B) the amount
that would be received by the Interested Party under the Ultimate
Determination with respect to such Disputed Adjustment is more than 120% of
the amount that the Interested Party would receive with respect to such
Disputed Adjustment under the actual outcome reached with respected to such
Disputed Adjustment. If an Interested Party is entitled to modification of
its share of any Disputed Adjustment under the preceding sentence, the amount
the Interested Party is entitled to receive, or is required to pay, as the
case may be, with respect to such Disputed Adjustment shall be equal to the
amount of the Ultimate Determination of such Disputed Adjustment. The
Independent Third Party will provide notice to the Controlling Party and the
Interested Party stating whether the Interested Party is entitled to
modification of its share of the Disputed Adjustment pursuant to this
paragraph (ii) and, if the Interested Party is entitled to such modification,
the amount as determined in the preceding sentence that the Interested Party
is entitled to receive from, or required to pay to, the Controlling Party with
respect to such Disputed Adjustment.
(c) Any determination made or notice given by an
Independent Third Party pursuant to this Section 3.5 shall be (i) in writing;
(ii) made within thirty (30) days following the selection of the Independent
Third Party as set forth in Section 3.5(a) of this Agreement unless such
period is otherwise extended by the mutual consent of the parties; and (iii)
final and binding upon the parties. The costs of any Independent Third Party
retained pursuant to this Section 3.5 shall be shared equally by the parties.
The Controlling Party and the Interested Party shall provide the Independent
Third Party jointly selected pursuant to Section 3.5(a) hereof with such
information or documentation as may be appropriate or necessary in order for
such Independent Third Party to make the determination requested of it. Upon
issuance of an Independent Third Party's notice under Section 3.5(b)(ii)
hereof, the Controlling Party or the Interested Party, as the case may be,
shall pay as specified in Article IV of this Agreement, the amount, if any, of
the Disputed Adjustment to the appropriate party.
ARTICLE IV
PROCEDURE AND PAYMENT
4.1. PROCEDURE. (a) If an Interested Party has any
liability and/or obligation to make, or the right to receive, any indemnity
payment, reimbursement or other payment with respect to an Adjustment under
this Agreement for which it does not have a right to a determination by an
Independent Third Party under Section 3.5 hereof, then the amount of such
Adjustment shall be immediately due and payable upon receipt by the Interested
Party of a notice of Final Determination of a Tax Contest as required and
specified in Section 3.4(a) hereof.
(b) If after (i) notice of a Final Determination of
a Tax Contest as required and specified in Section 3.4(a) hereof has been
given by a Controlling Party to an Interested Party; and (ii) the Interested
Party receiving such notice has either:
(A) failed to provide the Interested
Party Notice specified in Section 3.4(b) hereof within the thirty (30) day
period set forth in Section 3.4(b);
(B) provided the Interested Party Notice
specified in Section 3.4(b) hereof within the thirty (30) day period specified
in Section 3.4(b) agreeing to all Adjustments (and the Interested Party's
share of all such Adjustments) and waiving the right to an Independent Third
Party determination pursuant to Section 3.5 hereof with respect to all such
Adjustments (and the Interested Party's share of such Adjustments);
(C) provided the Interested Party Notice
specified in Section 3.4(b) hereof within the thirty (30) day period specified
in Section 3.4(b) agreeing with some, but not all, Adjustments (and the
Interested Party's share of such agreed Adjustments) and waiving the right to
an Independent Third Party Determination pursuant to Section 3.5 hereof with
respect to all such agreed Adjustments (and the Interested Party's share of
such Adjustments); or
(D) provided the Interested Party Notice
specified in Section 3.4(b) hereof within the thirty (30) day period specified
in Section 3.4(b) specifically enumerating the Disputed Adjustments to which
it does not agree and for which the notice specified in either Section
3.5(b)(ii) hereof relating to any such Disputed Adjustment has been given by
an Independent Third Party, then the amount of any Adjustment agreed to or
deemed to be agreed to by the Interested Party, or for which an Independent
Third Party notice has been given pursuant to either Section 3.5(b)(ii)
hereof, as set forth in each of clauses (A), (B, (C) or (D) above, shall be
immediately due and payable.
(c) Any Person entitled to any indemnification,
reimbursement or other payment under this Agreement with respect to the amount
of any Adjustment that has become immediately due and payable under Section
4.1(b) (the "Indemnified Party") shall notify the Person against whom such
indemnification, reimbursement or other payment is sought (the "Indemnifying
Party") of its right to and the amount of such indemnification, reimbursement
or other payment; provided, however, that the failure to notify the
Indemnifying Party shall not relieve the Indemnifying Party from any liability
and/or obligation which it may have to an Indemnified Party on account of the
provisions contained in this Agreement except to the extent that the
Indemnifying Party was prejudiced by such failure, and in no event shall such
failure relieve the Indemnifying Party from any other liability or obligation
which it may have to such Indemnified Party. The Indemnifying Party shall
make such indemnity payment, reimbursement or other payment to the Indemnified
Party within thirty (30) days of the receipt of the notice specified in the
preceding sentence; provided, however, that, in the case of any Final
Determination of a Tax Contest involving a state, local or municipal Tax in
which the Indemnifying Party is also the Controlling Party with respect to
such Tax Contest and, as Controlling Party, is entitled to receive an overall
net refund from the applicable state, local or municipal Taxing Authority with
respect to such state, local or municipal Tax, then the Indemnifying Party
shall make such indemnity payment, reimbursement or other payment to the
Indemnified Party within thirty (30) days from the date the Indemnifying Party
actually receives payment of or obtains the benefit of the net refund due from
the applicable state, local or municipal Taxing Authority.
4.2. PAYMENT. Any indemnity payment, reimbursement or other
payment required to be made pursuant to this Agreement by an Indemnifying Party
to an Indemnified Party shall be made, at the option of the Indemnifying
Party, by (a) certified check payable to the order of the Indemnified Party;
or (b) wire transfer of immediately available funds to such bank and/or other
account of the Indemnified Party as from time to time the Indemnified Party
shall have directed the Indemnifying Party, in writing. Any indemnity
payment, reimbursement or other payment required to be made by an Interested
Party pursuant to this Agreement shall bear interest at the Federal Short-Term
Rate plus 2 %, per annum, from the date such Interested Party receives the
notice of Final Determination made with respect to a Tax Contest as provided
in Section 3.4(a) hereof. Any indemnity payment, reimbursement or other
payment required to be made by a Controlling Party to an Interested Party
pursuant to this Agreement shall bear interest at the Federal Short-Term Rate
plus 2%, per annum, from a date thirty (30) days after the date of a Final
Determination made with respect to a Tax Contest; provided, however, that, in
the case of any Final Determination of a Tax Contest involving a state, local
or municipal Tax in which the Controlling Party is entitled to receive an
overall net refund from the applicable state, local or municipal Taxing
Authority with respect to such state, local or municipal Tax, such indemnity
payment, reimbursement or other payment to be made by the Controlling Party
shall bear interest at the Federal Short-Term Rate plus 2%, per annum, from
the date the Controlling Party actually receives payment of or obtains the
benefit of the net refund due from the applicable state, local or municipal
Taxing Authority.
ARTICLE V
OTHER TAX MATTERS
5.1. TAX POLICIES AND PROCEDURES DURING CONSOLIDATION. It
is understood and agreed that during Consolidation:
(a) Members of the RCN Group and members of the Cable
Michigan Group, respectively, shall each adopt and follow the Tax policies and
procedures that have been established by C-TEC, unless C-TEC shall otherwise
consent as provided herein.
(b) C-TEC shall establish all Return positions and
make all Tax elections relating to a Consolidated Return. Members of the RCN
Group and members of the Cable Michigan Group shall take such Consolidated
Return positions and make such Tax elections relating to a Consolidated Return
as may be taken or made by C-TEC, or as reasonably requested by C-TEC to be
taken or made by any member of the RCN Group and/or any member of the Cable
Michigan Group, as the case may be, unless C-TEC shall otherwise consent, as
provided herein.
(c) With respect to the Consolidated Return for
the taxable period including the Distribution Date, the parties of this
Agreement shall indemnify each other in a manner consistent with Article II
for the amount of any difference between (i) the Tax liability of such
party (including all of the members of its respective Group) as calculated
on a separate basis for purposes of determining the final tax accrual
provision for the period ending on the Distribution Date and (ii) the Tax
liability of such party (including all the members of its respective Group)
as calculated on a separate basis for purposes of determining the total Tax
liability as reported on the Consolidated Return filed with respect to the
taxable period including the Distribution Date. Any payments to be made
pursuant to this Section 5.1(c) shall be made within forty-five (45) days
of the filing of such Consolidated Return.
5.2. COOPERATION. Except as otherwise provided in this
Agreement, each member of the C-TEC Group, the RCN Group and/or the Cable
Michigan Group, as the case may be, shall, at their own expense, cooperate with
each other in the filing of, or any Tax Contest relating to, any Return and
any other matters relating to Taxes and, in connection therewith, shall (i)
maintain appropriate books and records for any and all Taxable periods or any
portion of a Taxable period that may be required by C-TEC's record retention
policies; (ii) provide to each other such information as may be necessary or
useful in the filing of, or any Tax Contest relating to, any such Return;
(iii) execute and deliver such consents, elections, powers of attorney and
other documents as may be required or appropriate for the proper filing of any
such Return or in conjunction with any Tax Contest relating to any such
Return; and (iv) make available for responding to inquiries of any other party
or any Taxing Authority, appropriate employees and officers of and advisors
retained by any member of the C-TEC Group, the RCN Group, or the Cable
Michigan Group, as the case may be.
5.3. FILING OF RETURNS. The Person that would be the
Controlling Party with respect to any Tax Contest relating to a Return for
which any indemnity payment, reimbursement or other payment may be sought
under this Agreement shall (a) prepare and file, or cause to be prepared and
filed, any such Return within the time prescribed for filing such Return
(including all extensions of time for filing); and (b) shall timely pay, or
cause to be timely paid, the amount of any Tax shown to be due and owing on
any such Return. Such Person shall bear all costs associated with preparing
and filing, or causing to be prepared and filed, any such Return. Except as
provided in Section 5.l(b) hereof (relating to Consolidated Returns), such
Person shall establish all Return positions and make all Tax elections
relating to such Returns.
ARTICLE VI
MISCELLANEOUS
6.1. GOVERNING LAW. To the extent not preempted by any
applicable foreign or U.S. federal, state, or local Tax law, this Agreement
shall be governed by and construed and interpreted in accordance with the laws
of the State of New York, irrespective of the choice of laws principles of the
State of New York, as to all matters, including matters of validity,
construction, effect, performance and remedies.
6.2. AFFILIATES. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions,
agreements and obligations set forth herein to be performed by any Affiliate
of such party; provided, however, that for purposes of the foregoing, no
Person shall be considered an Affiliate of a party if such Person is a member
of another party's Group.
6.3. INCORPORATION OF DISTRIBUTION AGREEMENT PROVISIONS.
Article 9 of the Distribution Agreement (Miscellaneous) is hereby incorporated
herein by reference, and unless otherwise expressly specified herein, shall
apply as if fully set forth herein.
6.4. NOTICES. On behalf of C-TEC, RCN, and Cable Michigan,
the individuals set forth below (or any other individuals delegated in writing
by each of the foregoing) shall serve as the single point of contact to
receive or give any notice or other communication required or permitted to be
given to any member of each of their respective Groups under this Agreement.
Unless the individual designated to receive any notice or other communication
is the same individual designated to give such notice or other communication,
all notices or other communications under this Agreement shall be in writing
and shall deemed to be duly given when (a) delivered in person; or (b) sent by
facsimile; or (c) deposited in the United States mail, postage prepaid and
sent certified mail, return receipt requested; or (d) deposited in private
express mail, postage prepaid, addressed as follows:
If to any member of the C-TEC Group, to:
C-TEC Corporation
105 Carnegie Center
Princeton, NJ 08540
Attn: James J. Saile, Vice President of Taxation
Facsimile: 609-734-3875
If to any member of the RCN Group, to:
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540
Attn: James J. Saile, Vice President of Taxation
Facsimile: 609-734-3875
If to any member of the Cable Michigan Group, to:
Cable Michigan, Inc.
105 Carnegie Center
Princeton, NJ 08540
Attn: James J. Saile, Vice President of Taxation
Facsimile: 609-734-3875
Copies of any and all notices shall be (a) delivered in person; or (b) sent by
facsimile; or (c) deposited in the United States mail, postage prepaid and sent
certified mail, return receipt requested; or (d) deposited in private express
mail, postage prepaid, addressed as follows:
Matthew A. Rosen
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Facsimile: (212) 735-2000
Any party may, by written notice to the other parties, change the address to
which such notices (or copies of notices) are to be given.
6.5. CONFLICTING OR INCONSISTENT PROVISIONS. In the event
that any provision or term of this Agreement conflicts or is inconsistent with
any provision or term of any other agreement between or among C-TEC or any
other member of the C-TEC Group, RCN or any other member of the RCN Group
and/or Cable Michigan or any other member of the Cable Michigan Group, as the
case may be, which is in effect on or prior to the date hereof, the provision
or term of this Agreement shall control and apply and the provision or term of
any other agreement shall, to the extent of such conflict or inconsistency, be
inoperative and inapplicable.
6.6. DURATION. Notwithstanding anything in this Agreement or
the Distribution Agreement to the contrary, the provisions of this Agreement
shall survive for the full period of all applicable statutes of limitations
(giving effect to any waiver, mitigation or extension thereof).
6.7. AMENDMENT. Without limiting the provisions contained in
Article 9 of the Distribution Agreement which are incorporated herein by
reference pursuant to Section 6.3 hereof, the parties hereto agree that any
waiver, amendment, supplement or modification of this Agreement that solely
relates to and affects only two of the three parties hereto shall not require
the consent of the third party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Tax
Sharing Agreement to be executed by their duly authorized representatives
as of date hereof.
C-TEC Corporation
By: /s/
--------------------------------------
Name:
Title:
RCN Corporation
By: /s/
--------------------------------------
Name:
Title:
Cable Michigan, Inc..
By: /s/
--------------------------------------
Name:
Title:
<PAGE>
