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
--------------
RCN CORPORATION
(Exact name of registrant as specified in its charter)
--------------
DELAWARE 22-3498533
(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
==============================================================================
RCN Corporation, 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 Cable Michigan; 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 Form of Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and the Registrant
3.1 Form of Amended and Restated Articles of Incorporation of the Registrant(*)
3.2 Form of Amended and Restated Bylaws of the Registrant(*)
4.1 Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems, Inc., ComVideo Systems,
Inc., C-TEC Cable Systems of New York, Inc. and First Union National Bank, as agent(*+)
10.1 Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan, Inc. and the Registrant
10.2 Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber Systems/McCourt,
Inc. and RCN Telecom Services of Massachusetts, Inc.(*)
10.3 Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber Systems of New York,
Inc. and RCN Telecom Services of New York, Inc.(*)
10.4 Telephone Service to Reseller Agreement for Boston among Metropolitan Fiber Systems/McCourt,
Inc. and RCN Telecom Services of Massachusetts, Inc.(*)
10.5 Telephone Service to Reseller Agreement for New York among Metropolitan Fiber Systems of New
York, Inc. and RCN Telecom Services of New York, Inc.(*)
10.6 OVS Agreement dated May 8, 1997 between RCN Telecom Services, Inc. and MFS Communication
Company, Inc.(*)
10.7 Joint Venture Agreement dated as of December 23, 1996 between RCN Telecom Services, Inc. and
Boston Energy Technology Group, Inc.(*)
10.8 Amended and Restated Operating Agreement of RCN-BecoCom, LLC dated as of June 17, 1997(*)
10.9 Management Agreement dated as of June 17, 1997 among RCN Operating Services, Inc. and
BecoCom, Inc.(*)
10.10 Construction and Indefeasible Right of Use Agreement dated as of June 17, 1997 between BecoCom,
Inc. and RCN-BecoCom, LLC(*)
10.11 License Agreement dated as of June 17, 1997 between Boston Edison Company and BecoCom, Inc.(*)
10.12 Joint Investment and Non-Competition Agreement dated as of June 17, 1997 among RCN Telecom
Services of Massachusetts, Inc., BecoCom, Inc. and RCN-BecoCom, LLC(*)
21.1 Subsidiaries of the Registrant(*)
27.1 Financial Data Schedule(*)
</TABLE>
(*) Previously filed
(+) 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.
RCN Corporation
By: /s/ Bruce Godfrey
-----------------------------------
Name: Bruce Godfrey
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]
RCN CORPORATION
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 RCN
Corporation, a Delaware corporation ("RCN" 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 one share 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.
Concurrent with the Distribution, C-TEC will distribute (the
"Cable Michigan 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 Cable Michigan, Inc., a
Pennsylvania corporation ("Cable Michigan"). Cable Michigan operates cable
television systems in the State of Michigan. The Cable Michigan Distribution
is described in a separate Information Statement that is being provided to the
holders of C-TEC Common Equity.
Prior to the time the Distribution is effected, C-TEC will
engage in a series of internal restructuring transactions that will result in
RCN owning C-TEC's competitive telecommunications services operations in New
York City, Boston and other markets (the "RCN Telecom Business"), its cable
television operations in the states of New York (other than New York City),
New Jersey and Pennsylvania, certain of its long distance operations and its
40% interest in Megacable, S.A. de C.V. (collectively, the "Company
Businesses") in accordance with the terms of the Distribution Agreement dated
September 5, 1997, among C-TEC, the Company and Cable Michigan, 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 Cable Michigan."
At the time of the Distribution, the Company will own the Company Businesses.
C-TEC's principal shareholder is Kiewit Telecom Holdings Inc., a Delaware
corporation ("Kiewit Telecom"), which was formerly known as RCN Corporation
and recently changed its name. RCN is a separate company from Kiewit Telecom.
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 "RCNC." See "Trading
Market."
In reviewing this Information Statement, stockholders should
carefully consider the matters described under the section entitled "Risk
Factors" on page 11.
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............................................................... 11
THE DISTRIBUTION........................................................... 21
RELATIONSHIP AMONG THE COMPANY, C-TEC AND CABLE MICHIGAN................... 24
TRADING MARKET............................................................. 30
DIVIDENDS.................................................................. 31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................... 32
PRO FORMA CAPITALIZATION................................................... 40
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............................ 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 42
DESCRIPTION OF THE CREDIT AGREEMENT........................................ 50
BUSINESS................................................................... 53
MANAGEMENT................................................................. 81
EMPLOYEE STOCK OWNERSHIP PLAN.............................................. 88
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT........................................... 89
DESCRIPTION OF CAPITAL STOCK............................................... 91
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS............................ 92
INDEPENDENT AUDITORS....................................................... 95
ADDITIONAL INFORMATION..................................................... 95
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 one
share 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, all of the outstanding capital
stock of the subsidiaries that own and operate the Company Businesses 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 RCN Corporation,
105 Carnegie Center, Princeton, New Jersey 08540-6215. The Company's
telephone number is (609) 734-3700 and its Internet website is www.rcn.com.
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
"RCN" means RCN Corporation and its subsidiaries after giving effect to the
Distribution.
The Company
Overview
RCN Corporation ("RCN" or the "Company") is developing advanced
fiber optic networks to provide a wide range of telecommunications services
including local and long distance telephone, video programming and data
services (including high speed Internet access), primarily to residential
customers in selected markets in the Boston to Washington, D.C. corridor as
well as certain commercial accounts on or near its networks. RCN seeks to act
as a single-source provider of a wide range of voice, video and data services
offered individually or in bundled service packages, with superior customer
service and competitive prices as compared to incumbent service providers.
The Company currently utilizes a variety of owned and leased facilities
including advanced fiber optic networks, a wireless video system and hybrid
fiber/coaxial cable systems, although it intends to deploy advanced fiber
optic networks specifically designed to provide high speed, high capacity
telecommunications services for all new facilities. RCN's initial advanced
fiber optic networks have been established in New York City and, through a
joint venture, in Boston and surrounding communities, and formally commenced
operations in September 1996. RCN has recently announced that it plans to
develop an advanced fiber optic network in the Washington, D.C. area through a
joint venture. Since it formally commenced operation of its advanced fiber
optic networks in New York City and Boston, RCN has built or acquired through
long term lease arrangements approximately 300 route miles of fiber optic
cable and added approximately 1,500 customer connections to its advanced fiber
optic networks. In addition, during the same period the Company added
approximately 13,500 wireless video, resold telephone and other connections,
the majority of which represent customers that RCN expects to migrate to its
advanced fiber optic networks. At June 30, 1997, RCN had an aggregate of
approximately 234,600 connections (local telephone, video programming or
Internet access) among all facilities, approximately 48,400 of which were
attributable to customers in the New York City and Boston markets. See
"Business--RCN Services--Connections."
RCN seeks to exploit competitive opportunities which have
resulted from widespread changes in the U.S. telecommunications industry.
Industry sources estimate that annual revenues generated by the U.S.
telecommunications industry are approximately $220 billion, approximately 50%
of which is attributable to residential users. The Boston to Washington
corridor represents approximately 4% of the geography of the U.S. but accounts
for over 26% of the telecommunications market (as measured by telephone access
lines). RCN believes that density is a critical factor in the economic
deployment of advanced fiber optic networks, and that due to population
density, favorable demographics and the aging infrastructure of the
incumbents' facilities, the Boston to Washington corridor is a particularly
attractive market for development of advanced fiber optic facilities.
The opportunity to effectively deploy advanced fiber optic
networks and to compete with incumbent telephone and cable television service
providers results from several key factors, including the broad deregulation
of the telecommunications industry pursuant to the Telecommunications Act of
1996 and other developments, the need for more advanced, higher capacity
networks to meet growing consumer demands and the typically superior
technology of the Company's networks in contrast to the network and other
limitations of the incumbent providers. To address this opportunity, RCN is
pursuing the following key strategies:
bullet Developing Advanced Fiber Optic Networks. RCN is developing
advanced fiber optic networks specifically designed to provide a single
source for high speed, high capacity voice, video programming and data
services. RCN's ability to offer a wide range of services through its
advanced fiber optic networks greatly increases the size of its
potential market, as compared to the networks of incumbent service
providers which typically provide only single or limited services. RCN
seeks to be the first operator of an advanced fiber optic network
targeting residential customers in each of its target markets.
bullet Focus on Residential Customers in High Density Markets. The
Company's primary focus is on residential customers in high density
areas. The Company also serves certain commercial accounts which are on
or near its networks. Most of the other new competitive entrants,
including most competitive local exchange carriers ("CLECs"), have
focused their network development and sales efforts almost exclusively
on providing telephone service to large commercial customers and have
generally not offered their telephone services to the residential
marketplace. Additionally, these new competitors and the incumbent
service providers have generally not expanded their offerings to include
both voice and video programming services.
bullet Utilizing Strategic Alliances and Existing Facilities to
Speed and Reduce Cost of Entry. Utilizing existing facilities and
entering into strategic alliances enables RCN to enter the market
quickly and efficiently and to reduce its up-front capital investment.
RCN has established strategic relationships with MFS Communications
Company, Inc. (now a subsidiary of WorldCom, Inc.) ("MFS/WorldCom") and
the Boston Edison Company ("BECO"), both of which have extensive fiber
optic networks and other assets, and is utilizing its own existing cable
television infrastructure to help expedite and reduce the cost of
market entry and development of its business. RCN also benefits from
its interconnection and resale agreements with incumbent telephone
service providers. On August 1, 1997, RCN entered into a letter of
intent with Potomac Capital Investment Corporation ("PCI"), a subsidiary
of Potomac Electric Power Company ("PEPCO"), to form a joint venture to
develop an advanced fiber network in Washington, D.C. and certain
communities in Maryland and Virginia (the "Washington, D.C. Market").
See "Business--Strategic Relationships."
bullet Implementing Subscriber-Driven Investment Strategy. RCN
attempts to defer as much of its capital investment as possible by tying
facility development to the procurement of customer connections. In
order to help promote its presence in its markets and to develop a
subscriber base for its advanced fiber optic networks, the Company may
provision services to its customers by first reselling services, and then
by establishing leased facilities (such as unbundled local loops), in
advance of constructing or extending its network.
Operations
In addition to its initial advanced fiber optic networks in New
York City and Boston, RCN provides video programming and local and long
distance telephone services through other facilities including a wireless video
system in New York City, hybrid fiber/coaxial cable television systems in the
States of New York (outside New York City), New Jersey and Pennsylvania, all
within 75 miles of New York City, and resale agreements with the incumbent
telephone service providers. RCN's wireless video and resale telephone
services are offered primarily to customers located near RCN's current or
proposed advanced fiber optic networks. RCN intends to convert as many of
those customers as is economically feasible to advanced fiber optic networks.
As of June 30, 1997, RCN had approximately 234,600 customer
connections. This amount includes approximately 48,400 connections in the New
York City and Boston markets (approximately 1,500 advanced fiber connections,
approximately 38,300 wireless video service connections and approximately
8,530 resold telephone and other connections). Also included within the total
customer connections as of June 30, 1997 were approximately 181,800 hybrid
fiber/coaxial cable connections. RCN had revenues of $104.9 million for the
year ended December 31, 1996 and $60.7 million for the six months ended June
30, 1997. Because it delivers multiple services, RCN reports the total number
of its various service connections (for local telephone, video programming or
Internet access) rather than the number of customers.
RCN owns a 40% interest in Megacable S.A. de C.V.
("Megacable"), the second largest cable television provider in Mexico with
approximately 176,000 subscribers and 622,000 homes passed by its systems as of
June 30, 1997. Megacable operates 22 wireline cable systems throughout
Mexico, principally in Guadalajara, Mexico's second largest city, and along
the Pacific and Gulf Coasts. Megacable is presently expanding the fiber
capacity of certain of its systems and has recently begun to offer high-speed
data services; it may in the future provide voice services. Megacable had
revenues of $23.2 million for the year ended December 31, 1996 and $14.2
million for the six months ended June 30, 1997.
The Company's management team and board of directors benefit
from experience gained in connection with the management of C-TEC, which has
100 years of experience in the telephone business and nearly 25 years of
experience in the cable television business. Both C-TEC and certain members
of management also have extensive experience in the design and development of
advanced telecommunications facilities. The Company also benefits from its
relationship with Peter Kiewit Sons' Inc. ("PKS"), the founder of MFS
Communications Company, Inc., and from the experience gained by certain of the
Company's key employees who participated in the development of MFS
Communications Company, Inc. Kiewit Telecom, an affiliate of PKS, will be the
Company's largest shareholder after the Distribution.
Competitive Strengths
RCN believes it benefits from the following competitive
strengths:
bullet Experience in Operating Telephone and Cable Networks. RCN's
extensive operating experience in both the telephone and video
industries and in the design and development of telecommunications
facilities provides it with expertise in systems operation and
development, an established infrastructure for customer service and
billing for both voice and video services and established relationships
with providers of equipment and video programming.
bullet State-of-the-art Technology. RCN's advanced fiber networks
are purpose-built using state-of-the-art technology. These networks are
designed to deliver a wide range of voice, video and data services with
superior quality and increased capacity.
bullet Ability to Offer Bundled Voice and Video Services. RCN
believes that, as a full service voice and video programming provider,
it will be able to offer a single-source package of voice, video and
data services which is not yet generally available from any incumbent
telephone, cable or other service provider.
bullet Superior Customer Service. RCN seeks to provide superior
customer service as compared to incumbent service providers, with
service features such as a 24-hour-a-day call center and quality control
system, on-time service guarantees and bundled service offerings,
providing the consumer with added choice and convenience. In addition,
services provided over RCN's advanced fiber networks are generally priced
at competitive rates as compared to the incumbent service providers.
bullet Existing Customer Base in Attractive Markets. RCN benefits
from an existing base of 234,600 connections in New York City, Boston
and surrounding communities and in additional markets with favorable
customer demographics within 75 miles of New York City. RCN expects
that the majority of its wireless video and resale telephone customers
(an aggregate of approximately 43,000 connections) will ultimately be
connected to its advanced fiber optic networks. See "Business--RCN
Services--Connections."
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 Cable Michigan
Distribution are in the best
interests of C-TEC, the Company,
Cable Michigan and the holders of
C-TEC's 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 the Company with stock
that correlates more closely to the
performance of the Company
Businesses, (iii) facilitate
possible future acquisitions and
joint venture investments by Cable
Michigan; (iv) facilitate possible
future equity or equity-linked
offerings by the Company; (v)
facilitate possible future
acquisitions and joint venture
investments by the Company; (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 27,484,628 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 one share 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
"RCNC". 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.
Relationship with C-TEC
and Cable Michigan After
the Distribution................. In connection with the Distributions,
C-TEC, the Company and Cable
Michigan have entered into the
Distribution Agreement and the Tax
Sharing Agreement (as hereinafter
defined) described under
"Relationship Among the Company,
C-TEC and Cable Michigan". These
agreements are not the result of
arm's length negotiations between
unrelated parties as the Company,
C-TEC and Cable Michigan 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 Cable Michigan" 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 Cable Michigan
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 Cable
Michigan following the
Distributions. 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 Cable Michigan... 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 Cable
Michigan. Cable Michigan operates
cable television systems in the
State of Michigan. The Cable
Michigan 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.)
Summary Selected Historical Consolidated Financial Data
Prior to the Distribution Date, the Company and the Company
Businesses have been operating as part of C-TEC. The table below sets forth
selected historical consolidated financial data for RCN. 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 three 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>
Statement of Operations Data:
Sales........................... $60,706 $49,017 $104,910 $91,997 $59,500 $49,504 $44,030
Costs and expenses, excluding
depreciation and amortization. 55,703 37,041 79,107 75,003 49,747 30,821 25,725
Depreciation and amortization... 25,455 17,830 38,881 22,336 9,803 9,922 9,984
Nonrecurring charges............ 10,000 -- -- -- -- -- --
-------- ------- ------- ------ ------ ------ ------
Operating (loss) income......... (30,452) (5,854) (13,078) (5,342) (50) 8,761 8,321
Interest income................. 9,761 13,591 25,602 29,001 21,547 1,922 2,375
Interest expense................ (7,129) (7,758) (16,046) (16,517) (16,669) (1,167) (3,007)
Other (expense) income, net..... 600 (461) (546) (304) 1,343 1,195 6,015
(Benefit) provision for income
taxes......................... (7,143) 321 979 1,119 2,340 167 5,203
Minority interest in (income)
loss of consolidated entities. 1,388 (90) 1,340 (144) (95) (85) (43)
Equity in (loss) of
unconsolidated entities....... (1,561) (1,299) (2,282) (3,461) -- -- --
Cumulative effect of changes in
accounting principles............ -- -- -- -- (83) 1,628 --
-------- ------- ------- ------ ------ ------- ------
Net (loss) income............... $(20,250) $(2,192) $(5,989) $2,114 $3,653 $12,087 $8,458
======== ======= ======= ====== ====== ======= ======
Balance Sheet Data:
Total assets.................... $671,430 $650,982 $628,085 $649,610 $568,586 $291,634 $289,833
Long-term liabilities........... 131,250 135,250 131,250 135,250 154,000 181,500 191,070
Shareholder's equity............ 341,454 406,369 390,765 394,069 372,847 74,329 56,083
</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, 1997 December 31, 1996
---------------- ------------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Sales......................................... $60,706 $110,116
Costs and expenses, excluding
depreciation and amortization............... 55,703 86,570
Depreciation and amortization................. 26,705 49,525
Nonrecurring charges.......................... 10,000 --
-------- --------
Operating (loss).............................. (31,702) (25,979)
Interest income............................... 3,229 10,480
Interest expense.............................. (3,731) (9,117)
Other (expense) income, net................... 600 (546)
-------- --------
(Loss) before income taxes.................... (31,604) (25,162)
(Benefit) for income taxes.................... (8,677) (5,452)
Equity in (loss) of unconsolidated entities... (1,561) (2,282)
-------- --------
Net (Loss).................................... $(24,488) $(21,992)
======== ========
Balance Sheet Data:
Total assets.................................. $600,797 N/A
Total long-term debt (including current
portion).................................... 110,000 N/A
Stockholders' equity.......................... 399,237 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
develop networks and upgrade facilities, the market opportunity presented by
markets targeted by the Company, the Company's intention to connect certain
wireless video and resale telephone customers to its advanced fiber networks,
the development of the Company's businesses, the markets for the Company's
services and products, the Company's anticipated capital expenditures, the
Company's anticipated sources of capital and effects of regulatory reform and
competitive and technological developments. 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. Such risks include, but are not limited to, the
Company's ability to successfully market its services to current and new
customers, access markets, finance network development, design and construct
fiber optic networks, install or lease fiber optic cable and other facilities,
including switching electronics, and obtain rights-of-way, building access
rights and any required governmental authorizations, franchises and permits,
all in a timely manner, at reasonable costs and on satisfactory terms and
conditions, as well as regulatory, legislative, judicial, competitive and
technological developments that could cause actual results to vary materially
from the future results indicated, expressed or implied, in such
forward-looking statements.
Limited Operating History; Negative Cash Flow; Operating Losses
RCN has only recently begun operating its competitive New York
City and Boston voice, video and data services business (the "RCN Telecom
Business") and this business has only a limited operating history upon which
investors may base an evaluation of that business' performance. As a result
of operating expenses and development expenditures, this business has incurred
operating and net losses and negative cash flows to date. RCN expects that
the operating and net losses and negative cash flows from this business will
rise in the future as it expands and develops its network and customer base.
RCN had operating losses after depreciation and amortization of $(13,078,000)
and $(5,342,000) for the years ended December 31, 1996 and 1995. There can be
no assurance that RCN will achieve or sustain profitability or positive cash
flows from operating activities in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Significant Capital Requirements; Substantial Indebtedness
Expansion and development of RCN's networks and services will
require significant capital expenditures. In addition, the Company expects to
incur operating losses for a number of years. The Company estimates that its
capital requirements for planned capital expenditures and to fund anticipated
operating losses over the three year period through 1999 will be approximately
$340 million (excluding capital costs expected to be contributed by its joint
venture partners and capital costs associated with the development of
additional markets). The Company currently has budgeted capital expenditures
of approximately $90 million during 1997, approximately $145 million during
1998 and approximately $150 million during 1999, in order to expand its
network, develop its New York City, Boston and Washington, D.C. markets and
add service enhancements to certain of its hybrid fiber/coaxial cable
television systems. The Company expects to fund such capital requirements
through cash on hand, equity or debt financings and joint ventures. There
can be no assurance, however, that the Company will be successful in raising
sufficient additional capital on terms that it will consider acceptable.
Failure to raise and generate sufficient funds may require the Company to
delay or abandon some of its planned future expansion or expenditures, which
could have a material adverse effect on the Company's growth and its ability
to compete in the telecommunications industry. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company expects that it will fund its operations in part
with substantial indebtedness. Subject to market conditions, the Company
expects to raise approximately $200-250 million of additional debt financing
within six months following the Distribution. 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 it will have
substantial leverage for the foreseeable future. The Company believes that
cash flow generated by operations, cash balances and, if necessary, borrowings
under the Company's committed credit facilities available as of the date
hereof, will enable the Company to meet 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.
Ability to Manage Growth
The expansion and development of the Company's operations
(including the construction and development of additional networks) will
depend on, among other things, the Company's ability to assess markets, design
fiber optic network backbone routes, install or lease fiber optic cable and
other facilities, including switches, and obtain rights-of-way, building
access rights and any required government authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions. There can be no assurance that the Company will be able to
expand its existing network. Furthermore, the Company's ability to manage its
expansion effectively will also require it to continue to implement and
improve its operating and administrative systems and attract and retain
qualified management and professional and technical personnel. If the Company
were not able to manage its planned expansion effectively it could have a
material adverse effect on the Company.
Rapid Technological Changes
The telecommunication industry is subject to rapid and
significant changes in technology. While the Company believes that for the
foreseeable future these changes will neither materially affect the continued
use of fiber optic telecommunications networks nor materially hinder its
ability to acquire necessary technologies, the effect of technological changes
on the business of the Company cannot be predicted. There can be no assurance
that technological developments in telecommunications will not have a material
adverse effect on the Company.
Dependence on Strategic Relationships; Right of BECO to Convert Joint Venture
Interest into RCN Common Stock
The Company has entered into a number of strategic alliances
and relationships in order to provide it with early entry into the market for
telecommunications services. As the Company's network is further developed, it
will be dependent on these arrangements to provide the full range of its
telecommunication service offerings. The key strategic relationships include
(1) RCN's arrangements with MFS/WorldCom to, among other things, lease
portions of MFS/WorldCom's fiber optic network in New York City and Boston,
(2) RCN's joint venture with BECO under which the Company has access to BECO's
extensive fiber optic network in Greater Boston and (3) RCN's proposed joint
venture with PCI, a subsidiary of PEPCO, to develop an advanced fiber optic
network in the Washington, D.C. market. In addition, the Company's joint
venture with BECO imposes, and future joint ventures may impose, certain
restrictions and obligations including transfer restrictions, obligations for
capital contributions and put/call rights in the event of certain changes in
control. See "Business--Strategic Relationships." The Company also
has in place arrangements to act as a reseller of Bell Atlantic local telephone
services and arrangements to lease Bell Atlantic unbundled local loop and T-1
facilities (including Bell Atlantic services previously provided by NYNEX).
Any disruption of these relationships or arrangements could have a material
adverse effect on the Company. The Company has also executed comprehensive
telephone service co-carrier interconnection agreements with Bell Atlantic and
Sprint, covering, along with the District of Columbia, ten states in the
Northeast and New England-Middle Atlantic corridor areas, which the Company
has targeted as its initial geographic markets. The Company may be required
to negotiate new interconnection agreements as it enters new markets in the
future. There can be no assurance that the Company will successfully
negotiate such other agreements for interconnection with the incumbent local
exchange carrier or renewals of existing interconnection agreements. The
failure to negotiate or renew required interconnection agreements could have a
material adverse effect on the Company.
In connection with RCN's joint venture with BECO, BECO was
granted the right from time to time to convert its ownership interest in the
joint venture into Company Common Stock. The number of shares of Company
Common Stock to be issued to BECO would be based on the appraised value of the
joint venture, provided that if BECO exercises its conversion right within a
brief period of time after the Distribution, BECO may at its option, in lieu
of an appraisal proceeding, convert its interest in the joint venture into a
number of shares of Company Common Stock determined by dividing the amount of
BECO's cash contributions in 1997 (expected to be approximately $20-30
million) by 95% of the prevailing market price for Company Common Stock.
Conversion by BECO pursuant to these provisions would result in dilution to
existing stockholders of the Company. See "Business--Strategic Relationships".
Competition
RCN competes with a wide range of service providers for each of
the services that it provides. Virtually all markets for voice and video
services are extremely competitive, and RCN expects that competition will
intensify in the future. In each of the markets in which it offers voice and
video programming services, RCN faces significant competition often from
larger, better-financed incumbent local telephone carriers and cable companies,
and RCN often competes directly with incumbent providers which have
historically dominated their respective local telephone and cable television
markets. These incumbents presently have numerous advantages as a result of
their historic monopoly control of their respective markets.
With respect to local telephone services, RCN competes with the
incumbent local exchange carriers ("LECs"), and alternative service providers
including CLECs and cellular and other wireless telephone service providers.
With respect to long distance telephone services, RCN faces, and expects to
continue to face, significant competition from the interexchange carriers
("IXCs"), including AT&T, Sprint and MCI, which account for the majority of
all long distance revenue. Certain of the IXCs, including AT&T, MCI and
Sprint, have announced their intention to offer local services in major U.S.
markets using their existing infrastructure in combination with resale of
incumbent LEC service, lease of unbundled local loops or other providers'
services.
All of the Company's video services face competition from
alternative methods of receiving and distributing television signals and from
other sources of news, information and entertainment. Among the alternative
video distribution technologies are home satellite dish earth stations,
private satellite master antenna television systems, direct broadcast
satellite services ("DBS") and wireless program distribution services such as
multi-channel multipoint distribution service systems. The Company expects
that its video programming service will face growing competition from current
and new DBS service providers.
RCN believes that among the existing competitors, the incumbent
LECs and the incumbent cable providers provide the most direct competition to
RCN in the delivery of "last mile" connections to residential consumers for
voice and video services. In each of its target markets for advanced fiber
optic networks, RCN faces, and expects to continue to face, significant
competition from the incumbent LEC (including Bell Atlantic in New York City
and Boston), which currently dominate their local telephone markets. RCN
competes with the incumbent LECs in its markets for local exchange services on
the basis of product offerings (including the ability to offer bundled voice
and video services), reliability, state-of-the-art technology and superior
customer service, as well as price. The incumbent LECs have begun to expand
the amount of fiber facilities in their networks and to prepare to re-enter
into the long distance telephone services market and, in addition, have
long-standing relationships with their customers. The Company expects that
the increased competition made possible by regulatory reform will result in
certain pricing and margin pressures in the telecommunications services
business.
The Telecommunications Act of 1996 (the "1996 Act") permits the
incumbent LECs and others to provide a wide variety of video services directly
to subscribers in competition with RCN. 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.
Certain of RCN's video programming service businesses compete
with incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time-Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes with Time Warner Cable, Cablevision
Systems and Comcast. RCN's Pennsylvania hybrid fiber/coaxial cable television
system competes with an alternate service provider, Service Electric Cable TV,
which also holds a franchise for the relevant service area.
RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the markets in which RCN offers
its services. Other CLECs such as Teleport Communications Group, compete for
local telephone services, although they have to date focused primarily on the
market for commercial customers. In addition, potential competitors capable
of offering private line and special access services also include other
smaller long distance carriers, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end-users, including Winstar, Dualstar and New Vision.
Cellularvision, a provider of local multipoint distribution service ("LMDS"),
recently began offering wireless Internet and video programming services in
New York City and has announced plan to offer telephone service in the future.
Other new technologies may become competitive with services
that RCN offers. Advances in communications technology as well as changes in
the marketplace and the regulatory and legislative environment are constantly
occurring. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may also create significant new
competitors to RCN. The Company cannot predict whether competition from such
developing and future technologies or from such future competitors will have a
material impact on its operations.
For additional information on the competitive environment in
which the Company operates, see "Business--Competition."
Regulation
The telephone and video programming transmission services
offered by the Company are subject to federal, state, and local government
regulation. The 1996 Act, which became effective in February 1996, introduced
widespread changes in the regulation of the communications industry, including
the local telephone, long distance telephone, data services, and television
entertainment segments in which the Company operates.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses, preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations,
and sets basic standards for relationships between telecommunications
providers.
Among other things, the 1996 Act removes barriers to entry in
the local telephone exchange market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow incumbent LECs
to enter the long distance market within their own local service regions.
Regulations promulgated by the Federal Communications
Commission (the "FCC") under the 1996 Act require LECs to 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 certain aspects of these regulations. The appeals have
been consolidated and are being reviewed by the U.S. Court of Appeals for the
Eighth Circuit, which has stayed certain of the FCC's pricing and
nondiscrimination regulations. RCN has entered into competitive
interconnection agreements using the federal guidelines established in the
FCC's interconnection order, which agreements remain in effect notwithstanding
the stay of the FCC's regulations.
The 1996 Act also makes far-reaching changes in the regulation
of the video programming transmission services offered by RCN, including
changes to the regulations applicable to video operators, the elimination of
restrictions on telephone company entry into the video business, and the
establishment of a new "open video systems" ("OVS") regulatory structure for
telephone companies and others to offer such services. Under the 1996 Act,
local telephone companies, including both incumbent LECs such as Bell
Atlantic, and CLECs such as RCN, may provide service as traditional cable
television operators subject to municipal cable television franchises, or they
may opt to provide their programming over non-franchised open video systems
subject to certain conditions, including, but not limited to, making available
a portion of their channel capacity for use by unaffiliated program
distributors and satisfying certain other requirements, including providing
capacity for public, educational and government channels, and payment of a
gross receipts fee equivalent to the franchise fee paid by the incumbent cable
television operator. RCN is one of the first CLECs to provide television
programming over an advanced fiber optic network pursuant to the OVS
regulations implemented by the FCC under the 1996 Act.
RCN's voice business is subject to regulation by the FCC at the
federal level with respect to interstate telephone services (i.e. those that
originate in one state and terminate in separate states). State regulatory
commissions have jurisdiction over intrastate communications; (i.e. those that
originate and terminate in the same state). See
"Business--Regulation--Regulation of Voice Services." Municipalities also
regulate limited aspects of RCN's voice business by, for example, imposing
various zoning requirements and, in some instances, requiring
telecommunications licenses or franchise agreements and/or installation
permits for access to local streets and rights-of-way. In New York City, for
example, RCN will be required to obtain a telephone franchise in order to
provide voice services using its advanced fiber optic network facilities
located in the streets of New York City.
In February, 1997, RCN subsidiaries were certified to operate
OVS networks in the five boroughs of New York City and, as part of a joint
venture with Boston Edison, in Boston and 47 surrounding communities.
Initiation of OVS services is subject to negotiation of certain agreements
with local governments. RCN executed an agreement with the City of Boston on
June 2, 1997, and initiated OVS service in the City on that day. RCN is still
in the process of negotiating agreements with the other 47 Boston-area
municipalities, either to offer OVS services or franchised cable television
services, and it is also continuing to negotiate an OVS agreement with the
City of New York.
In areas where it offers video programming services as an OVS
operator, RCN will be required to hold a 90-day open enrollment period every
three years, during which times RCN will be required to offer capacity on its
network to other video programming providers ("VPPs"). Under the OVS
regulations, RCN must offer at least two-thirds of its capacity to
unaffiliated parties, if demand for such capacity exists during the open
enrollment period. In certain areas, RCN is in discussions with local
municipal authorities to explore the feasibility of obtaining a cable
franchise in lieu of an OVS agreement, and will consider providing RCN video
service pursuant to franchise agreements rather than OVS certification, if
franchise agreements can be obtained on terms and conditions acceptable to
RCN. However, RCN will consider the relative benefits of OVS certification
versus local franchise agreements, including the possible imposition of
universal service requirements, before making any such decisions. In
addition, the current FCC rules concerning OVS are subject to appeal in the
United States Court of appeals and, to the extent that certain favorable
aspects of the FCC's rules are overturned on appeal, the determination of
whether to operate as an OVS provider versus as a franchised cable television
operator may be affected. Moreover, the incumbent cable television provider
in Boston, Cablevision Systems, has requested that the FCC permit it to obtain
capacity on RCN's Boston area OVS network, and Time Warner has indicated that
it may make the same type of request for capacity on both the New York and
Boston OVS networks. RCN intends to oppose any such request made to the FCC,
but to the extent that the FCC were to grant the request, such a result would
likely affect the Company's determination as to whether to operate as an OVS
provider versus as a franchised cable television operator.
Prior to its certification as an OVS provider, RCN offered
limited video programming services using the video dialtone ("VDT") services
offered by MFS/WorldCom in Manhattan and the City of Boston. In February,
1997, the FCC held that MFS/WorldCom's facilities did not qualify as video
dialtone facilities entitled to an extension of time to comply with the
newly-adopted OVS rules; nonetheless, the FCC did not direct MFS/WorldCom and
RCN to cease video programming distribution operations over the MFS/WorldCom
platform. This FCC order has been appealed by MFS/WorldCom. It is too soon
to predict the likely outcome of that proceeding, but should the court uphold
the FCC, it is likely that MFS/WorldCom and RCN will need to resolve
challenges to their former (pre-OVS) operations which were brought before the
New York Public Service Commission and the Massachusetts Cable Television
Commission by the incumbent cable television companies in the two cities where
MFS/WorldCom and RCN operated under the VDT framework.
RCN's 18 GHz wireless video services in New York City are
distributed using microwave facilities provided by Bartholdi Cable Company (
"Bartholdi Cable") pursuant to licenses issued to Bartholdi Cable by the FCC.
Bartholdi Cable has agreed to provide transmission services to RCN until RCN
has either converted the wireless video subscribers to its advanced fiber
optic network facilities or has obtained FCC authority to provide such
services pursuant to its own wireless radio licenses. In addition, Bartholdi
Cable has agreed to transfer to RCN the transmission equipment on demand.
Bartholdi Cable's obligation to provide transmission services is subject to
Bartholdi Cable having licenses from the FCC to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are currently being examined by the FCC.
It is too early to judge the likely outcome of that proceeding. Because of
the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to RCN, the Company has filed its own license
applications at the FCC for all of the microwave transmission paths which are
currently being used by Bartholdi Cable to provide transmission services to
RCN.
There can be no assurance that RCN will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities, to convert its wireless video subscribers to an advanced
fiber optic network or to offer wireless video services pursuant to its own
FCC licenses.
RCN's hybrid fiber/coaxial cable systems are subject to
regulation under the Cable Television Consumer Protection and Competition Act
of 1992, as amended (the "1992 Act"), which provide, among other things, for
rate regulation for cable services in communities that are not subject to
"effective competition." With the passage of the 1996 Act, however, all cable
systems rates will be deregulated as effective competition is shown to exist
in the franchise area, or by March 31, 1999, whichever date is sooner. RCN
anticipates that the remaining provisions of the 1992 Act that do not relate
to rate regulation, such as the provisions relating to retransmission consent
and customer service standards, will remain in place and may serve to reduce
the future operating margins of RCN's hybrid fiber/coaxial cable television
businesses as video programming competition develops in its cable television
service markets. Federal requirements also impose certain broadcast signal
carriage requirements that allow local commercial television broadcast
stations to require a cable system to carry the station, and that require
cable operators to set aside certain channels for public, educational and
governmental access programming. Because a cable communications system uses
local streets and rights-of-way, such cable systems are generally subject to
state and local regulation, typically imposed through the franchising process.
The terms and conditions of state or local government franchises vary
materially from jurisdiction to jurisdiction and generally contain provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, customer service standards,
franchise renewal, sale or transfer of the franchise, territory of the
franchisee and use and occupancy of public streets and types of cable services
provided.
RCN's ability to provide franchised cable television services
is dependent to a large extent on its ability to obtain and renew its
franchise agreements from local government authorities on generally acceptable
terms. RCN currently has 91 franchise agreements relating to the hybrid
fiber/coaxial cable systems' networks in New York (outside New York City), New
Jersey and Pennsylvania. 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. These franchises provide for the payment of
fees to the issuing authorities and generally range from 3% to 5% of revenues.
The duration of these outstanding franchises presently varies up to the year
2011. To date, all of RCN's cable franchises have been renewed or extended,
generally at or prior to their stated expirations and on acceptable terms.
During 1996, RCN completed negotiations with three communities resulting in
franchise renewals on terms which are acceptable to it. A total of 34 of
RCN's hybrid fiber/coaxial cable system's franchises are due for renewal
within the next three years. No assurances can be given that RCN will be able
to renew its franchises on acceptable terms. No one franchise accounts for
more than 7% of RCN's total revenue. RCN's five largest franchises account
for approximately 27% of RCN's total revenue.
The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
telephone and video programming industries. 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 communications companies operate. The
ultimate outcome of these proceedings, and the ultimate impact of the 1996 Act
or any final regulations adopted pursuant to the new law on RCN or its
businesses cannot be determined at this time. For additional information on
the regulatory environment in which the Company operates, see
"Business--Regulation."
Need to Obtain and Maintain Permits, Building Access Agreements and
Rights-of-Way
In order to develop its networks, the Company must obtain local
franchises and other permits, as well as building access agreements and rights
to utilize underground conduit and pole space and other rights-of-way and
fiber capacity from entities such as incumbent LECs and other utilities,
railroads, long distance companies, state highway authorities, local
governments and transit authorities. There can be no assurance that the
Company will be able to maintain its existing franchises, permits and rights
or to obtain and maintain the other franchises, permits, building access
agreements and rights needed to implement its business plan 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 arrangements could
materially adversely affect the Company's business in the affected area. In
addition, the failure to enter into and maintain any such required
arrangements for a particular network, including a network which is already
under development, may affect the Company's ability to acquire or develop that
network.
Ability to Procure Programming Services
The Company's video programming services are dependent upon
management's ability to procure programming that is attractive to its
customers at reasonable commercial rates. The Company is dependent upon third
parties for the development and delivery of programming services. These
programming suppliers charge the Company for the right to distribute the
channels to the Company's customers. The costs to the Company for programming
services is determined through negotiations with these programming suppliers.
Management believes that the availability of sufficient programming on a
timely basis will be important to the Company's future success. There can be
no assurance that the Company will have access to programming services or that
management can secure rights to such programming on commercially acceptable
terms.
Reliance on Key Personnel
The Company believes that its continued success will depend in
large part on its ability to attract and retain highly skilled and qualified
personnel. The Company believes that the Distribution will, among other
things, permit the Company to offer equity-based compensation that is more
directly linked to the Company's performance, which the Company believes will
facilitate the attraction, retention and motivation of highly skilled and
qualified personnel. In this regard, the Company will form an Employee Stock
Ownership Plan ("ESOP") and make available competitive employee benefit
programs providing benefits substantially comparable to benefits provided
immediately prior to the Distribution Date. There can be no assurance that
the Company will retain or, as necessary, attract qualified management
personnel.
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.
After the Distribution, the Company will be a holding company and its ability
to pay cash dividends will be dependent on its ability to receive cash
dividends, advances and other payments from its subsidiaries. In addition,
the Credit Agreement (as defined below) into which certain of the Company's
subsidiaries have entered contains restrictions on the payment of dividends by
these subsidiaries. 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.
Variability of Operating Results
As a result of factors such as the significant expenses
associated with the development of its networks and services, the Company
anticipates that its operating results could vary significantly from period to
period.
Control by Kiewit Telecom; Conflicts of Interest
Following the Distribution, 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 PKS.
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 Cable Michigan. 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 Cable Michigan following the
Distribution. See "Management." In particular, David C. McCourt, Chairman
and Chief Executive Officer of the Company, will also serve as a director and
Chairman and Chief Executive Officer of Cable Michigan as of the Distribution
and will remain as a director and Chairman and Chief Executive Officer of
C-TEC. Mr. McCourt expects to devote approximately 70% of his time to
managing the affairs of the Company. In addition, Michael J. Mahoney, who
will be President and Chief Operating Officer, as well as a director, of the
Company as of the Distribution, will also remain a director of C-TEC. Mr.
Mahoney expects to devote approximately 85-90 % of his time to managing the
affairs of the Company. The Company's other named executive officers expect
to devote the following approximate portions of their time to managing the
affairs of the Company: Mr. Godfrey (80%); Mr. Haverkate (75%) and Mr. Adams
(100%). 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 Cable Michigan 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.
In connection with the Distributions, C-TEC has agreed to
provide or cause to be provided to the Company and to Cable Michigan certain
specified 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 services to the Company, Cable
Michigan and C-TEC. Based on this allocation arrangement, the fee for such
services to the Company would have been approximately $753,000 for 1996. See
"Relationship Among the Company, C-TEC and Cable Michigan--Transitional
Services and Arrangements." The aforementioned arrangements are not the
result of arm's length negotiation between unrelated parties as the Company
and C-TEC 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 better terms 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 Cable Michigan after the Distribution,
which will be negotiated at arm's length.
Possibility of Substantial Sales of Common Stock
The Distribution will involve the distribution of an aggregate
of approximately 27,484,628 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 Certificate of
Incorporation and Bylaws (as will be in effect as of the Distribution) and the
Delaware General Corporation Law could discourage potential acquisition
proposals and could deter or delay unsolicited changes in control of the
Company, including provisions of the Certificate 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 certain subsidiaries of the
Company have entered includes as an event of default certain changes in
control of the Company. See "Description of the Credit Agreement." Certain
of the Company's Agreements with MFS/WorldCom permit MFS/WorldCom to terminate
those agreements on a change of control of RCN. BECO is entitled to purchase
RCN's interest in their joint venture upon change of control of RCN. Under
the letter of intent with PCI, upon a change of control of RCN, PCI would have
the right to sell to RCN its interest, or to buy RCN's interest, in the joint
venture to be formed between the parties. See "Business--Strategic
Relationships".
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 data 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., the subsidiary that owns the 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 from Bartholdi Cable.
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 Prior
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 Company Businesses, which will be owned by the Company
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")) and C-TEC International, which
owns the 40% interest in Megacable;
(ii) the Cable Michigan Business, which will be owned by Cable
Michigan and will consist of C-TEC's cable television business in
Michigan, including C-TEC's 61.92% interest in Mercom, Inc.; 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
Pennsylvania CLEC operations, Commonwealth Communications, Inc.
(communications engineering) and C-TEC's long distance business in the
Commonwealth Service Territory.
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 Cable Michigan (referred to herein as the "Cable Michigan
Distribution"), (iv) the formation of an employee stock ownership plan by the
Company, and (v) within one year of the Distributions, an equity or
equity-linked financing by C-TEC. 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,
Cable Michigan 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
the Company with stock that correlates more closely to the performance of the
Company Businesses, (iii) facilitate possible future acquisitions and joint
venture investments by Cable Michigan; (iv) facilitate possible future equity
or equity-linked offerings by the Company; (v) facilitate possible future
acquisitions and joint venture investments by the Company; (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.
As described above, C-TEC purchased from Kiewit Telecom in
August 1996 the 80.1% interest in Freedom held by Kiewit Telecom. In March
1997, C-TEC purchased the remaining 19.9% interest in Freedom from Bartholdi
Cable, the former owner of the Liberty Cable Television of New York 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 Cable
Michigan 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 one share of C-TEC Common Equity held as of the Record Date and one
share of Cable Michigan Common Stock for every four shares 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, Cable Michigan and
the Company. See "Relationship Among the Company, C-TEC and Cable
Michigan--Terms of 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 one share 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 27,484,628 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.
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 Cable Michigan. Cable Michigan operates cable
television systems in the State of Michigan. The Cable Michigan 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) A Holder will not recognize gain or loss as a result of the
Distribution.
(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 Cable
Michigan received in the Cable Michigan 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 Cable Michigan 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 any 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, Cable
Michigan and the Company have provided for certain tax sharing and other tax
matters, see "Relationship Among the Company, C-TEC and Cable Michigan--Tax
Sharing Agreement."
RELATIONSHIP AMONG THE COMPANY, C-TEC AND CABLE MICHIGAN
This section of the Information Statement describes certain
agreements among the Company, C-TEC and Cable Michigan that will govern
certain of the on-going relationships among C-TEC, Cable Michigan 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 Cable Michigan's Registration Statement on Form 10
(the "Cable Michigan Form 10") filed with the Commission of which Cable
Michigan's Information Statement (the "Cable Michigan 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 Cable Michigan
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 Cable
Michigan after the Distribution, which will be negotiated at arm's length.
Terms of Distribution Agreement
C-TEC, Cable Michigan 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, Cable
Michigan 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, Cable
Michigan 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 Cable Michigan Form 10 shall
have become effective under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"); (ii) the Company Common Stock and the common
stock, par value $1.00 per share, of Cable Michigan (the "Cable Michigan
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 maket 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
Board, as named in this Information Statement, shall have been elected by
C-TEC, as sole stockholder of the Company, and the Company's Certificate of
Incorporation and Bylaws (each as defined under "Description of Capital Stock"
below) shall be in effect and (B) Cable Michigan's Board of Directors, as
named in the Cable Michigan Information Statement, shall have been elected by
C-TEC, as sole shareholder of Cable Michigan, and Cable Michigan's articles of
incorporation and bylaws (each as defined under "Description of Capital Stock"
in the Cable Michigan Information Statement) shall be in effect; (vi) the Tax
Sharing Agreement (defined below) 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, Cable Michigan and C-TEC have agreed to indemnify
one another against certain liabilities. The Company 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") 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 the Company or any
of its subsidiaries at the time of the Distribution (collectively, the
"Company Group") to pay, perform or otherwise discharge any of the Company
Liabilities (as defined below), (ii) arising out of the breach by any member
of the Company 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 Company Group except to the extent that such Losses
result from the gross negligence or willful misconduct of a C-TEC Indemnitee.
"Company Liabilities" refers to (i) all liabilities of the Company Group under
the Distribution Agreement or any of the other Distribution Documents, (ii)
all other liabilities of the Company, Cable Michigan 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
Company Businesses prior to the effective time of the Distribution (the
liabilities in clauses (i) and (ii) collectively, the "True Company
Liabilities") and (iii) 30% of the Shared Liabilities (as defined below).
Cable Michigan has agreed to indemnify the Company Group and
the respective directors, officers, employees and Affiliates of each Person in
the Company Group (collectively, the "Company Indemnitees") and the C-TEC
Indemnitees from and against any and all Losses incurred or suffered by any of
the Company 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 (as defined below)
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 Company Indemnitees, arising out of the provision by the
Company 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 a Company 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, Cable Michigan 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 Company Indemnitees and the
Cable Michigan Indemnitees from and against any and all Losses incurred or
suffered by any of the Company Indemnitees or the Cable Michigan 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 Company
Indemnitees, arising out of the provision by the Company 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 a Company
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, Cable Michigan 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, Cable Michigan 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 Cable Michigan Liability or a
True Company Liability.
The Company, Cable Michigan 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 Cable Michigan Form
10 and Cable Michigan 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 in the same
proportions as Shared Liabilities.
Transitional Services and Arrangements
The Company 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 .
The Company 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)-(xii), (xv) and (xvii) will be
4.0% of the revenues of the Cable Michigan Group plus a direct allocation of
certain consolidated cable administrative 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 charge 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 the Company to provide such customer and billing
services for the Company 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
Company Group and the 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
the Company to provide such services and arrangements to all three groups.
Based on this allocation arrangement, the fee for providing such services and
arrangements to the Company 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 better terms 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 Cable Michigan 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 Cable Michigan Group and the C-TEC Group (each a "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, Cable Michigan 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 Cable Michigan 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 Cable Michigan
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 Cable Michigan following the
Distribution. See "Management." In particular, David C. McCourt, Chairman
and Chief Executive Officer of the Company, will also serve as a director and
Chairman and Chief Executive Officer of Cable Michigan as of the Distribution
and will remain as a director and Chairman and Chief Executive Officer of
C-TEC. Mr. McCourt expects to devote approximately 70% of his time to
managing the affairs of the Company. In addition, Michael J. Mahoney, who
will be President and Chief Operating Officer, as well as a director, of the
Company as of the Distribution, will also remain a director of C-TEC. Mr.
Mahoney expects to devote approximately 85-90 % of his time to managing the
affairs of the Company. The Company's other named executive officers expect
to devote the following approximate portions of their time to managing the
affairs of the Company: Mr. Godfrey (80%); Mr. Haverkate (75%) and Mr. Adams
(100%). 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 Cable Michigan 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.
Tax Sharing Agreement
The Tax Sharing Agreement dated as of September 5, 1997, by and
among the Company, Cable Michigan 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 Cable Michigan 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, 30% to the Company and 20% to Cable Michigan.
Notwithstanding the above, if the Company, Cable Michigan or
C-TEC, takes any action or fails to take any action that results in either the
Distribution or the Cable Michigan Distribution not qualifying as a tax-free
distribution under Section 355 of the Code, then the Company, Cable Michigan,
or C-TEC, as the case may be, will be liable for any increased tax liability
of the Company, Cable Michigan and C-TEC attributable thereto.
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 "RCNC." 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 Cable
Michigan to be distributed in the Cable Michigan Distribution shall have been
approved for listing on NASDAQ, subject to official notice of issuance. See
"Relationship Among the Company, C-TEC and Cable Michigan--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. Nor can there be any assurance that such prices will not be
significantly below the book value per share of the Company Common Stock.
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
1,520,500 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 the 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.
Except for the Exchange Agreement referred to in "Business -- Strategic
Relationships -- BECO Joint Venture", the Company has not entered into any
agreement or otherwise committed to register any shares of Company Common
Stock under the Securities Act of 1933 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. After the Distribution, the Company will be a holding
company and its ability to pay cash dividends will be dependent on its ability
to receive cash dividends, advances and other payments from its subsidiaries.
The Credit Agreement into which certain subsidiaries of the Company have
entered contains restrictions on the payment of dividends by those
subsidiaries. See "Description of the Credit Agreement."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Distribution Date, the Company and the Company
Businesses have 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 whi.ch 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.
RCN Corporation
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
Adjustments Pro Forma for
for for Liberty/ Acquisition
Historical Distribution Distribution Freedom (1) Adjustments Pro Forma
---------- ------------ ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales................................ $104,910 $104,910 $ 5,206 (17) $110,116
Cost and expenses, excluding
depreciation and amortization....... 79,107 79,107 7,463 (17) 86,570
Depreciation and amortization........ 38,881 38,881 5,644 (18) $5,000 (19) 49,525
-------- -------- -------- ------- ------ --------
Operating (loss)..................... (13,078) (13,078) (7,901) (5,000) (25,979)
Interest income...................... $25,602 $(15,127)(1) $10,475 $ 5 (20) $10,480
Interest expense..................... (16,046) (7,461)(2) (737)(20) (9,117)
15,127 (3) (8,380)
Other (expense), net................. (546) (546) (546)
-------- -------- -------- ------- ------- --------
(Loss) before income taxes........... (4,068) (7,461) (11,529) (8,633) (5,000) (25,162)
(Benefit) provision for income taxes. 979 (2,611)(4) (1,632) (2,420)(21) (1,400)(21) (5,452)
-------- -------- -------- ------- ------- --------
(Loss) before minority interest and
equity in unconsolidated entities... (5,047) (4,850) (9,897) (6,213) (3,600) (19,710)
Equity in (loss) of unconsolidated
entities............................ (2,282) (2,282) (2,282)
-------- -------- -------- ------- ------- --------
(Loss) before extraordinary
item and minority interest in
loss of consolidated entities...... $(7,329) $ (4,850) $(12,179) $(6,213) $(3,600) $(21,992)
======== ======== ======== ======= ======= ========
Unaudited pro forma net (loss) per
common share before
extraordinary item................. $ (0.39) $ (0.80)
Weighted average number of
common shares outstanding.......... 27,484,628 (5) 27,484,628 (5)
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN Corporation
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 Acquisition
Historical Distribution Distribution Adjustments Pro Forma
---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 60,706 $ 60,706 $ 60,706
Cost and expenses, excluding
depreciation and amortization.......... 55,703 55,703 55,703
Depreciation and amortization........... 25,455 25,455 $1,250 (19) 26,705
Nonrecurring charges.................... 10,000 10,000 10,000
-------- -------- ------ --------
Operating (loss)........................ (30,452) (30,452) (1,250) (31,702)
Interest income......................... 9,761 $(6,532)(1) 3,229 3,229
Interest expense........................ (7,129) (3,731)(2) (3,731) (3,731)
7,129 (3)
Other (expense) income, net............. 600 600 600
-------- ------- -------- ------ --------
(Loss) before income taxes.............. (27,220) (3,134) (30,354) (1,250) (31,604)
(Benefit) for income taxes.............. (7,143) (1,097)(4) (8,240) (437)(21) (8,677)
-------- ------- -------- ------ --------
(Loss) before minority interest and
equity in unconsolidated entities...... (20,077) (2,037) (22,114) (813) (22,927)
Equity in (loss) of unconsolidated
entities............................... (1,561) (1,561) (1,561)
-------- ------- -------- ------ --------
(Loss) before minority interest in loss
of consolidated entities............... $(21,638) $(2,037) $(23,675) $ (813) $(24,488)
-------- ------- -------- ------ --------
Unaudited pro forma net (loss) per
common share........................... $ (0.81) $ (0.89)
Weighted average number of
common shares outstanding.............. 27,484,628 (5) 27,484,628 (5)
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN Corporation
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1997
($ in thousands)
<TABLE>
<CAPTION>
Adjustments for Pro Forma for
Historical Distribution Distribution
---------- --------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments......................... $ 41,478 $171,168 (6) $212,646
Short-term investments...................................... 4,003 4,003
Accounts receivable affiliates.............................. 16,577 (16,577)(7) --
Accounts receivable, net of reserve for doubtful accounts
of $1,809.................................................. 13,999 13,999
Unbilled revenues........................................... 1,109 1,109
Material and supply inventory, at average cost.............. 1,323 1,323
Prepayments and other....................................... 1,731 780 (8) 2,511
Deferred income taxes....................................... 4,468 4,468
-------- -------- --------
Total current assets......................................... 84,688 155,371 240,059
Notes receivable - affiliates................................ 145,592 (110,000)(9)
(35,592)(7) --
Property, Plant and Equipment
Hybrid Fiber/Coaxial Cable plant............................ 166,919 166,919
Other property, plant and equipment......................... 73,534 73,534
-------- -------- --------
Total property, plant and equipment.......................... 240,453 -- 240,453
Accumulated depreciation.................................... 95,457 95,457
-------- -------- --------
Net property, plant and equipment........................... 144,996 -- 144,996
-------- -------- --------
Investments.................................................. 72,135 72,135
Intangible assets, net....................................... 121,030 121,030
Deferred Charges and other assets............................ 25,209 728 (10)
(3,360)(11) 22,577
-------- -------- --------
Total Assets................................................. $593,650 $ 7,147 $600,797
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable affiliates................................. $ 9,726 $ (9,726)(7) --
Accounts payable............................................ 13,520 $13,520
Advance billings and customer deposits...................... 8,482 8,482
Accrued taxes............................................... 900 (1,680)(12)
780 (8) --
Accrued interest............................................ 4,293 (4,286)(13) 7
Accrued contract settlements................................ 3,127 3,127
Accrued cable programming expense........................... 3,339 3,339
Accrued expenses............................................ 19,748 19,748
-------- -------- --------
Total current liabilities................................... 63,135 (14,912) 48,223
-------- -------- --------
Long-Term Debt............................................... 131,250 (131,250)(13)
110,000 (14) 110,000
Notes payable affiliates..................................... 13,346 (13,346)(7) --
Deferred Income Taxes........................................ 26,913 26,913
Other Deferred Credits....................................... 4,151 (1,128)(15) 3,023
Commitments and Contingencies................................
Minority Interest............................................ 13,401 13,401
Common Shareholder's Equity.................................. 341,454 (3,120)(12)
90,000 (16)
(29,097)(7) 399,237
-------- -------- --------
Total Liabilities and Shareholder's Equity................... $593,650 $ 7,147 $600,797
======== ======== ========
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN Corporation
Notes to Unaudited Pro Forma
Consolidated Financial Statements
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statements of Operations
and Balance Sheet of RCN 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 income of $6,532 for the six months
ended June 30, 1997 and $15,127 for the year ended December 31, 1996,
net of income taxes of $(2,286) for the six months ended June 30, 1997
and $(5,294) for the year ended December 31, 1996, on outstanding
intercompany notes payable owed to the Company of which $110,000 is
assumed to be repaid and the remaining balance is assumed to be
treated as capital contributions from the Company to the borrower.
(2) Adjustment to reflect interest expense and amortization of debt issuance
costs of $3,731 for the six months ended June 30, 1997 and $7,461 for the
year ended December 31, 1996, net of income taxes of $(1,306) for the six
months ended June 30, 1997 and $(2,611) for the year ended December 31,
1996, on new third party debt of $110,000, which is assumed to be
incurred.
(3) Adjustment to eliminate interest expense and amortization of debt
issuance costs of $7,129 for the six months ended June 30, 1997 and
$15,127 for the year ended December 31, 1996 and related income taxes
of $2,495 for the six months ended June 30, 1997 and $5,294 for the
year ended December 31, 1996 on existing outstanding third party debt
which is assumed to be repaid and on outstanding intercompany notes
payable owed by the Company which are assumed to be treated as capital
contributions to the Company from the borrower.
(4) Income tax effects are summarized as follows:
<TABLE>
Six Months Year Ended
Ended December 31,
June 30, 1997 1996
------------- ------------
<S> <C> <C>
Benefit (provision)
Elimination of interest expense and amortization of debt issuance on
existing outstanding third party debt (see Note 3).......................... $ 2,495 $ 5,294
Incurrence of interest expense and amortization of debt issuance costs on
new third party debt (see Note 2)........................................... (1,306) (2,611)
Elimination of interest income on outstanding intercompany notes (see
Note 1)..................................................................... (2,286) (5,294)
------- -------
Total..................................................................... $(1,097) $(2,611)
======= =======
</TABLE>
(5) 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.
(6) Reflects the following Pro Forma adjustments: (i) Receipt of $110,000 in
respect of repayment of outstanding intercompany notes (See Note 9); (ii)
repayment by RCN of $135,536 of existing third party debt (See Note 13);
(iii) receipt of $90,000 of equity contributions from C-TEC (See Note
16); (iv) incurrence of $110,000 of new third-party debt (See Note
14); (v) the transfer of $3,360 of pre-paid pension costs (See Note
11); (vi) incurrence of $728 of debt issuance costs related to new
third party debt (See Note 10); (viii) payment of $4,800 in respect
of a prepayment penalty on existing third-party debt (See Note 12);
and (ix) the transfer of $1,128 of employee benefit liabilities (See
Note 15).
(7) Adjustment to reflect the assumed treatment of remaining receivables and
payables balances with affiliates as capital contributions to (from) the
respective affiliates.
(8) Adjustment to reclassify prepaid taxes.
(9) Adjustment to reflect the assumed partial payment of notes receivable
affiliate by Cable Michigan. Cable Michigan will incur new third party
debt for the purpose of repaying $110,000 of the total amount of
outstanding intercompany notes payable owed to the Company.
(10) Adjustment to reflect debt issuance costs of $728 in connection with the
assumed incurrence of new third party debt (see Note 14).
(11) 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 RCN will no longer
accrue benefits under the defined benefit pension plan. The defined
benefit pension plan will be continued for employees of the C-TEC Group.
This adjustment reflects the assumed transfer of the prepaid pension
cost of $3,360 from RCN's books to C-TEC.
(12) Adjustment to reflect the penalty of approximately $4,800 (excluding an
income tax benefit of approximately $1,680), on the assumed prepayment
of existing outstanding third party debt (see Note 13).
(13) Adjustment to reflect the assumed repayment of third-party debt of
$131,250 and accrued interest of $4,286, primarily using the proceeds
from repayment by Cable Michigan of a portion of the total amount of
outstanding intercompany notes payable owed to the Company (see Note 9)
and from the assumed contribution by C-TEC of equity capital to the
Company (see Note 16).
(14) Adjustment to reflect the assumed incurrence of new third party debt of
$110,000 by the Company.
(15) Adjustment to reflect the transfer of certain employee benefit
liabilities aggregating $1,128 from RCN's books to C-TEC.
(16) Adjustment to reflect the assumed contribution by C-TEC, of equity
capital of $90,000 to the Company from new C-TEC borrowings.
(17) Adjustment to reflect revenues of $1,330 and expenses of $2,598 of
Liberty Cable Television and affiliates for the period January 1996 to
March 1996 and revenues of $3,876 and expenses of $4,865 of Freedom for
the period March 1996 to August 1996 to present information as if the
acquisition of Freedom had occurred at the beginning of 1996.
(18) Adjustment to reflect depreciation and amortization of Liberty Cable and
Freedom for the period as if the acquisition of Freedom had occurred at
the beginning of 1996 and to reflect the increase in depreciation and
amortization applicable as a result of the allocation of the purchase
price paid on the basis of the fair value of assets acquired and
liabilities assumed.
(19) Adjustment to reflect the additional depreciation and amortization of
$5,000 in 1996 and $1,250 in 1997 resulting from the acquisition of the
minority interest of Freedom in March 1997 and to present the
information as if the acquisition of the minority interest of Freedom
had occurred at the beginning of 1996.
(20) Adjustment to reflect interest expense and income of Liberty Cable and
Freedom as if the acquisition of Freedom occurred at the beginning of
1996.
(21) Adjustment to income taxes summarized as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31 Ended
1996 June 30, 1997
<S> <C> <C>
Losses of Liberty Cable and Freedom for period January 1996 to August 1996 $(1,757) $0
Additional depreciation and amortization (see Note 18) (663) 0
Additional depreciation and amortization of acquisition in 1997 of 19.9%
minority interest in March 1997 (see Note 19) (1,400) (437)
------- -----
Total $(3,820) $(437)
</TABLE>
PRO FORMA CAPITALIZATION
Prior to the Distribution Date, the Company and the Company
Businesses have been operated as part of C-TEC. The following table sets
forth the capitalization of the Company as of June 30, 1997, and as adjusted to
give effect to the Distribution and the related transactions and events
described in the notes hereto and the Notes to the Unaudited Pro Forma
Consolidated Balance Sheet included in this Information Statement as if the
Distribution and such transactions and events had been consummated on June 30,
1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Pro Forma Capitalization. The Pro
Forma Capitalization table below should be read in conjunction with the
historical Financial Statements and Notes thereto included elsewhere in this
Information Statement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Consolidated
Financial Statements." The Pro Forma Capitalization table below is provided
for information purposes only and should not be construed to be indicative of
the Company's capitalization or financial condition had the Distribution and
such related transactions and events been consummated on the date assumed, may
not reflect the capitalization or financial condition which would have
resulted had the Company been operated as a separate, independent Company
during such period, and are not necessarily indicative of the Company's future
capitalization or financial condition.
<TABLE>
<CAPTION>
June 30, 1997
($ in thousands)
-------------------------------------------
Pro Forma
Historical for Distribution
----------- ----------------
<S> <C> <C>
Cash, temporary cash investments and short-term investments $ 45,481 $216,649
======== ========
Long-term debt................................................... 131,250 110,000
Notes payable-affiliates......................................... 91,126 --
-------- --------
Total indebtedness............................................... 222,376 110,000
Common shareholder's equity...................................... 341,454 399,237
-------- --------
Total capitalization............................................ $563,830 $509,237
======== ========
</TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Prior to the Distribution Date, the Company and the
Company Businesses have 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
three 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........................... $ 60,706 $ 49,017 $104,910 $ 91,997 $ 59,500 $ 49,504 $ 44,030
Costs and expenses, excluding
depreciation and amortization. 55,703 37,041 79,107 75,003 49,747 30,821 25,725
Depreciation and amortization... 25,455 17,830 38,881 22,336 9,803 9,922 9,984
Nonrecurring charges............ 10,000 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating (loss) income......... (30,452) (5,854) (13,078) (5,342) (50) 8,761 8,321
Interest income................. 9,761 13,591 25,602 29,001 21,547 1,922 2,375
Interest expense................ (7,129) (7,758) (16,046) (16,517) (16,669) (1,167) (3,007)
Other (expense) income, net..... 600 (461) (546) (304) 1,343 1,195 6,015
(Benefit) provision for income
taxes......................... (7,143) 321 979 1,119 2,340 167 5,203
Minority interest in (income)
loss of consolidated entities. 1,388 (90) 1,340 (144) (95) (85) (43)
Equity in (loss) of
unconsolidated entities....... (1,561) (1,299) (2,282) (3,461) -- -- --
Cumulative effect of changes in
accounting principles............ -- -- -- -- (83) 1,628 --
-------- -------- -------- -------- -------- -------- --------
Net (loss) income.. $(20,250) $ (2,192) $ (5,989) $ 2,114 $ 3,653 $ 12,087 $ 8,458
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Total assets.................... $671,430 $650,982 $628,085 $649,610 $568,586 $291,634 $289,833
Long-term liabilities........... 131,250 135,250 131,250 135,250 154,000 181,500 191,070
Shareholder's equity............ 341,454 406,369 390,765 394,069 372,847 74,329 56,083
</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 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 and the Company
Businesses have 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.
The Company is developing advanced fiber optic networks to
provide a wide range of telecommunications services in the Northeastern United
States. Such networks are networks that are capable of providing a full range
of high speed, high capacity telecommunications services, including voice,
video programming and data services including Internet access. The Company
intends to provide these services singly or in bundled services packages
primarily to residential customers in high-density areas and also seeks to
serve certain commercial accounts on or near it networks. The Company has
recently commenced providing service through advanced fiber optic network
facilities in New York City and Boston. Through 1996, the revenue from
services provided over such networks has not been material. The Company also
has hybrid fiber/coaxial cable television operations in New York (outside New
York City) New Jersey and Pennsylvania ("Hybrid Fiber/Coaxial"), wireless
video operations in New York City ("Wireless Video"), and certain other
operations, including long distance telephone (collectively, "Other
Operations"). Financial results related to advanced fiber and wireless
facilities are included in the "Advanced Fiber, Wireless Video and Other
Operating" segment data which follows. The Company has historically managed
its business along these lines and the discussion which follows addresses
those lines accordingly. As the development of the Company's advanced fiber
networks continues, in the future the Company may reflect such operations as a
separate segment. The Company expects that the operating and net losses and
negative cash flows from this business will rise in the future as it expands
and develops its network and customer base. There can be no assurance that
RCN will achieve or sustain profitability or positive cash flows from
operating activities in the future as it develops its advanced fiber optic
network.
Selected segment data was as follows for the years ended
December 31, 1996, 1995 and 1994 and for the six months ended June 30, 1997
and 1996:
<TABLE>
<CAPTION>
Six Months ended June 30, Year ended December 31,
------------------------- ----------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales
Hybrid Fiber/Coaxial.............. $45,872 $41,437 $ 84,096 $66,404 $45,937
Advanced Fiber, Wireless Video
and Other Operating............. 14,829 7,560 20,768 25,528 13,514
Corporate......................... 5 20 46 65 49
------- ------- -------- ------- -------
Total........................... $60,706 $49,017 $104,910 $91,997 $59,500
======= ======= ======== ======= =======
</TABLE>
Operating Income Before Depreciation and Amortization:
<TABLE>
<CAPTION>
Six Months ended June 30, Year ended December 31,
------------------------- ----------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Hybrid Fiber/Coaxial............. $21,267 $19,085 $40,094 $28,458 $22,279
Advanced Fiber, Wireless Video
and Other Operating............ (12,621) (4,170) (11,711) (8,416) (11,542)
Corporate........................ (13,643) (2,939) (2,580) (3,048) (984)
------- ------- ------- ------- -------
Total.......................... $(4,997) $11,976 $25,803 $16,994 $ 9,753
======= ======= ======= ======= =======
</TABLE>
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended
June 30, 1996
For the six months ended June 30, 1997, operating income
before depreciation and amortization was $(4,997) as compared to $11,976
for the six months ended June 30, 1996. Sales increased 23.9% to $60,706
for the six months ended June 30, 1997 from $49,017 for the same period in
1996.
Sales. Sales are primarily comprised of subscription fees for
basic, premium and pay per view cable television services, long distance
telephone service fees based on minutes of traffic and tariffed rates or
contracted fees, and Internet access fees billed at contracted rates. For the
six months ended June 30, 1997, sales were $60,706, an increase of $11,689 due
to higher Hybrid Fiber/Coaxial sales of $4,435 and higher Advanced Fiber,
Wireless Video and Other Operating sales of $7,269. The increase in Hybrid
Fiber/Coaxial sales principally results from higher basic service revenue
resulting from approximately 4,600 additional average monthly subscribers over
the same period in 1996 and the effects of a rate increase in the first
quarter of 1997. Advanced Fiber, Wireless Video and Other Operating sales
increased primarily due to the acquisition of an 80.1% interest in Freedom in
August 1996 (the "Freedom Acquisition"). The Freedom Acquisition resulted in
the addition of approximately 25,000 video subscribers, primarily in the New
York City market, and was the principal reason for the increase of
approximately 43,000 video subscribers as compared to the same period of the
prior year. The increase in Advanced Fiber, Wireless Video and Other
Operating Sales also includes increases of approximately $1,500 related to
expansion of the long distance business.
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 its Hybrid Fiber/Coaxial segment was
approximately 1.2% in the six months ended June 30, 1997. In the six months
ended June 30, 1997, the Company's average monthly customer turnover in its
Advanced Fiber, Wireless Video and Other Operating segment (excluding long
distance) was approximately 1.1%, in part due to the relatively brief
operating history of the segment and development stage characteristics of the
industry. Accordingly, these initial turnover rates may not be indicative of
future performance.
Costs and Expenses, Excluding Depreciation and Amortization.
Cost and expenses, excluding depreciation and amortization, are comprised of
direct costs of providing services, primarily cable programming and franchise
costs, network access fees, video transmission licensing fees, salaries and
benefits, and 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, amortization, and nonrecurring charges,
were $55,703, an increase of $18,662 or 50.4% as compared to the same period
in 1996. The increase is primarily attributable to higher Advanced Fiber,
Wireless Video and Other Operating costs and expenses, excluding depreciation
and amortization, of approximately $15,700, resulting principally from the
Freedom Acquisition in August 1996 and expansion of the business in the Boston
and New York City markets. The most significant increases occurred in market
development costs, including personnel and related costs, origination and
programming costs, and advertising expenses. Expansion of the long distance
business contributed approximately $2,800 of the remaining increase in
Advanced Fiber, Wireless Video and Other Operating costs and expenses,
excluding depreciation and amortization. Hybrid Fiber/Coaxial costs and
expenses, excluding depreciation and amortization, increased approximately
$2,200 primarily due to higher basic programming costs resulting from higher
rates, additional channels and subscriber increases.
Depreciation and Amortization. Depreciation and amortization
is comprised principally of depreciation relating to the Company's Hybrid
Fiber/Coaxial facilities and amortization of subscriber lists, building access
rights and goodwill. Depreciation and amortization increased $7,625 or 42.8%
to $25,455 for the six months ended June 30, 1997 as compared to $17,830 for
the comparable period in 1996. The increase is due to the additional
depreciation and amortization resulting from the Freedom Acquisition and
depreciation related to the Company's advanced fiber optic networks in New
York City and Boston.
In future periods, depreciation and amortization are expected
to exceed amounts recorded in 1996 and during the six months ended June 30,
1997 due to the Freedom Acquisition (as well as the acquisition in March 1997
of the remaining 19.9% ownership interest in Freedom), and depreciation with
respect to the Company's advanced fiber optic networks in New York City and
Boston.
Nonrecurring Charges. Nonrecurring charges of $10,000
represent costs incurred with respect to the termination of a marketing
services agreement held by Freedom.
Interest Income. For the six months ended June 30, 1997,
interest income was $9,761 a decrease of $3,830 or 28.2% primarily due to
lower average cash balances and lower average notes receivable-affiliates.
Average cash balances decreased principally as a result of the Freedom
Acquisition in August 1996.
Interest Expense. For the six months ended June 30, 1997,
interest expense was $7,129, a decrease of $629 or 8.1% primarily due to the
required principal payment of $18,750 on long-term debt in December 1996.
Income Tax. Income tax expense decreased $7,464 primarily due
to the decrease of $24,598 in operating income.
Minority Interest. Minority interest in the loss of
consolidated entities increased $1,433 as a result of the minority share of
the losses of Freedom from January 1 through March 21. The Company acquired
the 19.9% minority ownership of Freedom on March 21, 1997.
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
For the year ended December 31, 1996, operating income before
depreciation and amortization was $25,803 as compared to $16,994 for the year
ended December 31, 1995. Sales increased 14.0% to $104,910 for 1996 from
$91,997 in 1995. The improvement in operating income before depreciation and
amortization of $8,809 was offset by higher depreciation and amortization of
$16,545, as discussed below, resulting in a net loss of $(5,989) for the year
ended December 31, 1996 as compared to net income of $2,114 in 1995.
Sales. For 1996, sales were $104,910, an increase of $12,913,
or 14.0%, due to higher Hybrid Cable Television sales partially offset by
lower Advanced Fiber, Wireless Video and Other Operating sales, principally
long distance. Hybrid Fiber/Coaxial sales increased $17,692, or 26.6%,
primarily due to the acquisition of the Pennsylvania cable system (formerly
Twin County Trans Video, Inc.) in May 1995, which resulted in $13,530 of the
increase in Hybrid Fiber/Coaxial sales in 1996. The Pennsylvania cable system
serves approximately 74,000 subscribers in the Greater Lehigh Valley area of
Pennsylvania. The 14.0% increase in sales in 1996 was lower than the increase
of 54.6% in 1995, principally due to the consolidation of the Pennsylvania
cable system for seven months (from acquisition in May 1995). Since the
Pennsylvania cable system was consolidated for seven months in 1995,
consolidation for a full year in 1996 reflects only an incremental five months
revenue as compared to an incremental seven months revenue in 1995.
Additionally, long distance revenues decreased approximately 30% from 1995 to
1996, principally as a result of termination of AT&T Tariff 12 production in
1996, as compared to increases of 77% from 1994 to 1995, which resulted from
the resale of AT&T Tariff 12 long distance services and increases in long
distance switched business and 800 services sales in 1995. The remaining
increase in Hybrid Fiber/Coaxial sales is due to higher basic service revenues
resulting from an increase in average subscribers of 4,995 or 5.3% and the
full year impact, in 1996, of the 9.6% rate increase in April 1995 and the
impact of a 5.9% rate increase in February 1996. These increases were
partially offset by lower Advanced Fiber, Wireless Video and Other Operating
sales of $4,760 primarily resulting from the termination in the second quarter
of 1995 of an agreement for the resale of AT&T Tariff 12 long distance
services to another long distance reseller. Included in Advanced Fiber,
Wireless Video and Other Operating sales for 1996 were Wireless Video sales of
$3,532, compared to zero for 1995 reflecting the Freedom Acquisition. In
1996, the Company's average monthly turnover rate in its Hybrid Fiber/Coaxial
segment was approximately 1.2%.
Cost and Expenses, Excluding Depreciation and Amortization. In
1996, costs and expenses, excluding depreciation and amortization, were
$79,107, an increase of $4,104 or 5.5% as compared to 1995. Hybrid
Fiber/Coaxial programming expense increased $3,930 due to license fee
increases, channel additions, and subscriber growth, primarily due to the
acquisition of the Pennsylvania cable system. Additionally, Hybrid
Fiber/Coaxial salaries and benefits expense increased $1,862 primarily due to
the acquisition of the Pennsylvania cable system. Corporate costs and
expenses, excluding depreciation and amortization, decreased $487. This
decrease is primarily due to the corporate allocable share of the gain on the
partial curtailment and settlement of C-TEC's defined benefit pension plan of
$992 (See Note 12 to the Financial Statements) partially offset by the
Company's allocable portion of costs associated with the investigation of the
feasibility of various restructuring alternatives to enhance shareholder
value. Advanced Fiber, Wireless Video and Other Operating costs and expenses,
excluding depreciation and amortization, decreased $1,465 primarily due to
lower expenses associated with the 97% reduction in AT&T Tariff 12 long
distance revenues partially offset by an increase of $2,320 representing costs
associated with the development of the Company's advanced fiber optic networks
in New York City and Boston and Wireless Video costs and expenses of $8,303 in
1996 compared to zero in 1995 reflecting the Freedom Acquisition.
Depreciation and Amortization. For 1996, depreciation and
amortization expense was $38,881, an increase of $16,545 or 74.1% as compared
to 1995 primarily due to purchase accounting effects of the acquisition of
Pennsylvania cable system in May 1995 and the Freedom Acquisition on August
30, 1996. (See Note 4 to 1996 Consolidated Financial Statements.) In
addition, the Company incurred $3,756 in depreciation related to the Company's
advanced fiber optic networks in New York City and Boston.
Interest Income. For the year ended December 31, 1996,
interest income was $25,602, a decrease of $3,399 or 11.7% due primarily to a
reduction in average cash balances in 1996 as compared to 1995 and a decrease
in the average yield on invested cash, partially offset by interest income of
$2,222 accrued on a $13,088 note receivable acquired from Mazon Corporativo
S.A. de C.V. in January 1996. Average cash balances decreased in 1996
primarily due to cash used in the Freedom Acquisition and the purchase of the
loan receivable from Mazon Corporativo S.A. de C.V. Additionally, lower
balances on notes receivable-affiliates contributed to the decrease.
Interest Expense. Interest expense for 1996 was $16,046, a
decrease of $471 or 2.9% in 1996 as compared to 1995. This decrease is due to
lower average rates on outstanding debt and includes approximately $922 paid
to Kiewit Telecom, the Company's controlling shareholder, in connection with
the Freedom Acquisition. This portion of the consideration represents an
amount to compensate Kiewit Telecom for forgone interest on the amount
invested in Freedom.
Income Taxes. The Company's effective income tax rate was
(19.5%) in 1996 and 34.6% in 1995. For an analysis of the change in income
taxes, see the reconciliation of the effective income tax rate in Note 11 to
the 1996 consolidated financial statements.
Minority Interest. As a result of the Freedom Acquisition,
Freedom's financial results are consolidated with the Company since August 30,
1996, the date of acquisition. This resulted in minority interest in the loss
of Freedom of $1,546 for 1996. Additionally, the 20% minority interest in the
income of HomeLink Limited Partnership, a Hybrid Fiber/Coaxial subsidiary, was
$(206) in 1996 as compared to $(144) in 1995.
Equity in (loss) of Unconsolidated Entities. The Company's
equity in the (loss) of unconsolidated entities was $(2,282) in 1996 and
$(3,461) in 1995, and is comprised principally of the Company's share of the
operating results of Megacable. In January 1995, the Company purchased a
forty percent equity position in Megacable, a Mexican cable television
provider, for cash of $84,115. The Company is exposed to foreign currency
translation adjustments resulting from translation into U.S. dollars of the
financial statements of Megacable, which through December 1996 utilize the
peso as the local and functional currency. Such adjustments have historically
been included as a separate component of common shareholders' equity and
reflected losses of $449 and $2,606, net of income taxes, in 1996 and 1995,
respectively. Effective January 1, 1997, since the three year cumulative rate
of inflation at December 31, 1996 exceeded 100 percent, Mexico will be treated
for accounting purposes as having a highly inflationary economy. Therefore,
the U.S. dollar will be treated as the functional currency and translation
adjustments will be included in income. The Company is also exposed to
foreign currency transaction losses resulting from transactions of Megacable
which are made in currencies different from its own. The Company's
proportionate share of transaction gains (losses) are included in income as
they occur. It is not possible to determine what effect future currency
fluctuations will have on the Company's operating results. The Company's
proportionate share of such gains (losses) in 1996 and 1995 were approximately
$247 and $(932), respectively. Megacable reduced its exposure to such losses
by utilizing a portion of the Company's cash investment to repay U.S. dollar
denominated debt of approximately $55,000 in 1995.
In 1996, Megacable had sales of $23,244, operating income
before depreciation and amortization of $10,187 and net income of $10,221. In
1995, Megacable had sales of $20,841, operating income before depreciation and
amortization of $8,154 and net income of $5,802. Year end subscriber counts
were 178,664 at December 31, 1996 as compared to 177,317 at December 31, 1995.
In 1996 and 1995, the Company's share of the income of Megacable was $4,090
and $2,696, respectively, which includes foreign currency transaction losses
as noted above. The Company's investment in Megacable exceeded its underlying
equity in the net assets of Megacable when acquired by approximately $94,000,
which goodwill is being amortized on a straight-line basis over 15 years. In
1996 and 1995, amortization of the Company's excess purchase price over the
net assets of Megacable when acquired was $6,280 and $5,757, respectively.
Year Ended December 31, 1995 Compared to Year Ended December
31, 1994
For the year ended December 31, 1995, operating income before
depreciation and amortization was $16,994 as compared to $9,753 for the year
ended December 31, 1994. Sales increased 54.6% to $91,997 for 1995 from
$59,500 in 1994. The improvement in operating income before depreciation and
amortization of $7,241 and the increase in interest income of $7,454 were
offset by higher depreciation and amortization of $12,533 and a loss in the
equity of consolidated entities of $(3,461) resulting in lower net income of
$2,114 in 1995 as compared to $3,653 in 1994.
Sales. Sales for 1995 were $91,997, an increase of $32,497 or
54.6% primarily due to higher Hybrid Fiber/Coaxial sales of $20,467. Hybrid
Fiber/Coaxial sales increases resulted primarily from the acquisition of the
Pennsylvania cable system, effective May 1, 1995. The Pennsylvania cable
system accounts for $18,384 of the increase in Hybrid Fiber/Coaxial sales of
$20,467, or 44.6%, as compared to 1994. Additionally, average subscriber
increases of approximately 4,386 over the same period in 1994 and a rate
increase effective in April 1995 account for the remaining increase in Hybrid
Fiber/Coaxial sales. Advanced Fiber, Wireless Video and Other Operating sales
increased $12,014, or 88.9% in 1995 as compared to 1994. This increase
included revenues of $4,070 from the resale of AT&T Tariff 12 long distance
services to another long distance reseller under an arrangement which
terminated during the second quarter of 1995. Increases in long distance
switched business sales and 800 services sales account for the majority of the
remaining increase. In 1995, the Company's average monthly turnover rate in
its Hybrid Fiber/Coaxial operations was approximately 1.1%.
Cost and Expenses, Excluding Depreciation and Amortization. In
1995, costs and expenses, excluding depreciation and amortization, were
$75,003, an increase of $25,256, or 50.8% in 1995 as compared to 1994. Hybrid
Fiber/Coaxial programming expense increased $6,079 due to license fee
increases, channel additions, and subscriber growth, primarily due to the
acquisition of the Pennsylvania cable system. Additionally, Hybrid
Fiber/Coaxial salaries and benefits increased $5,272, primarily due to the
acquisition of the Pennsylvania cable system. The remaining increase in costs
and expenses for Hybrid Fiber/Coaxial of $2,937 is attributable to various
increases in other general operating expenses resulting from the consolidation
of approximately 75,420 Pennsylvania cable system subscribers as a result of
the acquisition. Advanced Fiber, Wireless Video and Other Operating costs and
expenses, excluding depreciation and amortization, increased $8,888, or 35.5%
in 1995 as compared to 1994. The primary increases occurred in expenses
associated with Tariff 12 long distance sales of $4,068 and long distance
carrier expense. Costs and expenses associated with the start-up of the
Company's fiber optic network business in Boston and New York City increased
$3,648 in 1995. Partially offsetting these increases were decreases of
approximately $5,300 in charges related to long distance contract settlement
and termination resulting from management's determination that it had
adequately provided for such matters in 1994.
Corporate costs and expenses, excluding depreciation and
amortization, increased $2,080, due to the Company's allocable share of
professional fees associated with the evaluation of strategic alternatives for
enhancing shareholder value, higher salary expense resulting from additional
corporate personnel to support the Company's growing operations, and higher
bonus expense resulting primarily from the improvement in operating income
before depreciation and amortization.
Depreciation and Amortization. For 1995, depreciation and
amortization expense was $22,336, an increase of $12,533 or 127.8% as compared
to 1994, primarily due to the consolidation of the Pennsylvania cable system
since May 1, 1995.
Interest Income. Interest income for 1995 was $29,001, an
increase of $7,454 or 34.6% as compared to the prior year. The increase is
the result of both higher average cash balances and higher yields in 1995.
Average cash balances increased primarily as a result of cash transfers by
C-TEC to the Company of proceeds received from the sale of C-TEC's cellular
operations in September 1994 and from C-TEC's common stock rights offering,
which concluded in December 1994. The Company utilized a portion of these
fundings from C-TEC for the 1995 acquisition of a 40% interest in Megacable
for approximately $84,000 and for the cash portion of the purchase price for
the Pennsylvania cable system of approximately $37,000.
Interest Expense. Interest expense was $16,517 in 1995 as
compared to $16,669 in 1994, as debt levels and interest rates were relatively
stable.
Other (Expense) Income, Net. Other expense for 1995 was $304,
compared to other income of $1,343 in 1994. The change in other (expense)
income in 1995 as compared to 1994 is primarily due to the inclusion in 1994
of a gain of approximately $900 on the sale of certain of the Company's Hybrid
Fiber/Coaxial operations.
Income Taxes. The Company's effective income tax rate was
34.6% in 1995 and 38.5% in 1994. For an analysis of the change in income
taxes, see the reconciliation of the effective income tax rate in Note 11 to
accompanying consolidated financial statements.
Minority Interest. The 20% minority interest in the income of
HomeLink Limited Partnership, a Hybrid Fiber/Coaxial subsidiary, was $(144) in
1995 and $(95) in 1994.
Equity in (Loss) of Unconsolidated Entities. The equity in the
loss of unconsolidated entities in 1995 relates to the Company's share of the
losses of Megacable, in which the Company acquired a 40% interest in January
1995. In 1995, Megacable had sales of $20,841, operating income before
depreciation and amortization of $8,154 and net income of $5,802.
Liquidity and Capital Resources
The Company expects that it will require a significant amount
of capital to fund its operations and development in its existing New York
City and Boston markets. These capital requirements include the following:
development of advanced fiber optic networks in Boston and New York City;
expansion and upgrade of Hybrid Fiber/Coaxial plant and other capital
expenditures; funding of operating losses of Boston and New York operations;
and repayment of existing outstanding third-party debt.
Planned capital expenditures for development of advanced fiber
networks in New York City and Boston include costs related to connecting
customers to the advanced optic network which will be incurred on a
per-connection basis. The Company currently has budgeted capital expenditures
(excluding capital costs expected to be contributed by its joint venture
partners) of approximately $90 million during 1997, approximately $145 million
during 1998 and approximately $150 million during 1999, in order to expand
its network, develop its New York City, Boston and Washington, D.C. markets
and add service enhancements to certain of its Hybrid Fiber/Coaxial cable
television systems. These estimates exclude approximately $150 million of
capital expenditures in the Company's joint ventures which are expected to be
funded by the Company's joint venture partners. The Company anticipates that
it may also incur other discretionary capital requirements related to the
development of additional markets during this three year period. The
development of such networks, however, will be contingent upon the degree of
success achieved in the Boston and New York City markets and the likelihood
and degree of success expected in the relevant markets chosen for development.
The Company currently anticipates the following sources of
funding:
Thousands of
Dollars
------------
Repayment of existing outstanding intercompany indebtedness
by Cable Michigan in connection with the Restructuring...... $110,000
Equity contribution by Commonwealth Telephone Enterprises
in connection with the Restructuring........................ 75,000
New third-party debt......................................... 110,000
Cash on hand................................................. 65,000
Operating cash flow of Hybrid Fiber/Coaxial.................. 100,000
--------
$460,000
========
In order to further fund its anticipated capital requirements
through the end of 1999, the Company is considering raising additional debt
financing. Subject to market conditions, the Company expects to raise
approximately $200-250 million of additional debt financing within six months
following the Distribution. However, the likelihood, success and amount of
any such debt incurrence offering would depend on market conditions and other
factors, including the continued need for capital based on the success based
buildout of its current and future markets. The Company believes that cash
flow generated by operations, cash balances and, if necessary, borrowings
under the Company's committed credit facilities available as of the date
hereof, will enable the Company to meet 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. The
Company expects that it and its subsidiaries will be in compliance with all
provisions and covenants of its and their debt agreements following the
Distribution.
Additionally, the Company may enter into other relationships
such as joint ventures, with appropriate partners in possible new markets
chosen by the Company for development. Such relationships should enable the
Company to limit its expenditures for network development by utilizing
existing facilities as well as by the potential capital contributions by
partners or investors in return for profit participation or equity. The
Company may also take advantage of the expertise of appropriate partners in
the relevant market in order to reduce its start-up costs in those markets.
For the six months ended June 30, 1997, the Company's net cash
provided by operating activities was $4,283, comprised primarily of a net loss
of $20,250 adjusted by non-cash depreciation and amortization of $25,456, other
non-cash items totaling $223 and working capital changes of $(1,199). Net
cash used in investing activities of $7,978 consisted primarily of additions
to property, plant and equipment of $20,914 and acquisitions of $30,475
(primarily acquisition of the minority interest of Freedom) partially offset
by sales and maturities of short-term investments of $42,934. Net cash used
in financing activities of $16,670 consisted of transfers to C-TEC of $28,051
partially offset by a change in affiliate notes of $11,381.
For 1996, the Company's net cash provided by operating
activities was $23,831 comprised primarily of a net loss of $5,989 adjusted by
non-cash depreciation and amortization of $38,881 and other non-cash items
totaling $(7,184). Net cash used in investing activities of $9,377 consisted
primarily of additions to property, plant and equipment of $40,369, the
purchase of a loan receivable of $13,088 and acquisitions of $30,090
(primarily the Freedom Acquisition), partially offset by net sales and
maturities of short-term investments of $73,995. Net cash provided by
financing activities of $9,391 included the issuance of long-term debt of
$19,000, and change in affiliate notes of $32,802, partially offset by the
redemption of long-term debt of $44,750.
There can be no assurance that the Company will be successful
in raising sufficient additional capital on terms that it will consider
acceptable. Failure to raise and generate sufficient funds may require the
Company to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company's
growth and its ability to compete in the telecommunications industry and limit
the Company's flexibility in planning for, or reacting to, changes in its
business.
DESCRIPTION OF THE CREDIT AGREEMENT
This section of the Information Statement describes the terms
and conditions of the Credit Agreement that certain subsidiaries of the
Company have 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.
Certain of the Company's direct and indirect subsidiaries,
namely, C-TEC Cable Systems, Inc. ("Cable Systems"), ComVideo Systems, Inc.
("ComVideo") and C-TEC Cable Systems of New York, Inc. ("Cable Systems New
York") (collectively, the "Borrowers"), have 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"), which was effective as of July 1, 1997 (the "Closing
Date"). The first is a five-year revolving credit facility in the amount of
$25 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 existing indebtedness of the Borrowers,
(ii) to finance an equity investment by Cable Systems in RCN Telecom Services,
Inc. (a member of the RCN Group), (iii) to finance permitted acquisitions, and
(iv) for capital expenditures, working capital and general corporate purposes.
Borrowings under the Credit Agreement 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 Borrowers contained in the Credit
Agreement and related pledge agreements must be true. Each Borrower is
jointly and severally liable for all borrowings and other obligations under
the Credit Facilities.
The interest rate on the Credit Facilities will be, at the
election of the Borrowers, 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 Cable Systems'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), from 50 basis points to 125 basis points. 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. In the case of the term credit facility, a fee of 20
basis points on the unused term commitment will accrue from the forty-sixth
day after the Closing Date through the earlier of the date on which the term
commitment is fully drawn and the ninetieth day after the Closing Date and
will be payable ninety days after the Closing Date.
The Term Credit Facility is available in up to two
installments, and to the extent not borrowed during the ninety-day period
described above will cease to be available. One installment of $50 million of
the Term Credit Facility was drawn on August 1, 1997. The entire amount of
the Revolving Credit Facility is available to the Borrowers until June 30,
2002. As of August 1, 1997, no 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 (assuming the entire $100
million is drawn, and if less then pro rata to the amounts given below):
1999 $3,750,000
2000 $11,250,000
2001 $16,250,000
2002 $17,500,000
2003 $19,374,000
2004 $21,250,000
2005 $10,626,000
The Borrowers have 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 Borrowers are 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 Cable Systems of 100% of the stock in ComVideo (which will
be given only after approval from the appropriate regulatory authority in New
Jersey is granted) and in Cable Systems New York; (ii) a first priority pledge
by ComVideo of 100% of its partnership interests in Home Link Communications
of Princeton, L.P. ("Home Link") at such time that ComVideo has acquired 100%
of the partnership interests in Home Link (at which time Home Link will become
a Borrower) and subject also to approval of the appropriate regulatory
authority in New Jersey being granted; (iii) a first priority pledge by each
Borrower of 100% of the stock owned by it in each other material subsidiary of
such Borrower created after the Closing Date; and (iv) a first priority pledge
by RCN of 100% of the stock of Cable Systems (which will be given within 30
days of the Distribution Date). In addition, the Borrowers are subject to a
prohibition on granting other negative pledges to other parties on the assets
of Cable Systems and certain of its subsidiaries (subject to customary
exceptions). The stock and assets of C-TEC Cable Systems of Pennsylvania,
Inc., RCN Telecom Services, Inc. and RCN International, Inc. are excluded from
the security arrangements.
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, making of capital expenditures
and transactions with affiliates. The Credit Agreement requires the
Borrowers, Home Link and all subsidiaries of the Borrowers created after the
Closing Date on a combined basis 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 periods ending during the first 3 years after the Closing Date,
adjusting to 3.0:1 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 1.0:1 for periods ending on or
before December 31, 2000 and adjusting to 1.05:1 thereafter.
The Credit Agreement 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) PKS shall cease to hold, either directly or
indirectly through one or more PKS entities, (1) shares of RCN 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 RCN (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 the Distribution 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 RCN or
any of its wholly owned subsidiaries), (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 RCN or (C) RCN shall cease to hold, directly or indirectly,
all of the outstanding shares of capital stock of Cable Systems.
BUSINESS
Overview
RCN is developing advanced fiber optic networks to provide a
wide range of telecommunications services including local and long distance
telephone, video programming and data services (including high speed Internet
access), primarily to residential customers in selected markets in the Boston
to Washington, D.C. corridor as well as certain commercial accounts on or near
its networks. RCN seeks to act as a single-source provider of a wide range of
voice, video and data services offered individually or in bundled service
packages, with superior customer service and competitive prices as compared to
incumbent service providers. The Company currently utilizes a variety of
owned and leased facilities including advanced fiber optic networks, a
wireless video system and hybrid fiber/coaxial cable systems, although it
intends to deploy advanced fiber optic networks specifically designed to
provide high speed, high capacity telecommunications services for all new
facilities. RCN's initial advanced fiber optic networks have been established
in New York City and, through a joint venture, in Boston and surrounding
communities, and formally commenced operations in September 1996. RCN has
recently announced that it plans to develop an advanced fiber network in the
Washington, D.C. area through a joint venture. Since it formally commenced
operation of its advanced fiber optic networks in New York City and Boston,
RCN has built or acquired through long term lease arrangements approximately
300 route miles of fiber optic cable and added approximately 1,500 customer
connections to its advanced fiber optic networks. In addition, during the same
period the Company added approximately 13,500 wireless video, resold telephone
and other connections, the majority of which represent customers that RCN
expects to migrate to its advanced fiber optic networks. At June 30, 1997,
RCN had an aggregate of approximately 234,600 connections (local telephone,
video programming or Internet access) among all facilities, approximately
48,400 of which were attributable to customers in the New York City and Boston
markets. See "--RCN Services--Connections."
RCN seeks to exploit competitive opportunities which have
resulted from widespread changes in the U.S. telecommunications industry.
Industry sources estimate that annual revenues generated by the U.S.
telecommunications industry are approximately $220 billion, approximately 50%
of which is attributable to residential users. The Boston to Washington
corridor represents approximately 4% of the geography of the U.S. but accounts
for over 26% of the telecommunications market (as measured by telephone access
lines). RCN believes that density is a critical factor in the economic
deployment of advanced fiber optic networks, and that due to population
density, favorable demographics and the aging infrastructure of the
incumbents' facilities, the Boston to Washington corridor is a particularly
attractive market for development of advanced fiber optic facilities.
The opportunity to effectively deploy advanced fiber optic
networks and to compete with incumbent telephone and cable television service
providers results from several key factors, including the broad deregulation
of the telecommunications industry pursuant to the Telecommunications Act of
1996 and other developments, the need for more advanced, higher capacity
networks to meet growing consumer demands and the typically superior
technology of the Company's networks in contrast to the network and other
limitations of the incumbent providers. To address this opportunity, RCN is
pursuing the following key strategies:
bullet Developing Advanced Fiber Optic Networks. RCN is developing
advanced fiber optic networks specifically designed to provide a single
source for high speed, high capacity voice, video programming and data
services. RCN's ability to offer a wide range of services through its
advanced fiber optic networks greatly increases the size of its
potential market, as compared to the networks of incumbent service
providers which typically provide only single or limited services. RCN
seeks to be the first operator of an advanced fiber optic network
targeting residential customers in each of its target markets.
bullet Focus on Residential Customers in High Density Markets. The
Company's primary focus is on residential customers in high density
areas. The Company also serves certain commercial accounts which are on
or near its networks. Most of the other new competitive entrants,
including most CLECs, have focused their network development and sales
efforts almost exclusively on providing telephone service to large
commercial customers and have generally not offered their telephone
services to the residential marketplace. Additionally, these new
competitors and the incumbent service providers have generally not
expanded their offerings to include both voice and video programming
services.
bullet Utilizing Strategic Alliances and Existing Facilities to
Speed and Reduce Cost of Entry. Utilizing existing facilities and
entering into strategic alliances enables RCN to enter the market quickly
and efficiently and to reduce its up-front capital investment. RCN has
established strategic relationships with MFS/WorldCom and BECO, both of
which have extensive fiber optic networks and other assets, and is
utilizing its own existing cable television infrastructure to help
expedite and reduce the cost of market entry and development of its
business. RCN also benefits from its interconnection and resale
agreements with incumbent telephone service providers. On August 1, 1997
RCN entered into a letter of intent with PCI, a subsidiary of PEPCO, to
form a joint venture to develop an advanced fiber optic network in the
Washington, D.C. Market. See "--Strategic Relationships."
bullet Implementing Subscriber-Driven Investment Strategy. RCN
attempts to defer as much of its capital investment as possible by tying
facility development to the procurement of customer connections. In order
to help promote its presence in its markets and to develop a subscriber
base for its advanced fiber optic networks, the Company may provision
services to its customers by first reselling services, and then by
establishing leased facilities (such as unbundled local loops), in
advance of constructing or extending its network.
In addition to its initial advanced fiber optic networks in New
York City and Boston, RCN provides video programming and local and long
distance telephone services through other facilities including a wireless video
system in New York City, hybrid fiber/coaxial cable television systems in the
States of New York (outside New York City), New Jersey and Pennsylvania, all
within 75 miles of New York City, and resale agreements with the incumbent
telephone service providers. RCN's wireless video and resale telephone
services are offered primarily to customers located near RCN's current or
proposed advanced fiber optic networks. RCN intends to convert as many of
those customers as is economically feasible to advanced fiber optic networks.
As of June 30, 1997, RCN had approximately 234,600 customer
connections. This amount includes approximately 48,400 connections in the New
York City and Boston markets (approximately 1,500 advanced fiber connections,
approximately 38,300 wireless video service connections and approximately
8,500 resold telephone and other connections). Also included within the total
customer connections as of June 30, 1997 were approximately 181,800 hybrid
fiber/coaxial cable connections. RCN had revenues of $104.9 million for the
year ended December 31, 1996 and $60.7 million for the six months ended June
30, 1997. Because it delivers multiple services, RCN reports the total number
of its various service connections (for local telephone, video programming or
Internet access) rather than the number of customers.
RCN owns a 40% interest in Megacable, the second largest cable
television provider in Mexico with approximately 176,000 subscribers and
622,000 homes passed by its systems as of June 30, 1997. Megacable operates
22 wireline cable systems throughout Mexico, principally in Guadalajara,
Mexico's second largest city, and along the Pacific and Gulf Coasts.
Megacable is presently expanding the fiber capacity of certain of its systems
and has recently begun to offer high-speed data services; it may in the future
provide voice services. Megacable had revenues of $23.2 million for the year
ended December 31, 1996 and $14.2 million for the six months ended June 30,
1997.
The Company's management team and board of directors benefit
from experience gained in connection with the management of C-TEC, which has
100 years of experience in the telephone business and nearly 25 years of
experience in the cable television business. Both C-TEC and certain members
of management also have extensive experience in the design and development of
advanced telecommunications facilities. The Company also benefits from its
relationship with PKS, the founder of MFS Communications Company, Inc., and
from the experience gained by certain of the Company's key employees who
participated in the development of MFS Communications Company, Inc. Kiewit
Telecom, an affiliate of PKS, will be the Company's largest shareholder after
the Distribution.
RCN believes it benefits from the following competitive
strengths:
bullet Experience in Operating Telephone and Cable Networks. RCN's
extensive operating experience in both the telephone and video industries
and in the design and development of telecommunications facilities
provides it with expertise in systems operation and development, an
established infrastructure for customer service and billing for both
voice and video services and established relationships with providers of
equipment and video programming.
bullet State-of-the-art technology. RCN's advanced fiber networks
are purpose-built using state-of-the-art technology. These networks are
designed to deliver a wide range of voice, video and data services with
superior quality and increased capacity.
bullet o Ability to Offer Bundled Voice and Video Services. RCN
believes that, as a full service voice and video programming provider, it
will be able to offer a single-source package of voice, video and data
services which is not yet generally available from any incumbent
telephone, cable or other service provider.
bullet Superior Customer Service. RCN seeks to provide superior
customer service as compared to incumbent service providers, with service
features such as a 24-hour-a-day call center and quality control system,
on-time service guarantees and bundled service offerings, providing the
consumer with added choice and convenience. In addition, services
provided over RCN's advanced fiber networks are generally priced at
competitive rates as compared to the incumbent service providers.
bullet Existing Customer Base in Attractive Markets. RCN benefits
from an existing base of 234,600 connections in New York City, Boston and
surrounding communities and in additional markets with favorable customer
demographics within 75 miles of New York City. RCN expects that the
majority of its wireless video and resale telephone customers (an
aggregate of approximately 43,000 connections) will ultimately be
connected to its advanced fiber optic networks. See "--RCN
Services--Connections."
Industry Overview - New Opportunities in Telecommunications
Overview of Incumbent Service Providers
The telecommunications industry today is dominated by the
incumbent LECs and cable television companies and by the IXCs. Typically,
only the incumbent LECs and cable television companies have a last mile
connection to their customers (with the exception of a small number of
"competitive access providers" (or "CAPs"), whose networks and operations have
been targeted almost exclusively at medium to large commercial users).
The distribution networks and customer connections of the
incumbent LECs can typically be characterized as a low capacity, high
reliability systems based upon copper twisted-pairs. Although telephone
service has relatively modest capacity requirements, the provisioning of
switch-based usage is a complex and difficult process. The incumbent LEC
telephone networks were constructed over a hundred-year period under a
regulatory regime which placed a premium upon reliability and universal
service, but which did not make significant advancement in terms of network
or operating efficiency. While the incumbent LECs have begun to expand the
amount of fiber optic facilities in their networks, the basic local exchange
systems have remained largely unchanged and are typically unable to deliver
higher capacity services such as video or high speed Internet connections.
These limitations, together with the significant investment imbedded in the
existing systems and the magnitude of the costs of an extensive upgrade of
such systems, have discouraged the incumbent LECs from expanding their service
offerings or comprehensively deploying new networks. Instead, the incumbent
LECs have concentrated their development efforts primarily on re-entering the
long distance business (which can be done with a relatively modest investment).
The distribution networks and customer connections of cable
television operators can typically be characterized as one-way, medium to high
bandwidth systems with generally lower reliability and integrity than the
incumbent LECs' telephone networks. The initial construction phase of the
cable networks was characterized by the rapid building of a subscriber base
and the cost-effective coverage of a broad service area, rather than providing
a framework for a wide range of high-capacity services with the necessary
reliability for delivery of telephone services. Accordingly, most existing
cable television systems do not typically have the capacity or architecture to
enter into the telephony business, nor do their operators typically have the
experience or infrastructure to quickly or effectively enter into the
provisioning of switch-based, usage sensitive services.
The data services industry is a relatively new and growing
business segment developed to meet consumer needs arising from the rapid
growth of initially simple services such as fax transmission to increasingly
complex and capacity consuming uses, such as local area networks and Internet
access, video teleconferencing and other high bandwidth applications.
Increasingly, demand for telecommunications services relating to data
transmission will require higher capacity platforms to deliver highly complex
material (including interactive applications) at speeds which will maximize
and promote rather than inhibit the utility of such services.
Widespread Changes in Telecommunications Industry
Both the telephone and cable television segments of the
telecommunications industry as well as overall network capacity requirements
are currently undergoing widespread changes brought about by, among other
things, (i) decisions of federal and state regulators which have opened the
monopoly local telephone and cable television markets to competition; (ii) the
ensuing transformation of the previously monopolistic telecommunications market
controlled by heavily regulated incumbents into a consumer-driven competitive
service industry; and (iii) the need for higher speed, higher capacity
networks to meet the increasing consumer demand for expanded
telecommunications services including broader video choices and high speed
data and Internet services. The convergence of these trends and the inherent
limitations of most existing networks have created opportunities for new types
of communications companies capable of providing a wide range of voice, video
and data services through new and advanced high speed, high capacity
telecommunications networks.
Opening of Telecommunications Markets
Divestiture of the Bell System. Until the passage of recent
federal legislative reform and other state and federal regulatory efforts to
expand competition into the local telephone market, the structure of the U.S.
telecommunications industry was shaped principally by the 1984
court-supervised divestiture of local telephone services from AT&T (the
"Divestiture") and other judicial and regulatory initiatives which were
designed primarily to implement structural and technical industry changes
through which competition could develop in the long distance market. Under
this structure, the Regional Bell Operating Companies ("RBOCs") and certain
other LECs were permitted to retain their monopolies in the provision of
local exchange services, but were required to connect their local subscribers
to the long distance services of AT&T and other IXCs. Under this regime, two
distinct industry segments developed; competitive IXCs, which offered
subscribers long distance telephone services between judicially defined local
access and transport areas ("LATAs"), and monopoly LECs, which offered
subscribers local and toll services within judicially defined LATAs, including
connection (or "access") to IXCs for interLATA long distance services. As a
result, the long-distance business became intensely competitive, with low
barriers to entry and many service providers competing in a commodity-type
market, while providers of local exchange services continued to face
relatively little competition.
Deregulation of Local Telephone Services. After the structural
and technical network changes were put in place following the Divestiture to
give IXCs other than AT&T "equal access" to the local exchange facilities of
the monopoly incumbent LECs, and with robust long distance competition began
to provide consumers with diverse services and lower rates, regulatory policy
gradually began to examine whether the competitive benefits which were being
experienced in the long distance marketplace as a result of Divestiture should
be expanded to local exchange services. While a small number of states and
the FCC had already adopted rules and regulations which opened certain limited
and discrete segments of the local exchange market to competition from CAPs
and CLECs offering primarily dedicated high-speed private line and some local
switching services to large business users, the passage of the 1996 Act in
February 1996 codified the pro-competitive policies on a national level and
required both the FCC and the state regulatory commissions to adopt dramatic
and sweeping changes in their rules and regulations in furtherance of those
policies. The 1996 Act required regulators to remove market entry barriers
and to enable companies like RCN to become full service providers of local
telephone service by, among other things, mandating that the incumbent LECs
provide interconnection and competitively priced network facilities to
competitors. In addition, the 1996 Act permits the incumbent LECs to offer
long distance interLATA services in competition with IXCs once they have
demonstrated that they have implemented changes to permit economically
efficient competition in their local markets for both business and residential
services. Re-entry into the long distance market has become a central
objective to all of the incumbent LECs due to the relatively modest capital
investment required and the prospect of attaining substantial operating
efficiencies in offering these services, as opposed to the extensive network
overhaul and the magnitude of the capital requirements that would be necessary
for the incumbent LECs to enter into video or other high-bandwidth services
using their own facilities. Although the incumbent LECs have begun to expand
the amount of fiber facilities in their networks, the incumbent LEC networks
are still largely copper wire-based, which limits their ability to expand into
video programming and other high capacity services.
Deregulation of Cable Television. Unlike the local telephone
market, the cable television market is not subject to regulatory or statutory
prohibitions on competition. Nevertheless, competition to incumbent
franchised cable television operators has developed in only a handful of
markets nationwide. To facilitate competition in the cable television
industry, the FCC developed a common carrier "video dialtone" (or "VDT")
alternative to franchised cable operation which would permit local telephone
companies to construct and operate transmission networks for the distribution
of video programming in competition with incumbent cable operators. Legal and
procedural challenges, however, as well as the significant financial and
other resources necessary to construct and operate such facilities, served to
delay implementation of this competitive alternative and to discourage many of
the incumbent LECs (and others who had been active proponents of VDT) from
actually entering into the video market. While its larger incumbent local
telephone provider competitors largely scaled back their plans to compete in
the video market, RCN did lead efforts to bring competition to the video
programming market by initiating fiber-optic based video programming
distribution in Boston and New York City under the VDT framework using the
existing network transmission services of MFS/WorldCom.
During the period in which the FCC endeavored to adopt and
implement its VDT policies as a vehicle for telephone companies to enter the
video market to provide competition in the cable industry, Congress also
experienced growing frustration at the lack of competition in the cable
industry and, in the absence of any significant competitive pressures to
improve the situation, passed legislation in 1992 providing for the regulation
of certain cable rates. Subsequently, as part of its general goal of
supplanting regulation with competition, the 1996 Act took further steps to
provide alternative regulatory structures to encourage entry into the
multichannel video programming distribution market. Given the lack of success
of the FCC's VDT efforts, Congress required that the VDT rules be terminated
and instead that the FCC adopt rules to implement a new "Open Video Systems"
("OVS") structure for telephone companies or others to deliver video services
through their networks. The OVS structure was specifically designed by the
Congress and the FCC to encourage more competition to local cable television
providers. Among other efforts to remove barriers which had discouraged
competition from developing in the video market, the 1996 Act specifies that
OVS providers, and any video programming providers ("VPPs") that lease
facilities from such OVS providers, may offer video services without obtaining
a local cable television franchise. Certain other obligations similar to
those placed on cable television operators, such as a gross receipts fee and
the transmission of public, educational and government programming, will also
apply to OVS providers.
Demand for High Speed, High Capacity Telecommunications
Services. The Company believes that, as a result of increased competition
and the development of new telecommunications products and services, the
telecommunications market has become increasingly consumer-driven, and
pricing, service quality and customer service are becoming more important than
loyalty to the incumbent providers. However, due to the inherent bandwidth
limitations of the existing copper wire networks, the incumbent LECs would be
required to undertake significant capital expenditures in order to offer high
speed, high capacity services and, to date, have instead focused primarily on
re-entering the long distance business which can be provisioned over their
existing facilities with modest investment. Similarly, constraints of
traditional coaxial cable television systems and lack of necessary
infrastructure have limited cable operators from offering switch-based, usage
sensitive services such as telephone and certain data services. As a result,
newly constructed facilities such as RCN's advanced fiber optic networks
provide a superior platform for providing cost effective, high speed, high
capacity telecommunications and enhanced telecommunications services.
The RCN Opportunity. The incumbent local telephone and cable
television providers have to date generally been slow to expand their services
beyond their traditional lines of business due primarily to the fundamental
limitations of their existing networks. In particular, the LECs have
generally not offered video programming services, nor have the incumbent cable
operators generally entered the telephone services market. RCN believes that
it will be able to offer a single-source package of bundled voice, video and
data services which are not yet generally available from any incumbent
telephone, cable or other providers. In addition, most of the other new
competitive entrants, including most CLECs, have focused almost exclusively on
providing telephone service to medium to large commercial customers and have
tailored the coverage area of their networks and the configuration of their
business operations to provision services accordingly. As a result, CLECs
have generally not yet begun to offer their telephone services to the
residential marketplace, or expanded their offerings to include video
programming services. Similarly, while a number of companies have begun to
market wireless alternatives to cable television service, those companies have
not generally begun to offer telephone services to their customers.
Accordingly, RCN believes that it is well-positioned to take advantage of the
new regulatory and market environment. By combining the enhanced telephone
and data services offered by CLECs with high quality video programming, RCN
acts as a single source provider of a wide range of voice, video and data
services to the residential market as well as to select institutional and
commercial customers with ready access to its facilities. RCN's integrated
service offerings are available either individually or in bundled packages,
providing the consumer with added choice and convenience. RCN's bundled
services are provided using state-of-the-art technology and are generally
provided at competitive prices and with superior customer service as compared
to RCN's existing competitors. As such, RCN believes that it is poised to
become an effective competitor in each of its markets.
Strategy
To address the opportunity to effectively deploy advanced fiber
networks, RCN has adopted the following strategies:
Development of Advanced Fiber Optic Networks. RCN seeks to
take advantage of the recent deregulation in the telecommunications industry
and the growing demand for telecommunications services primarily by developing
advanced fiber optic telecommunications networks specifically designed to
provide a single source for high speed, high capacity voice, video and data
services. RCN seeks to be the first operator of an advanced fiber optic
network providing the full range of these services in each of its target
markets. RCN believes that its newly built advanced fiber optic networks in
New York City and Boston and advanced fiber optic networks that it may develop
in the future will provide RCN with certain competitive advantages over
incumbent service providers using older equipment with inherent bandwidth
limitations and, in some cases, inferior signal quality and network
reliability. In addition, because RCN's advanced fiber optic networks will be
capable of delivering multiple services, RCN will have more potential
subscriber connections in its target markets than service providers using
their existing traditional copper wire or coaxial cable facilities to deliver
a single or limited services. RCN strives to connect its customers directly
to its advanced fiber optic network and, through such networks, to provide
services at rates that are competitive with those of the incumbent LECs and
cable operators and the major IXCs. RCN expects to compete in these markets
primarily on the basis of product offerings (including the ability to offer
bundled voice and video services), reliability, state-of-the-art technology
and superior customer service, as well as price.
Focus on Residential Customers in High Density Markets. The
Company's primary focus is on residential customers in high density areas.
The CLEC industry has primarily focused its networks on serving large
commercial customers, and the competitive alternatives that have emerged for
residential consumers have been for single or limited services. RCN believes
that it is unique in its markets in offering a wide range of bundled voice,
video and data services to customers in residential areas as well as
commercial accounts, and in striving to connect residential customers directly
to its advanced fiber optic network. RCN's services are provided at
competitive rates and in bundled service packages not typically available from
the incumbent service providers. The Company also serves certain commercial
accounts on or near its networks.
Utilize Strategic Alliances and Existing Facilities to Speed
and Reduce Cost of Entry. RCN seeks to speed and reduce the cost of its entry
into target markets through use of existing facilities and strategic
alliances. In New York City and Boston, RCN established an initial
distribution platform for its advanced fiber-based services through facilities
leased from MFS/WorldCom and RCN expects to significantly expand its network
in Boston through the facilities of BECO, its joint venture partner in Boston.
On August 1, 1997, RCN entered into a letter of intent with PCI, a subsidiary
of PEPCO, to develop an advanced fiber optic network in the Washington, D.C.
market. RCN has in place arrangements which allow it to lease certain
facilities owned by the incumbent LECs (unbundled local loops and T-1
facilities) to provide voice services. RCN has or will also utilized certain
components of the infrastructure of its established fiber/coaxial cable
televison operations. By utilizing existing facilities, RCN has been able to
enter the market quickly and efficiently and to reduce its up-front capital
investment.
Implement Subscriber-Driven Investment Strategy. RCN has
implemented a subscriber-driven investment strategy. As part of its
development plan for advanced fiber optic networks, RCN offers resale
telephone (and, in New York City, wireless video) on an interim basis to
customers located near its advanced fiber optic network. This allows RCN to
establish a customer base in advance of and concurrent with network expansion.
Depending on factors such as subscriber density, proximity to the advanced
fiber optic network and development costs, RCN will decide whether to extend
the advanced fiber optic network by leasing facilities (including incumbent LEC
unbundled loops and high capacity connections), by installing fiber or by
provisioning services on an interim basis through resale agreements. RCN
expects to continue its subscriber-driven investment strategy and to continue
to pre-market RCN services by offering resale telephone services in areas
targeted for expansion of advanced fiber optic network facilities. RCN will
consider rollout of its advanced fiber-based service to additional metropolitan
or high-density suburban areas if such rollout can be achieved on a
sufficiently economic basis.
RCN Services
RCN provides a wide range of local and long distance telephone,
video programming and data services, both individually and in bundled service
options.
RCN provides these services through a range of facilities
including its advanced fiber optic networks in New York City and Boston, a
wireless video system in New York City, its hybrid fiber/coaxial cable systems
in the states of New York (outside New York City), New Jersey and
Pennsylvania, and resale local and long distance telephony services.
Connections. The following table summarizes the development of
RCN's subscriber base:
<TABLE>
<CAPTION>
As of
------------------------------------------------
9/30/96 12//31/96 3/31/97 6/30/97
-------- --------- ------- -------
<S> <C> <C> <C> <C>
Connections(1)
Advanced Fiber Optic Networks
Voice........................................... -- -- -- 370
Video........................................... -- -- -- 1,060
Internet........................................ -- -- -- 81
------- ------- ------- -------
Subtotal.................................... -- -- -- 1,511
Other(2).......................................... 4,993 5,106 7,909 8,332
Resold Voice...................................... 1,750 1,875 2,315 4,672
Wireless Video ................................... 31,078 35,056 35,707 38,336
------- ------- ------- -------
Total RCN Telecom 37,821 42,037 45,931 52,851
------- ------- ------- -------
Hybrid Fiber/Coaxial Cable Operations(3).......... 177,844 179,932 180,169 181,790
------- ------- ------- -------
Total connections 215,665 221,969 226,100 234,641
======= ======= ======= =======
</TABLE>
(1) Because RCN delivers multiple services, the Company accounts for its
customer activity by the number of individual local telephone, video
programming or Internet access services, or "connections", purchased.
Consequently, a single customer purchasing local telephone, video
programming and Internet access constitutes three connections.
(2) RCN classifies connections provided over advanced fiber optic networks
within the "Other" category until the relevant network is capable of
providing voice, video and data services, including local telephone service
through an RCN switch. "Other" also includes, among other things, wireline
video connections serving the University of Delaware (4,474 connections at
June 30, 1997).
(3) In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in the Lehigh Valley area.
Set forth below is a brief description of RCN's services:
Voice. RCN offers full-featured local exchange telephone
service, including standard dial tone access, enhanced 911 access, operator
services and directory assistance in competition with the incumbent local
exchange providers and CLECs. In addition, RCN offers a wide range of
value-added services, including call forwarding, call waiting, conference
calling, speed dial, calling card, 800-numbers and voice mail. RCN also
provides Centrex service and associated features. RCN's local telephone rates
are generally competitive with the rates charged by the incumbent providers.
As of June 30, 1997, RCN had approximately 400 telephone service connections
on its advanced fiber optic networks and approximately 4,700 customers for
resold telephone service.
Through its RCN Commercial division ("RCN Commercial"), RCN
provides long distance telephone services, including outbound, inbound,
calling card, and operator services. These services are offered to
residential and business customers. At June 30, 1997 RCN Commercial had
approximately 13,500 customers. In the future RCN intends to offer long
distance telephone service predominantly to customers whom it expects will
eventually be connected to its own facilities.
Video Services. RCN offers a diverse line-up of high quality
basic, premium and pay-per-view video programming. Depending on the system,
RCN offers from 61 to 110 channels. RCN's basic video programming package
provides extensive channel selection featuring all major cable and broadcast
networks. RCN's premium services include HBO, Cinemax, Showtime and The Movie
Channel, as well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2.
RCN's StarCinema[SM] , available on the Company's advanced fiber optic
networks, utilizes the latest "impulse" technology allowing convenient impulse
pay-per-view ordering of the latest hit movies and special events instantly
from the customer's remote. RCN's "Music Choice" offers 30 different
commercial-free music channels delivered to the customer's stereo in digital
CD quality sound.
As of June 30, 1997, RCN had approximately 1,100 subscribers
for its video programming services provided over advanced fiber optic networks
in New York City and Boston. As of such date, RCN also had approximately
38,300 connections attributable to the wireless video system and approximately
181,800 connections attributable to the hybrid fiber/coaxial cable systems.
RCN also acts as a provider of DirecTV direct broadcast
satellite service to multiple dwelling units ("MDUs") in New York City.
Direct TV allows RCN to deliver an additional 175 channels of programming
including exclusive sports programming.
Internet Access and Data Transmission. RCN's StarPass[SM]
Internet service provides access for personal computers to RCN's advanced
fiber optic network for a reliable high speed connection to provide access to
electronic mail, World Wide Web, Internet chat lines and newsgroups and remote
access and file transfer services. RCN provides data transmission services
over its advanced fiber optic network either via two-way dial-up modem over
traditional telephone lines or via cable modem utilizing RCN's high capacity
network. RCN also offers private line point-to-point data transmission
services such as DS-1 and DS-3 with the capability to provide higher speed
connections as well.
Migration of Customers to Advanced Fiber Networks
RCN provides wireless video services to customers located near
its advanced fiber optic network in New York City and provides resale
telephone service with a view to extending the advanced fiber optic network
and fully activating RCN's own telephone switches to service many of those
customers. As RCN's advanced fiber optic network is extended into these areas
or buildings, customers receiving wireless video service in New York City will
be switched to the advanced fiber optic network from the wireless video
network, and the wireless video equipment will be used to provide service to
other customers in off-network premises. Similarly, as the advanced fiber
optic network is developed and switches are deployed, voice customers will be
switched to the advanced fiber optic network from resale accounts, thereby
allowing RCN to gain additional revenue from originating and terminating
access fees and larger margins and to control the related services and service
quality.
Strategic Relationships
RCN has developed a number of strategic alliances and
relationships in order to provide it with early entry and to reduce the cost
of entry into the market for telecommunications services. RCN expects to
continue to pursue opportunities that may be afforded by entering into
strategic alliances to facilitate network expansion and entry into new markets.
Relationship with MFS/WorldCom
RCN commenced development of its communications network by
entering into lease arrangements with MFS/WorldCom, allowing RCN initial
access to fiber optic networks owned by MFS/WorldCom in Boston and New York.
Through a construction cooperation agreement with MFS/WorldCom, RCN has also
been able to reduce the cost and time of installation of fiber in New York
City and Boston. Under certain other agreements, MFS/WorldCom has also agreed
to support RCN's efforts to implement OVS Service and to provide RCN with
local switched voice and data services for RCN's voice service business. The
following describes the terms of the main agreements between MFS/WorldCom and
RCN:
Fiber Agreements. RCN has entered into Fiber Agreements (the
"Fiber Agreements"), each dated May 8, 1997, with MFS/WorldCom, which owns or
has the right to use certain fiber optic network facilities (the "Fiber Optic
Facilities") in the Boston, Massachusetts and Borough of Manhattan, New York,
New York markets (the "Service Areas"). Pursuant to the Fiber Agreements,
MFS/WorldCom (i) will construct and provide extensions connecting the Fiber
Optic Facilities to buildings designated by RCN (the "Extensions") and (ii)
has granted to RCN the right to use certain dedicated fibers in the Fiber
Optic Facilities and the Extensions, except that RCN may not use such
facilities to deliver telephone services to commercial customers in the
Service Areas. In return, RCN has reimbursed MFS/WorldCom for the costs
MFS/WorldCom incurred to install, construct and acquire the Fiber Optic
Facilities constructed prior to March 31, 1997. RCN has further agreed to pay
all of the costs MFS/WorldCom incurs to (i) install, construct and acquire the
Fiber Optic Facilities constructed between March 31, 1997 and May 8, 1998 and
the Extensions, and (ii) maintain, and support RCN's use of, the Fiber Optic
Facilities and the Extensions. Unless earlier terminated upon the occurrence
of certain events set forth therein, including a change of control of RCN, the
Fiber Agreements terminate by their terms on January 1, 2007, provided that
(i) at such time the parties may agree to extend the Fiber Agreements for up
to 10 years or enter into other alternative arrangements, and (ii) under
certain circumstances, MFS/WorldCom is required to transfer the Extensions to
RCN.
Video Agreement. In connection with the Fiber Agreements,
affiliates of RCN and MFS/WorldCom have entered into the Video Agreement dated
May 8, 1997 (the "Video Agreement"). Pursuant to the Video Agreement,
MFS/WorldCom has agreed to use its reasonable good faith efforts to continue
to operate its video transport service until (a) RCN implements OVS services
in the Service Areas, (b) an order is issued by a regulatory authority
prohibiting the Video Agreement or terminating the OVS Certificates, (c) the
termination of the applicable Fiber Agreement in the applicable Service Area,
or (d) December 31, 1997. In consideration, RCN has agreed to reimburse
MFS/WorldCom for any obligations imposed upon MFS/WorldCom in connection with
its provision of Video Transport Service to RCN and, in the event RCN does not
implement OVS Service prior to December 31, 1997, RCN will pay MFS/WorldCom
15% of RCN's gross video receipts in the Service Areas earned since October
1995. RCN has already implemented OVS Service in Boston, and management
anticipates that RCN will implement OVS Service in New York City on or before
October 31, 1997, and that in any event, amounts payable to MFS/WorldCom under
the Video Agreement are not expected to exceed $700,000 as of December 31,
1997. The Video Agreement allows RCN to continue to operate its business
during the transition from the MFS/WorldCom video transport service platform
to the RCN OVS platform.
Telephone Service to Reseller Agreements. RCN and
MFS/WorldCom, through their affiliates, have also entered into Telephone
Service to Reseller Agreements (the "Telephone Service Agreements") pursuant
to which MFS/WorldCom has agreed to provide to RCN local switched voice and
data services. In exchange for MFS/WorldCom's services under the Telephone
Service Agreements, RCN will pay to MFS/WorldCom on a monthly basis
MFS/WorldCom's wholesale price for Telephone Service as determined from time
to time by MFS/WorldCom.
BECO Joint Venture
In September 1996, RCN and BECO, through wholly owned
subsidiaries, entered into a letter of intent to form a joint venture to
utilize 126 fiber miles of BECO's fiber optic network to deliver RCN's
comprehensive communications package in Greater Boston. The venture, in the
form of an unregulated entity with a term expiring in the year 2060, was
formed pursuant to a joint venture agreement dated December 23, 1996 (the
"Boston Joint Venture Agreement") providing for the organization and operation
of RCN-BECOCOM, LLC ("RCN-BECOCOM"). RCN-BECOCOM is a limited liability
company organized to own and operate an advanced fiber optic
telecommunications network (the "Network") and to provide, in the market in
and around Boston, Massachusetts (the "Boston Market"), voice, video and data
services, as well as the communications support component of energy related
customer services offered by BECO (collectively, the "Boston Services"). RCN
owns 51% of the equity interest in RCN-BECOCOM and BECO owns the remaining 49%
interest.
The closing of the transactions contemplated by the Boston
Joint Venture Agreement occurred on June 18, 1997. At the closing, (i) RCN
transferred to RCN-BECOCOM its business of providing Boston Services; (ii)
BECO transferred to RCN-BECOCOM access to and use of certain existing BECO
facilities; (iii) RCN and BECO made initial cash capital contributions to
RCN-BECOCOM; and (iv) the parties and/or their affiliates executed and
delivered (a) the Amended and Restated Operating Agreement of RCN-BECOCOM (the
"Operating Agreement"); (b) the Construction and Indefeasible Right of Use
Agreement (the "IRU Agreement"); (c) the Management Agreement (the "Management
Agreement"); (d) the Exchange Agreement (the "Exchange Agreement"); and (e)
the Joint Investment and Noncompetition Agreement (the "Joint Investment
Agreement").
Pursuant to the Operating Agreement, RCN and BECO are required
to make any additional capital contributions required by RCN-BECOCOM's annual
budget on a 51%/49% basis. In addition, certain fundamental business actions,
such as mergers, material acquisitions, sales of substantially all of the
assets, issuances of equity, liquidation or bankruptcy, material capital
expenditures, material affiliate transactions, material debt incurrence,
capital distributions and similar transactions require the approval of RCN and
BECO. Neither RCN nor BECO may transfer its interest in RCN-BECOCOM for three
years without the other's written consent. After three years, each party has
a right of first offer and "tag-along" rights with respect to certain
transfers by the other under certain conditions. Upon a change in control of
either RCN or BECO, the other party has the right to purchase all of the
equity interest in RCN-BECOCOM for fair market value, as determined by an
appraisal proceeding.
RCN will manage the business of RCN-BECOCOM pursuant to the
terms of the Management Agreement and, in consideration therefor, will receive
reimbursement for its reasonable costs, and a performance-based fee (based on
factors including the number of subscribers and operating cash flow) to be
determined by agreement of RCN and RCN-BECOCOM. The initial term of the
agreement expires on December 31, 2001. The agreement provides for automatic
successive three-year renewal periods, unless notice is given ninety days
before the end of the period.
Pursuant to the Joint Venture IRU Agreement, BECO will, for
certain agreed upon fees, (i) provide construction services to build out the
Network, (ii) make available to RCN-BECOCOM (a) all of the available capacity
of BECO's existing fiber backbone, and (b) the ability to use BECO's real
estate, poles, easements and other interests for the construction and
operation of the Network and (iii) maintain the Network. BECO's construction
obligations expire on June 17, 2007 and the term of the IRU Agreement
generally expires on December 31, 2060. One year before each respective
expiration date, BECO agrees to commence good-faith negotiations to extend
construction obligations beyond June 17, 2007 and to allow continued use of
BECO's facilities beyond December 31, 2060.
Under the Joint Investment Agreement, BECO will have the right
to acquire up to a 20% equity interest in any joint venture between RCN and an
electric utility company formed to provide any services similar to the Boston
Services in New England outside the Boston Market. BECO's joint investment
right shall terminate (i) upon BECO's stake in RCN-BECOCOM dropping below a
1/3 interest and (ii) on the later to occur of (a) June 17, 2002 or (b) two
years after RCN's stake in RCN-BECOCOM falls below a 1/3 interest. The
agreement also provides that neither RCN, BECO nor their affiliates will be
permitted to be involved in any other enterprise providing services similar to
the Boston Services in the Boston Market. This covenant not to compete will
survive for a period of two years after either party is no longer a member of
RCN-BECOCOM.
Pursuant to the Exchange Agreement, BECO will have the right at
the time of the Distribution and every two years thereafter to convert its
ownership interest in RCN-BECOCOM into the Common Stock of RCN pursuant to
specific terms and conditions, including exercise periods, appraisal
procedures and restrictions specifically set forth in the Exchange Agreement.
The number of shares of RCN Common Stock to be issued to BECO will be
determined by dividing (i) the appraised value of BECO's interest in
RCN-BECOCOM by (ii) the average closing trading price of Company Common Stock
over a period prior to the conversion. If BECO exercises its conversion
rights during the election period immediately following the Distribution, then
for purposes of that conversion, BECO may, in lieu of an appraisal proceeding,
exchange the amount of its cash contributions in 1997 for Company Common Stock
at a 5% discount from the prevailing market price. If BECO exercises its
conversion rights, BECO will remain obligated to make 49% of all cash
contributions by the parties and any cash contributions made after conversion
will result in it owning a portion of RCN-BECOCOM based on the value of
RCN-BECOCOM at the time of the contribution. BECO may exercise its conversion
rights from time to time. BECO's right to convert its joint venture interest
into Company Common Stock is subject to certain limitations designed to ensure
that the conversion does not jeopardize the tax free nature of the
Distribution. Subject to certain restrictions set forth in the Exchange
Agreement, BECO will also be entitled, upon exchanging its investment interest
in RCN-BECOCOM for Company Common Stock, to customary registration rights with
respect to such shares.
RCN expects to benefit from the ability to utilize BECO's large
fiber optic network, its focus on innovative technology, its sales and
marketing expertise and its reach into the market. In the future, the venture
may expand into energy management and property monitoring services. Starting
in Boston, the joint venture partners will consider further expansion into
surrounding markets. RCN anticipates that as a result of its access to the
extensive BECO network, RCN's reliance on and utilization of MFS/WorldCom
facilities in Boston will be reduced significantly.
Washington Joint Venture
On August 1, 1997, RCN Telecom Services Inc., a subsidiary of
RCN, and PCI, a wholly-owned subsidiary of PEPCO, entered into a letter of
intent (the "Letter of Intent") to form a joint venture (the "Washington Joint
Venture") which will own and operate a communications network to provide
voice, video, data and other communications services to residential and
commercial customers in the Washington, D.C. Market. The parties contemplate
that the Washington Joint Venture will be in the form of an unregulated
limited liability company, with a perpetual term, owned 50% by RCN and 50% by
PCI.
Pursuant to the Letter of Intent, the parties have agreed to
negotiate a definitive operating agreement (the "Definitive Agreement") within
60 days of the Letter of Intent or such later time as may be agreed by the
parties. It is contemplated by the parties that each will, within 30 days of
execution of the Definitive Agreement, make an initial cash capital
contribution to the Washington Joint Venture of $12,500,000. In addition, it
is contemplated that each party will contribute certain assets, contract
rights and experience to the venture. In particular, RCN is expected to
contribute certain customer accounts and building access agreements in the
Washington D.C. Market and will provide the Washington Joint Venture with the
benefit of certain agreements with suppliers of programming,
telecommunications equipment and other products and services (the "RCN
Agreements") at RCN's cost on commercially reasonable terms; PCI is expected
to make available to the joint venture access to and use of certain existing
facilities pursuant to an Indefeasible Right of Use Agreement and a Lease
Agreement to be negotiated between the parties on commercially reasonable
terms. The parties expect to enter into certain additional agreements,
including a Support Services Agreement whereby RCN will provide certain
support services to the Washington Joint Venture at RCN's cost for an interim
period, and an agreement providing the Washington Joint Venture with the
benefit of the RCN Agreements at RCN's cost.
Pursuant to the Definitive Agreement, RCN and PCI will be
required to make additional capital contributions required by the Washington
Joint Venture's annual budget. In the event that either party fails to make a
required capital contribution, the other party shall have the option to make
the capital contribution, and the parties' ownership interests in the venture
will be adjusted accordingly.
The Washington Joint Venture is expected to be managed by a
committee (the "Members Committee") on which RCN and PCI will have equal
representation. The Members Committee will, among other things, review and
approve the venture's operations and the implementation of plans and budgets,
and approve certain agreements with a value in excess of $50,000. The
Definitive Agreement is expected to contain customary deadlock resolution and
transfer provisions.
The closing of the venture will be subject to, among other
things, the completion of a satisfactory due diligence review by both
parties, approval by each party's board of directors, execution of the
definitive agreements and certain regulatory and other approvals. There can
be no assurance that these transactions will be successfully completed.
The Delivery Platforms
Overview of Advanced Fiber Networks
RCN's advanced fiber optic networks in Boston and New York City
are, and RCN expects that its future networks will be, designed to support
voice, video and data services via a switched, fiber-rich network architecture.
The Company's full service advanced fiber optic networks in Boston and New
York City consist of owned or leased fiber optic cables, local and long
distance digital switches, video headends, video and voice transmission and
distribution equipment and associated wiring and network termination
equipment. The Company's local telephone switching network (consisting of
Lucent 5ESS-2000 switches) is installed and fully operational in Boston and is
expected to be fully operational in New York City by year-end (in the interim,
RCN is utilizing switches owned by MFS/WorldCom on its New York City network).
The networks' leased fiber optic cables make up the fiber backbone, which acts
as the common signal transport medium for both digital signals (voice and
data) and analog signals (video). In both New York City and Boston, the
digital backbone transmission network utilizes synchronous optical network
("SONET") self-healing rings that provide high speed, redundant connections
for the delivery of RCN's voice and data services. Facility connections from
the backbone network to individual buildings or service areas are provided by
either leased facilities provided by MFS/WorldCom, BECO or the incumbent LEC,
or through RCN-owned fiber. RCN's fiber backbone includes over 5,267 fiber
miles in New York City and over 3,352 fiber miles in Boston. RCN owns two
switches (one in Boston and one presently being activated in New York) and two
General Instrument video headends that are installed and in service in both
Boston and New York City. As of June 30, 1997, RCN has connected 362 buildings
(310 in NYC and 52 in Boston) to its facilities.
Fiber optic systems are suitable for transmission of digitized
voice, data, video or a combination of these types of information. The main
benefits of deploying fiber in place of traditional coaxial cable or copper
wire result from its greater capacity, increased functionality, smaller size
and decreased requirements for periodic amplification of the signal. These
factors contribute to lower installation and maintenance costs and increase
the variety and quality of the service offerings. The inherent bandwidth
limitations of twisted pair copper wire historically used in telephone
networks present a substantial obstacle to the use of existing telephone
networks to provide video programming services. Although coaxial cable
provides substantially greater bandwidth than twisted pair copper wire, fiber
optic cable provides substantially greater bandwidth than coaxial cable.
Consequently, newly constructed fiber networks such as RCN's provide a
superior platform for delivering high speed, high capacity voice, video and
data services as compared to systems based on copper wire or coaxial cable
networks.
The fiber cable utilized by RCN's networks has the increased
capacity and bandwidth necessary for complex data and video transmission. The
fiber optic cable typically contains between 12 and 288 fiber strands, each of
which is capable of providing many telecommunications channels or "circuits".
Depending on transmission electronics, a single pair of glass fibers on RCN's
networks currently can transmit tens of thousands of simultaneous voice
conversations, whereas even with multiplexing equipment a typical pair of
copper wires can carry a maximum of 24 simultaneous conversations. Although
the LECs commonly use copper wire in their networks, they are currently
deploying fiber optic cable to upgrade portions of their copper based network,
particularly in areas served by RCN. RCN expects that continuing development
in communications equipment will increase the capacity of each optical fiber,
thereby providing even more capacity at relatively low incremental cost.
As the Company's network is further developed, it will be
dependent on certain strategic alliances and other arrangements in order to
provide the full range of its telecommunication service offerings. These
relationships include RCN's arrangements with MFS/WorldCom to lease portions
of MFS/WorldCom's fiber optic network in New York City and Boston, RCN's
joint venture with BECO under which the Company has access to BECO's extensive
fiber optic network in Greater Boston, RCN's proposed joint venture with PCI,
a subsidiary of PEPCO and RCN's arrangements to lease Bell Atlantic unbundled
local loop and T-1 facilities. See "--Strategic Relationships" and "--Voice
Services--Advanced Fiber Optic Networks". Any disruption of these arrangements
and relationships could have a material adverse effect on the Company.
Voice Services
Advanced Fiber Optic Networks. The Company's advanced fiber
optic networks in New York City and Boston utilize a voice network that
supports both switched and non-switched (private line) services. Individual
buildings are connected to the network backbone via fiber extensions that are
generally terminated on SONET equipment, which provide redundant and fail-safe
interconnection between the building and the RCN central office or switch
location. In situations where fiber extensions are not yet available, interim
facility connections can be provided by leasing special access facilities
through a leasing arrangement with MFS/WorldCom or the incumbent LEC. This
latter method enables RCN to provide voice and data services to off-net
subscribers who are not physically connected to RCN's advanced fiber optic
network. As RCN's network expands to reach more areas within a target market,
subscribers served by these temporary connections will be migrated to RCN's
advanced fiber optic network. Within a building (or small grouping of
buildings) a voice service hub is established by installing an Integrated
Digital Loop Carrier ("IDLC") device, which acts as the point of interface
between the SONET backbone facility and the intra-building wiring. Each IDLC
is installed with a standby power system and is capable of serving up to 672
lines. The IDLC is capable of supporting a wide range of both non-switched
services (DS-1, digital data) and switched voice services and features
including ISDN, Custom Calling and CLASS features. Within each building,
internal wiring (twisted pair copper cable) connects the IDLC to the customer
premises and the customer-owned telephone equipment. In certain instances,
voice service is extended to other buildings in the building group or cluster
via either fiber optic cable or twisted pair copper cable. At the time of
initial wiring, RCN generally installs wiring in excess of its initial
requirements, in order to meet future subscriber demand.
Video Programming
Advanced Fiber Optic Networks. There are presently two video
headend locations within RCN's advanced fiber optic networks in New York City
and Boston. The video headends consist of optical transmitters, optical
receivers, satellite receivers, signal processors, modulators, encoding
equipment and network status monitoring and automated tape distribution
equipment. From the headend, the video signal is distributed to individual
fiber nodes or receivers via the same fiber cable backbone used to deliver the
voice and data service. The fiber cable terminates in a fiber optic receiver
within an individual building or service area. From the fiber node, coaxial
cable and related distribution equipment is used to distribute the video
signals to the customer premises. The bandwidth of the video distribution is
750 MHz, which is capable of supporting 110 video channels. This distribution
plant is specifically designed to be predominantly fiber-based, which
increases the reliability and improves the quality of the services delivered
compared to traditional cable television distribution architectures.
Wireless Video. RCN also owns and operates a "wireless video"
television system (which was formerly operated as Liberty Cable Television of
New York, the assets of which were acquired by RCN in 1996) using
point-to-point 18GHz microwave technology. RCN is utilizing this system in New
York City as an alternate platform for delivering television programming to
buildings that are not yet connected to the advanced fiber optic network. RCN
expects that the majority of the buildings currently served by the wireless
service will ultimately be connected to the network, to the extent that
connection is feasible. As buildings are connected to the RCN network, RCN
will reuse the microwave equipment to provide service to other customers in
off-network premises. The transmission equipment and microwave services used
to provide RCN's wireless service are provided by Bartholdi Cable, which
formerly operated Liberty Cable Television of New York. Bartholdi Cable has
agreed to provide transmission services to RCN until RCN has either converted
the subscribers to its advanced fiber optic network or has obtained FCC
authority to provide such services pursuant to its own licenses. In addition,
Bartholdi Cable has agreed to transfer to RCN the transmission equipment on
demand. Bartholdi Cable's obligation to provide transmission services is
subject to Bartholdi Cable having authority to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are currently being examined by the FCC.
It is too early to judge the likely outcome of that proceeding. Because of
the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to RCN, the Company has filed its own license
applications at the FCC for all of the microwave transmission paths which are
currently being used by Bartholdi Cable to provide transmission services to
RCN. There can be no assurance that RCN will be able to obtain its own FCC
license.
Hybrid Fiber/Coaxial Cable Systems. RCN owns and operates
hybrid fiber/coaxial cable television networks in Pennsylvania, New Jersey and
New York State (outside of New York City), all within 75 miles of New York
City. These networks offer expanded bandwidth and a platform for two-way
services, and have an aggregate of 513 route miles of fiber optic cable. The
New York system includes 211 route miles of fiber optic cable serving 89 nodes
from one head-end. Approximately 70% of the New York system is two-way active
750 MHz plant with 82 active channels of programming. The New Jersey system
has deployed 144 route miles of fiber optic cable (over 30 miles of which is
two-way active) from two head-ends, and generally operates a 400/450 MHz plant
providing 61 channels of video programming. The Pennsylvania system operates
2,577 miles of coaxial cable and over 158 route miles of fiber with 41 nodes
from one headend, operating at 550 MHz with 78 active channels. All of the
Company's hybrid fiber/coaxial cable systems are 100% one-way addressable.
RCN also owns a separate high capacity fiber optic ring (84 fibers) in
Pennsylvania (covering approximately 25 route miles) designed and constructed
as a competitive access network.
These fiber-rich networks provide a basic fiber optic platform
capable of enhancement for supporting two-way services, such as high-speed
Internet services, in the future. RCN is presently expanding the fiber
capacity of certain of these fiber/coaxial cable television networks so that
they will be capable of delivering switched two-way services in the future.
In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in the Lehigh Valley area.
Data Services
Internet access and data transmission services are currently
provided over the advanced fiber optic network via dial-up modems facilitated
through the RCN voice network in on-net subscriber applications. In off-net
situations, subscribers use conventional dial-up modems through the incumbent
LEC network to access RCN's Internet transmission network. RCN is beginning
to offer Internet and data transmission services via cable modems. Cable
modems, which utilize the broadband coaxial plant, offer higher speed access
for data transmission than the speeds achieved by conventional telephone
dial-up techniques.
Hybrid Fiber/Coaxial Cable Systems
RCN's hybrid fiber/coaxial cable systems were operated by C-TEC
prior to the Distribution. The following table summarizes the development of
the hybrid fiber/coaxial cable systems over the last five years:
<TABLE>
<CAPTION>
As of
As of December 31, June 30,
--------------------------------------------------------------- ---------
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed............................ 115,394 118,216 119,761 282,836 283,940 288,641
Basic Subscribers....................... 83,068 87,660 92,140 176,131 179,932 181,790
Basic Penetration....................... 72.0% 74.2% 76.9% 62.3%(1) 63.4% 63.0%
Average Monthly Revenue per Subscriber
For Last Month of the Period........... $41.48 $40.98 $37.67 $36.73(1) $39.99 $42.87
</TABLE>
(1) Decline in basic penetration levels and average monthly revenue per
subscriber in 1995 reflects the acquisition of the Pennsylvania cable
systems, which are in a market in which a competing franchisee also offers
service.
The service area for these cable television networks enjoy
favorable customer demographics. The New York and New Jersey systems
primarily serve high growth affluent bedroom communities in suburban New
York City, with 28,522 and 74,242 connections at June 30, 1997,
respectively. The system in New York State serves ten municipalities in
Duchess, Putnam and Westchester Counties, approximately 45 miles north of
New York City. The New Jersey system serves 31 contiguous municipalities
in Hunterdon, Mercer, Morris and Somerset Counties, approximately 50 miles
west of Manhattan. The Pennsylvania system, which is the largest
competitive cable television system in the United States, serves
Pennsylvania's Lehigh Valley area including the cities of Allentown,
Bethlehem and Easton, and virtually all of Lehigh and Northampton Counties,
and is located less than 10 miles west of the Company's New Jersey system.
Interconnection
Because access to the public switched telephone network is an
essential component of any regional or national telecommunications network,
interconnection is critical to RCN's ability to provide voice and data
services. Bell Atlantic and the other incumbent LECs and independent
telephone companies are required to provide interconnection to CLECs such as
RCN pursuant to the facilities-based interconnection requirements of Section
251 of the 1996 Act. Under the 1996 Act, the RBOC's ability to offer
inter-LATA long distance service is contingent upon their ability to create an
environment allowing economically-efficient competition in their local markets
for both business and residential services.
Although implementation of the Section 251 interconnection
requirements is presently stayed by court order, RCN has achieved
interconnection through comprehensive telephone service co-carrier
interconnection agreements with Bell Atlantic and Sprint-New Jersey covering
their service areas in ten states and the District of Columbia in the
Northeast and New England-Middle Atlantic corridor areas. These agreements
will remain in effect regardless of the outcome of the proceedings regarding
the FCC's Section 251 regulations. RCN's interconnection agreements with Bell
Atlantic cover its service areas in the states of Massachusetts, New York,
Vermont, New Hampshire, Maine, Rhode Island, Delaware, Maryland, New Jersey,
Pennsylvania and Virginia and the District of Columbia. The agreement with
Sprint-New Jersey covers its service area in the State of New Jersey. All of
these agreements, with the exception of the Sprint-New Jersey agreement (which
is currently under consideration by the New Jersey Board of Public Utilities)
have been approved by the state regulatory commissions pursuant to Section 252
of the Communications Act of 1934, as amended by the Telecommunications Act of
1996 (the "Communications Act"). RCN believes it has more interconnection
agreements with incumbent LECs than any other company focused primarily on the
residential telecommunications market.
The terms of RCN's interconnection agreements with the
incumbent LECs include the following provisions: (i) interconnection at any
technically feasible point within their networks, equal in quality to what the
incumbent LEC provides to itself or to affiliates, (ii) exchange of all local
traffic at a fully reciprocal and identical rate; (iii) receipt by RCN of
access charges for long distance calls made to and from its customers,
including full "pass through" to RCN of such compensation on number
portability; (iv) interim number portability arrangements to allow customers
to keep their telephone numbers when they switch carriers; (v) unbundled
network elements, including local loop transmission from the incumbent LEC's
central offices to the customer's premises distinct from local switching or
other services; (vi) nondiscriminatory access to 911 and emergency 911
services; directory assistance services to allow RCN's customers to obtain
telephone numbers; operator call completion services and white pages directory
listings for RCN's customers; and (vii) access to the poles, ducts, conduits
and rights-of-way owned or controlled by the incumbent LEC at
nondiscriminatory rates. The interconnection agreements generally have an
initial term of three years and are cancellable thereafter at 90 days' notice.
Resale Arrangements
Resale of Bell Atlantic Local Telephone Services
RCN provides local telephone service on a resale basis to
customers not connected to the advanced fiber optic facilities. As of June
30, 1997, RCN had 4,672 customers for local telephone services provided through
agreements to act as a reseller of Bell Atlantic local telephone services.
RCN offers its resale customers competitive telephone rates and RCN's superior
customer service. Resale customers are billed by RCN and RCN personnel
provision customer service requests by coordinating with the incumbent LECs on
the customers' behalf.
RCN has entered into agreements to act as a reseller of Bell
Atlantic local telephone services, which enable RCN to grow its subscriber
base by offering telephone services in advance of connecting the customers to
an advanced fiber optic network. RCN's agreements with Bell Atlantic allow
RCN to purchase at a "wholesale" discount (the amount of which is determined
by regulatory commissions in each state) any telephone services that those
companies offer to their end users, such as local exchange services, vertical
features including Caller ID, Call Waiting, etc., and regional toll calls.
The agreements provide that RCN will be entitled to the most favorable terms
and conditions, including wholesale discounts, available to any
telecommunications carrier reselling similar services.
Long Distance Resale
RCN Commercial provides long distance telephone services,
including private line, operator and calling card services, to residential and
business customers throughout the United States. Such services are provided
through an owned and leased switching network utilizing leased interconnection
facilities and long distance resale. RCN provides on network origination and
termination of long distance telephone services throughout the Mid-Atlantic
and New England states. For call origination and completion throughout the
rest of the country, RCN has various resale agreements. Specifically, RCN has
contracted with LCI for 800/888 origination, Frontier for off network
origination of outbound calling and various carriers for terminating calls.
MFS/WorldCom Resale
RCN has entered into an agreement with MFS/WorldCom relating to
resale of MFS/WorldCom services. See "--Strategic Relationships."
Direct TV
In October 1996, RCN signed an agreement with DirecTV to
deliver DirecTV's high-power direct broadcast satellite service to MDUs in New
York City. DirecTV allows RCN to offer an additional 175 channels of
programming including exclusive sports programming.
Marketing
RCN Telecom Services
RCN focuses its marketing efforts on residential customers in
high-density areas, with an initial focus on residential customers located on
or near RCN's current or proposed advanced fiber optic networks. Through these
advanced fiber optic networks, RCN is able to offer a wide range of
telecommunication services, including bundled service options, and to offer
its services at rates that are competitive with the incumbent LECs and cable
television operators and the major IXCs. RCN believes that quality of
service, superior technology and the ability to offer bundled services, as
well as price, will be more important to its customers than brand-name
recognition. Although RCN's initial marketing focus has been on residential
customers, it also will seek to provide communications services to commercial
customers located on its advanced fiber optic networks wherever feasible,
particularly with respect to small and medium size businesses in Boston and in
other areas outside of New York City, including new markets. RCN will also
market its advanced fiber-based services to institutional accounts, such as
hotels, universities and hospitals.
RCN has a team of direct sales personnel calling on targeted
customers. This team has salespeople dedicated to selling commercial accounts
and salespeople dedicated to selling to residential households. This is done
with a combination of lead follow-up and cold calling. Prospective commercial
customers are typically offered local and long distance voice services, with
options for video and data service as well. Prospective residential customers
are solicited as the fiber network is activated at the customer location and
the complete array of RCN services is offered, with the choice of a discounted
bundled package or individual service selections.
RCN markets its telephone services both as separate customer
options for local voice, long distance, video, and data access, and as a
bundled discounted package from a single service provider. RCN advertises its
services and availability through television, radio and newspapers, as well as
on bus shelters, subway stations, billboards, and other local outlets, and
recently launched a mass-media advertising campaign in New York City and
Boston. Customer response is generally channeled to 1-800-RING-RCN or
www.rcn.com. Advertising is supported via targeted direct mail and
telemarketing. Customers are offered special incentives to purchase more than
one service from RCN. For example, as a six-month introductory offer, New
York City customers purchasing both video and local voice service are
currently eligible for a basic cable rate reduction (from $24.95 to $19.97)
and a free basic voice line (a $6.60 value).
RCN has employed specific teams dedicated to offering service
to customers in MDUs in high-density metropolitan areas. First, an access
agreement team makes presentations to owners/managers of MDUs seeking to
obtain private access agreements. This team also assists with presentations
to municipal officials in connection with applications for OVS license
agreements and franchise agreements. As of June 30, 1997, RCN has obtained
505 access agreements covering over 102,000 units in MDUs in New York City and
Boston and surrounding communities (markets of 2.9 million households and
770,000 households, respectively). Access agreements permit the installation
of electronics and wiring to service the buildings and typically provide a
term of access of 5-10 years. Of RCN's current access agreements, 12 % expire
within the next three years, 16 % expire in 3-5 years and 72% expire
thereafter. The access agreements generally provide for non-exclusive access,
but for exclusive marketing assistance, whereby the building management
promotes and assists in the promotion of RCN's services on an exclusive basis.
As an incentive, RCN may negotiate a success-based marketing payment to the
building owner. This payment takes the form of either a percentage of
revenue, or a reduced rate for services. RCN has also employed bulk service
agreements pursuant to which RCN provides services (generally video services)
at a flat subscription rate covering all units in the residential building
(typically, a condominium or cooperative apartment building) or institution.
RCN believes that bulk sales contracts are a useful vehicle for early entry
into a market, but expects the majority of its future agreements to facilitate
the purchase of services on an individual basis.
Second, a sales team, led by a group of customer account
managers, seeks to solidify the relationships with the building
owners/management, by coordinating the installation process, organizing the
initial marketing and promotion at each building, and selling RCN services to
each building resident. Usually, after an announcement and informational
package is distributed to each building resident, a lobby demonstration and
enrollment event takes place over several evenings. Residents are offered
free installation and convenient appointments. After the initial sales and
installation process is completed, the customer account manager works with the
building owner/manager to maximize ongoing penetration, especially through the
signup of new move-in residents.
RCN has opened two high-tech visitor centers in prominent
locations in Boston and New York City, where potential customers can sample
RCN's services. A network operations center including a graphic representation
of the RCN network is on view at each location.
Hybrid Fiber/Coaxial Cable Television
Sales and marketing to customers served by the Company's hybrid
fiber/coaxial cable systems is accomplished through a variety of means
including door-to-door sales, direct mail, telemarketing, incentive programs
and print and broadcast advertising. In addition to marketing efforts
targeting new subscribers, the Company conducts periodic campaigns to
encourage existing customers to purchase higher levels of service.
Customer Service and Billing
RCN has implemented a flexible, customer-service oriented
approach which RCN believes differentiates it from the mass-market strategy of
the incumbent providers. RCN provides customer service 24 hours a day, seven
days a week from an established central call center located in Dallas,
Pennsylvania. The facility utilizes state of the art technology which allows
communication with subscribers, field technicians and the Company's field
offices. In 1996, approximately 90.5% of calls placed to the facility were
answered in 30 seconds or less. Additionally, the facility initiates 180
technician service routes per day. The technical staff consistently maintains
an on-time appointment percentage of 99.8%. In order to maximize efficiency,
all service trucks are equipped with two-way radios and supervisors' trucks
are equipped with cellular phones. RCN's customer service professionals,
installers and technicians have been professionally trained, and many of the
service technicians are trained to handle both voice and video service. RCN
believes that its infrastructure for billing and customer service will provide
a competitive advantage in expanding into new markets.
RCN's advanced fiber optic network is continuously monitored
for quality control and capacity issues, pursuant to a control system
featuring 16 alarm monitor points per hub site and automated housekeeping
alarms. Approximately 90% of RCN's advanced fiber-based video services are
delivered using addressable set-top equipment permitting monitoring and
customer service to be handled from the remote operations center.
Billing services for video are provided by CableData while RCN
telephony billing services are provided by Consolidated Communications Systems
and Services. At the present time, RCN customers receive separate billing
statements for video and telephone service although RCN intends to offer a
single billing option in the future.
Account piracy is monitored by ongoing field audits and, in
RCN's advanced fiber optic networks, through use of state of the art
scrambling systems. Potential new customers are generally screened for
credit history before being authorized for service. RCN employs a full-time
credit and collection staff as well as a group that seeks to minimize toll
fraud by detecting and monitoring suspicious calling patterns.
Programming and Suppliers
RCN has secured license arrangements with all of its desired
programming suppliers, some of which provide volume discount pricing
structures and/or offer marketing support to the Company. Many of these
arrangements are extensions of long-standing agreements entered into by or on
behalf of the Company's hybrid fiber/coaxial cable systems, and some are newly
negotiated based upon RCN's OVS certifications. RCN has generally obtained
these license arrangements on terms and conditions that it considers favorable.
RCN programming arrangements include arrangements for basic
video channels, premium channels including multi-plexing, pay-per-view movies
and events, adult entertainment, electronic program guide services and digital
music services, as well as retransmission arrangements for relevant network
broadcasters.
The Company generally pays a monthly fee per subscriber per
channel for programming purchased from its suppliers. 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 future contract renewals for video
providers such as the Company will result in programming costs exceeding
current levels, particularly for sports programming.
A wide range of national manufacturers are the primary sources
of supplies, equipment and materials utilized in the development and
enhancement of the Company's networks. RCN has entered into Master Purchase
Agreements with certain equipment suppliers which enable it to purchase video
and switching equipment on terms which it considers favorable. The Company
anticipates that the costs for these supplies, equipment and materials 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.
RCN Commercial
RCN Commercial, a division of RCN's wholly owned subsidiary RCN
Long Distance Company, provides switched-based resale long distance services
to customers on the advanced fiber optic network as well as other customers.
RCN Commercial operates the long distance business formerly operated by C-TEC,
except within the Commonwealth Service Territory. During 1996, RCN obtained
certification in forty-seven states. RCN Commercial also provides local
telephone service to commercial customers. As of June 30, 1997, RCN
Commercial had approximately 15,200 long distance customers.
International
The Company owns a 40% interest in Megacable, the second
largest cable television provider in Mexico. Megacable owns 22 wireline cable
systems in Mexico, principally on the Pacific and Gulf coasts and including
Guadalajara, the second largest city in Mexico, Hermosillo, the largest city
in the state of Sonora and Veracruz, the largest city in the state of
Veracruz. At June 30, 1997 these systems passed approximately 622,000 homes
and served approximately 176,000 subscribers. Megacable had revenues of $23.2
million for the year ended December 31, 1996 and $14.3 million for the six
months ended June 30, 1997. Recent financial results for Megacable expressed
on a US GAAP basis and subscriber data are summarized below:
<TABLE>
<CAPTION>
As of or for the Year Ended As of or for the Six Months Ended
December 31, June 30,
1995 1996 1996 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
US GAAP
Revenue.................................. 20,841 23,244 10,882 14,245
Net Income............................... 5,802 10,221 4,603 3,979
RCN Equity in Earnings of Megacable (1).. (3,061) (2,190) (1,299) (1,549)
Accumulated Cash......................... 25,886 29,617 28,923 28,090
Total Assets............................. 62,035 67,826 66,738 71,507
Total Liabilities........................ 9,372 6,575 9,383 6,278
Net Worth................................ 52,664 61,251 57,355 65,229
Other Data
EBITDA(2)................................ 8,154 10,183 4,741 5,753
EBITDA Margin(2)......................... 39% 44% 44% 40%
Subscribers.............................. 177,317 178,664 163,312 176,447
</TABLE>
(1) Represents RCN's portion of the Megacable net income and the amortization
of imputed goodwill.
(2) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry
to analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period
and should not be considered as an alternative to cash flows from
operating, investing or financing activities as determined in accordance
with U.S. GAAP. EBITDA is not a measurement under U.S. GAAP and may
not be comparable with other similarly titled measures of other
companies. EBITDA is used by Megacable and the Company to assess the
extent to which cash flows are available for replacement and
modernization of plant, to offer new services to customers, to further
improve the quality of service and to fund new investment
opportunities.
Megacable is presently expanding the fiber capacity of certain
of its systems to provide high-speed data services and potentially voice
services. Specifically, Megacable has built out its systems in Veracruz,
Jalapa, Tepic and certain neighborhoods in Guadalajara using hybrid
fiber/coaxial network architecture, to provide a fiber optic cable
"backbone" capable of providing these services.
Additionally, Megacable presently holds a 99% interest in
Megacable Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license
from the Mexican government to allow it to build a fiber optic network in
Mexico City, Monterrey and Guadalajara. MCM intends to use this network to
provide local voice and high speed data services in these cities, principally
to commercial customers in Mexico City.
Competition
Overview
RCN competes with a wide range of service providers for each of
the services that it provides. Virtually all markets for voice and video
services are extremely competitive, and RCN expects that competition will
intensify in the future. In each of the markets in which it offers voice and
video programming services, RCN faces significant competition often from
larger, better-financed incumbent local telephone carriers and cable companies,
and RCN often competes directly with incumbent providers which have
historically dominated their respective local telephone and cable television
markets. These incumbents presently have numerous advantages as a result of
their historic monopoly control of their respective markets. However, RCN
believes that most existing and potential competitors will, at least
initially, provide narrower service offerings over limited delivery platforms
as compared to the wide range of voice, video and data services that will be
provided over RCN's fiber-based networks, thereby providing RCN with an
opportunity to achieve important market penetration.
With respect to local telephone services, RCN competes with the
incumbent LECs, and alternative service providers including CLECs. Commercial
mobile radio services providers, including cellular carriers (such as Bell
Atlantic Mobile Services), personal communications services ("PCS") carriers
(such as Sprint Spectrum), and enhanced specialized mobile radio services
("ESMRS") providers (such as NexTel), may also become a source of competitive
local and long distance telephone service. However, RCN believes these
operators may primarily use competitive access services to transport their
calls among their radio transmitter/receiver sites through networks that avoid
the incumbent LECs with whom they compete.
With respect to long distance telephone services, RCN faces,
and expects to continue to face, significant competition from the IXCs,
including AT&T, Sprint and MCI, which account for the majority of all long
distance revenue. The major long distance service providers benefit from
established market share and from established trade names brought about by
nationwide advertising. RCN, however, regards its long-distance service as a
complementary service rather than a principal source of revenue. Certain
IXCs, including AT&T, MCI and Sprint, have also announced their intention to
offer local services in major U.S. markets using their existing infrastructure
in combination with resale of incumbent LEC service, lease of unbundled local
loops or other providers' services.
All of the Company's video services 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. Among the alternative video
distribution technologies are home satellite dish earth stations ("HSDs")
which enable 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. RCN faces additional competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. 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 the Company's various video
distribution systems. These technologies include, among others, DBS service
whereby signals are transmitted by satellite to receiving facilities located
on customer premises. The Company expects that its video programming services
will face growing competition from current and new DBS service providers. RCN
also competes with wireless program distribution services such as
multi-channel multipoint distribution service ("MMDS") which use low-power
microwave frequencies to transmit video programming over-the-air to
subscribers. 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 RCN 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 video industry or on the operations of the Company.
RCN believes that among the existing competitors, the incumbent
LECs, incumbent cable providers and the CLECs provide the most direct
competition to RCN in the delivery of "last mile" connections for voice and
video services.
Incumbent LECs
In each of its target markets for advanced fiber optic
networks, RCN faces, and expects to continue to face, significant competition
from the incumbent LECs (including Bell Atlantic in New York City and Boston),
which currently dominate their local telephone markets. RCN competes with
the incumbent LECs in its markets for local exchange services on the basis of
product offerings (including the ability to offer bundled voice and video
services), reliability, state-of-the-art technology and superior customer
service, as well as price. RCN believes that its advanced fiber optic
networks provide superior technology for delivering high speed, high-capacity
voice, video and data services as compared to the primarily copper wire based
networks of the incumbent LECs. However, the incumbent LECs have begun to
expand the amount of fiber facilities in their networks and to prepare to
re-enter the long distance telephone service market and, in addition, have
long-standing relationships with their customers.
In addition, under the 1996 Act, and ensuing federal and state
regulatory initiatives, barriers to local exchange competition are being
removed. The introduction of such competition, however, also establishes the
predicate for the incumbent RBOCs, such as Bell Atlantic, to provide in-region
interexchange long distance services. The incumbent RBOCs are currently
allowed to offer "incidental" long distance service in-region and to offer
out-of-region long distance service. Once the incumbent RBOCs are allowed to
offer in-region long distance services, they will also be in a position to
offer single source local and long distance service similar to that offered by
RCN and proposed by the three largest IXCs (AT&T, MCI and Sprint). The
Company expects that the increased competition made possible by regulatory
reform will result in certain pricing and margin pressures in the
telecommunications services business.
RCN has sought, and will continue to seek, to provide a full
range of local voice services in competition with incumbent LECs in its
service areas. The Company expects that competition for local telephone
services will be based primarily on quality, capacity and reliability of
network facilities, customer service, response to customer needs, service
features and price, and will not be based on any proprietary technology. As a
result of the comparatively recent installation of RCN's advanced fiber optic
networks, its dual path architecture and the state-of-the-art technology used
in its networks, RCN may have capital cost and service quality advantages over
some currently available local networks relied upon by the incumbent LECs, as
well as the competitive advantage provided by the ability to deliver a bundled
voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a
wide variety of video services directly to subscribers in competition with
RCN. 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.
Incumbent Cable Television Service Providers
Certain of RCN's video service businesses compete with
incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time-Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes primarily with Time-Warner Cable. RCN
believes that the expanded capacity and fiber-to-node architecture of its
advanced fiber optic networks in New York City and Boston make it better
equipped to provide high-capacity communications services than coaxial cable
based networks utilizing "tree and branch" architecture. RCN's Pennsylvania
hybrid fiber/coaxial cable television system competes with an alternate
service provider, Service Electric, which also holds a franchise for the
relevant service area.
Since cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis, and 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.
CLECs and Other Competitors
RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the markets in which RCN offers
its services. Other CLECs such as Teleport Communications Group, compete for
local telephone services, although they have to date focused primarily on the
market for corporate customers. In addition, potential competitors capable of
offering private line and special access services also include other smaller
long distance carriers, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators and private networks
built by large end-users, including Winstar, Dualstar and New Vision.
However, RCN believes that, at least initially, it is relatively unique in its
markets in offering bundled voice, video and data services to customers in
residential areas, and in striving to connect residential customers directly
to its advanced fiber optic network.
Other new technologies may become competitive with services
that RCN can offer. Cellularvision, a provider of local multipoint
distribution service ("LMDS"), recently began offering wireless Internet and
video programming services in New York City and has announced plans to offer
telephone service in the future. Advances in communications technology as
well as changes in the marketplace and the regulatory and legislative
environment are constantly occurring. In addition, a continuing trend toward
business combinations and alliances in the telecommunications industry may
also create significant new competitors to RCN. The Company cannot predict
whether competition from such developing and future technologies or from such
future competitors will have a material impact on its operations.
Regulation
The telecommunications services offered by the Company are
subject to federal, state, and local government regulation. The 1996 Act,
which became effective in February 1996, introduced widespread changes in the
regulation of the communications industry, including the local telephone, long
distance telephone, data services, and television entertainment segments in
which the Company operates. The 1996 Act was intended to promote competition
and decrease regulation of these segments of the industry. The law delegates
to the FCC (and in some cases the states) broad regulatory and administrative
authority to implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and cable television businesses, preempts many
of the state barriers to local telephone service competition that previously
existed in state and local laws and regulations, and sets basic standards for
relationships between telecommunications providers.
Among other things, the 1996 Act removes barriers to entry in
the local exchange telephone market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow incumbent RBOCs
to enter the long distance market within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local
exchange services. Numerous parties have appealed certain aspects of these
regulations. The appeals have been consolidated and are being reviewed by the
U.S. Court of Appeals for the Eighth Circuit, which has stayed certain of the
FCC's pricing and nondiscrimination regulations. RCN has entered into
competitive interconnection agreements using the federal guidelines
established in the FCC's interconnection order, which agreements will remain
in effect regardless of the outcome of the proceedings regarding the FCC's
regulations. Portions of the FCC's order providing for number portability
remain in effect within the 100 largest Metropolitan Statistical Areas
("MSAs"), and are slated for implementation beginning in March 1998.
The 1996 Act also makes far-reaching changes in the regulation
of the video programming transmission services offered by RCN, including
changes to the regulations applicable to video operators, the elimination of
restrictions on telephone company entry into the video business, and the
establishment of a new OVS regulatory structure for telephone companies and
others to offer such services. Under the 1996 Act, local telephone companies,
including both incumbent LECs such as Bell Atlantic, and CLECS such as RCN,
may provide service as traditional cable television operators subject to
municipal cable television franchises, or they may opt to provide their
programming over non-franchised open video systems subject to certain
conditions, including, but not limited to, making available a portion of their
channel capacity for use by unaffiliated program distributors and satisfying
certain other requirements, including providing capacity for public,
educational and government channels, and payment of a gross receipts fee
equivalent to the franchise fee paid by the incumbent cable television
operator. RCN is one of the first CLECs to provide television programming
over an advanced fiber optic network pursuant to the OVS regulations
implemented by the FCC under the 1996 Act.
Regulation of Voice Services
RCN's voice business is subject to regulation by the FCC at the
federal level with respect to interstate telephone services (i.e. those that
originate in one state and terminate in separate states). State regulatory
commissions have jurisdiction over intrastate communications; (i.e. those that
originate and terminate in the same state).
State Regulation of Intrastate Local and Long Distance
Telephone Services. RCN's intrastate telephone service in New York City and
Boston is regulated by the States of New York and Massachusetts, respectively.
In New York, RCN's subsidiary RCN Telecom Services of New York, Inc.
("RCN-NY") is authorized by the New York Public Service Commission to provide
competitive local exchange services, and to resell intrastate long distance
services subject to a Certificate of Public Convenience and Necessity and
pursuant to tariffs setting forth its rates, terms and conditions of service.
In Massachusetts, RCN's subsidiary RCN Telecom Services of Massachusetts, Inc.
("RCN-MA") has registered to offer competitive local exchange services, and
to resell long distance services, and has filed tariffs setting forth its
Massachusetts rates, terms and conditions of service. The Company has also
obtained or is in the process of obtaining similar intrastate authorizations
through subsidiaries in other states where it intends to offer service in the
future. RCN's resale agreements with Bell Atlantic have been approved,
pursuant to Section 252 of the Communications Act of 1934 as amended by the
Telecommunications Act of 1996, and by state regulatory commissions in
Delaware, the District of Columbia, Maine, Maryland, Massachusetts, New York,
New Jersey, New Hampshire, Pennsylvania, Rhode Island, Vermont, and Virginia.
RCN Long Distance Company is also authorized to offer
intrastate long distance services in New York and Massachusetts and, in
addition, has received state regulatory authority to offer such services in 45
other states nationwide. Pursuant to such authorizations, RCN Long Distance
Company is permitted to resell intrastate long distance services both to other
carriers, including RCN-NY and RCN-MA for resale to their end user subscribers,
and to its own end user customers.
FCC Regulation of Interstate and International Telephone
Services. RCN, through several of its subsidiaries, including RCN-NY, RCN-MA
and RCN Long Distance Company, may also provide domestic interstate telephone
services nationwide pursuant to tariffs on file at the FCC, and has been
authorized by the FCC under Section 214 of the 1996 Act to offer worldwide
international services as well. RCN is authorized to resell in-state
long-distance services in 47 states (all except Alaska, Hawaii, and New
Mexico), and, where required, has registered with or obtained licenses or
certificates from state regulatory agencies for the provision of this service.
Local Regulation of Telephone Services. Municipalities also
regulate limited aspects of RCN's voice business by, for example, imposing
various zoning requirements and, in some instances, requiring
telecommunications licenses or franchise agreements and/or installation
permits for access to local streets and rights-of-way. In New York City, for
example, RCN will be required to obtain a telephone franchise in order to
provide voice services using its advanced fiber optic network facilities
located in the streets of New York City (although services may be provided
over certain leased or resold facilities pending receipt of a franchise).
Regulation of Video Services
Open Video Systems. In February, 1997, RCN subsidiaries were
certified to operate OVS networks in the five boroughs of New York City and,
as part of the BECO joint venture, in Boston and 47 surrounding communities.
Initiation of OVS services is subject to completion of an open enrollment
period for non-affiliated video programmers to seek capacity on the systems
and upon negotiation of certain agreements with local governments. The
initial open enrollment period for both the New York City and Boston areas
systems has expired. RCN executed an agreement with the City of Boston on
June 2, 1997, and initiated OVS service in the City on that day. Pursuant to
its agreement with the City of Boston, RCN will be required to pay a fee to
the City equal to 5% of video revenues. RCN is still in the process of
negotiating agreements with the other 47 Boston-area municipalities, either to
offer OVS services or franchised cable television services, and is also
continuing to negotiate an OVS agreement with the City of New York.
In areas where it offers video programming services as an OVS
operator, RCN will be required to hold a 90-day open enrollment period every
three years, during which times RCN will be required to offer capacity on its
network to other VPPs. Under the OVS regulations, RCN must offer at least
two-thirds of its capacity to unaffiliated parties, if demand for such
capacity exists during the open enrollment period. In certain areas, RCN is
in discussions with local municipal authorities to explore the feasibility of
obtaining a cable franchise in lieu of an OVS agreement, and will consider
providing RCN video service pursuant to franchise agreements rather than OVS
certification, if franchise agreements can be obtained on terms and conditions
acceptable to RCN. However, RCN will consider the relative benefits of OVS
certification versus local franchise agreements, including the possible
imposition of universal service requirements, before making any such
decisions. In addition, the current FCC rules concerning OVS are subject to
appeal in the United States Court of appeals and, to the extent that certain
favorable aspects of the FCC's rules are overturned on appeal, the
determination of whether to operate as an OVS provider versus as a franchised
cable television operator may be affected. Moreover, the incumbent cable
television provider in Boston, Cablevision Systems, has requested that the FCC
permit it to obtain capacity on RCN's Boston area OVS network, and Time Warner
has indicated that it may make the same type of request for capacity on both
the New York and Boston OVS networks. RCN intends to oppose any such request
made to the FCC, but to the extent that the FCC were to grant the request,
such a result would likely affect the Company's determination as to whether to
operate as an OVS provider versus as a franchised cable television operator.
Prior to its certification as an OVS provider, RCN offered
limited video programming services using the video dialtone services offered
by MFS/WorldCom in Manhattan and the City of Boston. In February, 1997, the
FCC held that MFS/WorldCom's facilities did not qualify as video dialtone
facilities entitled to an extension of time to comply with the newly adopted
OVS rules; nonetheless, the FCC did not direct MFS/WorldCom and RCN to cease
video programming distribution operations over the MFS/WorldCom platform.
This FCC order has been appealed by MFS/WorldCom. It is too soon to predict
the likely outcome of that proceeding, but should the Court of Appeals uphold
the FCC, it is likely that MFS/WorldCom and RCN will need to resolve
challenges to their former (pre-OVS) operations which were brought before the
New York Public Service Commission and the Massachusetts Cable Television
Commission by the incumbent cable television companies in the two cities where
MFS/WorldCom and RCN operated under the VDT framework.
Wireless Video Services. RCN's 18 GHz wireless video services
in New York City are distributed using microwave facilities provided by
Bartholdi Cable pursuant to licenses issued to Bartholdi Cable by the FCC.
Bartholdi Cable has agreed to provide transmission services to RCN until RCN
has either converted the wireless video subscribers to its advanced fiber
optic network facilities or has obtained FCC authority to provide such
services pursuant to its own wireless radio licenses. In addition, Bartholdi
Cable has agreed to transfer to RCN the transmission equipment on demand.
Bartholdi Cable's obligation to provide transmission services is subject to
Bartholdi Cable having licenses from the FCC to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are currently being examined by the FCC.
It is too early to judge the likely outcome of that proceeding. Because of
the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to RCN, the Company has filed its own license
applications at the FCC for all of the microwave transmission paths which are
currently being used by Bartholdi Cable to provide transmission services to
RCN.
There can be no assurance that RCN will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities, to convert its wireless video subscribers to an advanced
fiber optic network or to offer wireless video services pursuant to its own
FCC licenses.
Hybrid Fiber/Coaxial Cable. RCN's hybrid fiber/coaxial cable
systems are subject to regulation under the Cable Television Consumer
Protection and Competition Act of 1992, as amended (the "1992 Act"), which
provides, among other things, for rate regulation for cable services in
communities that are not subject to "effective competition," certain
programming requirements, and broadcast signal carriage requirements that
allow local commercial television broadcast stations to require a cable system
to carry the station. Local commercial television broadcast stations may
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. The FCC recently issued rules establishing
standards for digital television ("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 Communications Act permits
franchising authorities to require cable operators to set aside certain
channels for public, educational and governmental access programming. Cable
systems with 36 or more channels must designate a portion of their channel
capacity for commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator.
Because a cable communications system uses local streets and
rights-of-way, such cable systems are generally subject to state and local
regulation, typically imposed through the franchising process. The terms and
conditions of state or local government franchises vary materially from
jurisdiction to jurisdiction and generally contain provisions governing cable
service rates, franchise fees, franchise term, system construction and
maintenance obligations, customer service standards, franchise renewal, sale
or transfer of the franchise, territory of the franchisee and use and
occupancy of public streets and types of cable services provided. Local
franchising authorities (state or local, depending on the practice in
individual states) may award one or more franchises within their jurisdictions
and prohibit non-grandfathered cable systems from operating without a
franchise in such jurisdictions. 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.
RCN's ability to provide franchised cable television services
is dependent to a large extent on its ability to obtain and renew its
franchise agreements from local government authorities on generally acceptable
terms. RCN currently has 91 franchise agreements relating to the hybrid
fiber/coaxial cable systems in New York (outside New York City), New Jersey
and Pennsylvania. 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. These franchises provide for the payment of
fees to the issuing authorities and generally range from 3% to 5% of revenues.
The duration of these outstanding franchises presently varies up to the year
2011. To date, all of RCN's cable franchises have been renewed or extended,
generally at or prior to their stated expirations and on acceptable terms.
During 1996, RCN completed negotiations with three communities resulting in
franchise renewals on terms which are acceptable to it. A total of 34 of
RCN's hybrid fiber/coaxial cable systems' franchises are due for renewal
within the next three years. No assurance can be given that RCN will be able
to renew its franchises on acceptable terms. No one franchise accounts for
more than 7% of RCN's total revenue. RCN's five largest franchises account
for approximately 27% of RCN's total revenue.
The hybrid fiber/coaxial cable systems are also subject to
certain service quality standards and other obligations imposed by the FCC
and, where effective competition has not been demonstrated to exist, to rate
regulation by the FCC as well. RCN's cable television system in Pennsylvania
has been operating in a competitive cable environment for almost 30 years,
with approximately 80% of the homes passed having access to an alternate cable
operator, Service Electric Cable TV. As a result, the Company's Pennsylvania
cable system is exempt from many FCC cable television regulations, including
rate regulation. Its other cable television systems in New York State and New
Jersey currently remain subject to FCC rate regulation. With the passage of
the 1996 Act, however, all cable systems rates will be deregulated as
effective competition is shown to exist in the franchise area, or by March 31,
1999, whichever date is sooner. RCN anticipates that the remaining provisions
of the 1992 Act that do not relate to rate regulation, such as the provisions
relating to retransmission consent and customer service standards, will remain
in place and may serve to reduce the future operating margins of RCN's hybrid
fiber/coaxial cable television businesses as video programming competition
develops in its cable television service markets.
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 provided
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.
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 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.
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.
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 foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
telephone and video programming industries. 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 communications companies operate. The
ultimate outcome of these proceedings, and the ultimate impact of the 1996 Act
or any final regulations adopted pursuant to the new law on RCN or its
businesses cannot be determined at this time.
Employees
As of June 30, 1997, the Company had 1,008 full-time employees
including general office and administrative personnel. The Company considers
relations with its employees to be good.
Properties
RCN Corporation, the holding company, does not own any physical
properties.
RCN provides its services through facilities owned and leased
by RCN and its subsidiaries. RCN's properties are maintained in generally
good operating condition. See "Business--RCN--The Delivery Platforms."
Legal Proceedings
In the normal course of business, there are various legal
proceedings outstanding, including both commercial and regulatory litigation.
In the opinion of management, these proceedings will not have a material
adverse effect on the results of operations or financial condition of the
Company.
MANAGEMENT
Structure of RCN's Board of Directors
The Company will amend its Certificate 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 9 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 RCN 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
Michael J. Mahoney 47 Director (Class I), President and Chief Operating Officer
Bruce C. Godfrey 41 Director (Class II), Executive Vice President and Chief
Financial Officer
Michael A. Adams 39 President, Technology and Network Development Group,
and Executive Vice President
Mark Haverkate 42 Executive Vice President, Business Development
James Q. Crowe 47 Director (Class III)
Thomas May 50 Director (Class I)
Walter Scott, Jr. 65 Director (Class III)
Michael B. Yanney 63 Director (Class II)
Alfred Fasola 48 Director (Class II)
Thomas P. O'Neill, III 52 Director (Class I)
Richard R. Jaros 45 Director (Class II)
Eugene Roth 61 Director (Class III)
Stuart Graham 51 Director (Class I)
</TABLE>
David C. McCourt is the Chairman and Chief Executive Officer of
the Company as well as a director. Mr. McCourt will also serve as a director
and Chairman and Chief Executive Officer of Cable Michigan as of the
Distribution. In addition, he will remain as a director and Chairman and
Chief Executive Officer of C-TEC, positions 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, as well as a director, 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.
Michael J. Mahoney is the President and Chief Operating
Officer, as well as a director, of the Company. Mr. Mahoney will also remain
a director of C-TEC, a position he has held since May 1995. Mr. Mahoney has
been President and Chief Operating Officer of C-TEC since February 1994,
President and Chief Operating Officer of Mercom since February 1994 and a
director of Mercom since January 1994. In addition, he was Executive Vice
President of Cable Television Group from June 1991 to February 1994, Executive
Vice President of Mercom from December 1991 to February 1994 and the Chief
Operating Officer of Harron Communications Corp. from April 1983 to December
1990.
Bruce C. Godfrey will be the Executive Vice President and Chief
Financial Officer and a director of the Company as of the Distribution. Mr.
Godfrey will also be a director of Cable Michigan as of the Distribution. In
addition, he will remain the Executive Vice President and Chief Financial
Officer and a director of 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. He 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 to April 1994.
Michael A. Adams will be the President, Technology and Network
Development Group of the Company and Executive Vice President of the Company
as of the Distribution. Mr. Adams has held the corresponding position at
C-TEC since November 1996. Prior to that date, Mr. Adams has held the
following positions: Executive Vice President of Technology and Strategic
Development of C-TEC from August 1996 to November 1996, Executive Vice
President of the Communications Services Group from September 1994 to June
1996, Vice President of Technology from November 1993 to September 1994, Vice
President of Engineering for RCN Telecom Services from September 1992 to
October 1993, Vice President of McCourt Communications Co., Inc. from June
1992 to October 1993, Vice President of Business Development for
McCourt/Kiewit International from May 1991 to June 1992, Managing Director of
McCourt Cable & Communications, Ltd. from October 1989 to June 1992, Director
of Operations for MFS/McCourt from November 1988 to October 1989 and Vice
President of Engineering for McCourt Cable Systems, Inc. from June 1982 to
November 1988.
Mark Haverkate will be the Executive Vice President, Business
Development of the Company as of the Distribution. Mr. Haverkate will also
serve as President and Chief Operating Officer and a director of Cable
Michigan 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. Mr. Haverkate will continue in these
positions after the Distribution. 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 C-TEC's Cable Television Group from May 1981 to July
1988.
James Q. Crowe will be a director of the Company as of the
Distribution. Since August 1, 1997, Mr. Crowe has been the President and
Chief Executive Officer of KDG, a wholly owned subsidiary of PKS. Mr. Crowe
was Chairman of the Board of Directors of WorldCom, Inc. from December 1996 to
June 1997 and, as of the Distribution, will also serve as a director of the
Company. Mr. Crowe will also remain a director of C-TEC, a position he has
held since 1993. Mr. Crowe has served as Chairman of the Board of Directors
MFS since 1988 and Chief Executive Officer of MFS since November 1991 and was
President of MFS from January 1988 to June 1989 and April 1990 to January
1992. Mr. Crowe is a director of PKS, a construction and mining company, and
CalEnergy Company, Inc., ("CECI"), a geothermal energy producer.
Thomas May will be a director of the Company as of the
Distribution. Mr. May has been Chairman, President and Chief Executive
Officer of Boston Edison Company since 1994. Previously, Mr. May served as
President and Chief Operating Officer of Boston Edison Company from 1993 to
1994 and as an Executive Vice President from 1990 to 1993.
Walter Scott, Jr. will be a director of the Company as of the
Distribution. Mr. Scott will also remain a director of C-TEC, a position he
has held since 1993. Mr. Scott has been Chairman of the Board of Directors
and President of PKS for over five years and is also a director of Berkshire
Hathaway Inc., Burlington Resources, Inc., CECI, ConAgra, Inc., First Bank
System, Inc., Valmont Industries, Inc., KDG and Kiewit Telecom. Mr. Scott was
a director of WorldCom, Inc. from December 1996 to July 1997.
Michael B. Yanney will be a director of the Company as of the
Distribution. Mr. Yanney has been Chairman and Chief Executive Officer of
America First Companies L.L.C. since 1984 and is also a director of Burlington
Northern Santa Fe Corporation, Lozier Corporation, Forest Oil Corporation,
Freedom Communication, Inc. and Mid-America Apartment Communities. Mr. Yanney
was a director of WorldCom, Inc. from December 1996 to July 1997.
Alfred Fasola will be a director of the Company as of the
Distribution. Mr. Fasola was with the consulting firm Taggert - Fasola Group,
of which he was a co-founder and 50% shareholder, from 1986 to 1996. During
this period, Mr. Fasola served as Chairman, Chief Executive Officer, President
and/or Chief Operating Officer of various public and private companies
including Herman's Sporting Goods from 1993 to 1995, Circle Express from 1988
to 1989, Pilot Freight Carriers from 1987 to 1988 and Purolator Corporation
from 1985 to 1986.
Thomas P. O'Neill, III will be a director of the Company as of
the Distribution. Mr. O'Neill is the Chairman and founder of
McDermott/O'Neill & Associates. Prior to forming McDermott/O'Neill in 1991,
Mr. O'Neill founded Bay State Investors, Inc. in 1983. From 1975 to 1983, Mr.
O'Neill served as Lieutenant Governor of the Commonwealth of Massachusetts.
Richard R. Jaros will be a director of the Company as of the
Distribution. Mr. Jaros is a member of the Board of Directors of WorldCom,
CalEnergy Company and C-TEC. From 1980 to 1992 and from 1994 to 1997, Mr.
Jaros served as President of KDG and Executive Vice President and Chief
Financial Officer of PKS. He served as Chairman of CalEnergy Company from
1993 to 1994 and as President from 1992 to 1993.
Eugene Roth will be a director of the Company as of the
Distribution. Mr. Roth is also a director of C-TEC, a position he has held
since 1989. Mr. Roth has been a Partner at Rosenn, Jenkins and Greenwald
(Attorneys) since 1964 and is also a director of the Pennsylvania Regional
Board of Directors of First Fidelity Bank, N.A.
Stuart E. Graham will be a director of the Company as of the
Distribution. Mr. Graham will also remain a director of C-TEC, a position he
has held since 1990. Mr. Graham has been Chairman, President and Chief
Executive Officer of Skanska Engineering and Construction since 1994 and held
various positions throughout that company, being appointed Vice President of
Operations in 1977. Mr. Graham is also President and Chief Executive Officer
of Slattery Associates, Inc., a position he has held since 1995.
Executive Compensation
The following table sets forth certain information regarding
the compensation paid by C-TEC for the periods indicated to the Chief
Executive Officer of RCN and the persons expected to be the four other most
highly compensated executive officers of RCN (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation ---------------------------
----------------------- Restricted Securities
Stock Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Awards ($)(1) Options(2) Compensation(3)
- --------------------------- ---- ---------- --------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David C. McCourt.............. 1996 $491,154 $700,000 $238,333 -- $5,478
Chairman and Chief Executive 1995 397,885 700,000 220,000 250,000 5,612
Officer 1994 375,000 500,000 -- 250,000 387
Michael J. Mahoney............ 1996 $235,027 $175,000 $67,017 -- $5,478
President and Chief Operating 1995 222,462 100,000 65,000 -- 5,952
Officer 1994 190,719 125,000 -- 100,000 5,585
Bruce C. Godfrey.............. 1996 $221,462 $165,000 $74,333 -- $4,965
Executive Vice President and 1995 183,731 150,000 67,000 -- 4,790
Chief Financial Officer 1994 128,154 53,500 -- 70,000 165
Mark Haverkate................ 1996 $158,231 $135,000 $51,667 -- $3,641
Executive Vice President, 1995 137,952 100,000 48,000 35,000 $5,058
Business Development 1994 113,676 24,795 -- 25,000 4,507
Michael A. Adams.............. 1996 $138,673 $155,000 $36,950 -- $3,853
President, Technology and 1995 122,885 46,000 34,200 20,000 3,991
Network Development 1994 97,861 35,000 -- 35,000 192
</TABLE>
- ---------------
(1) Represents the market value of C-TEC Common Stock on the date of grant of
restricted shares of C-TEC Common Stock. Pursuant to the Distribution,
holders of restricted stock awards will be credited with an aggregate
equivalent value of restricted shares of Common Stock of C-TEC, the Company
and Cable Michigan. As of December 31, 1996, the aggregate holdings and
value of restricted share awards of C-TEC Common Stock were: Mr. McCourt,
13,308 shares, $322,709; Mr. Mahoney, 3,744 shares, $90,793; Mr. Godfrey,
4,035 shares, $97,846; Mr. Haverkate, 2,841 shares, $68,894; and Mr. Adams,
2,015 shares, $48,861.
Vesting of restricted shares is accelerated upon a change in control of the
Company. The occurrence of the Distribution will not be a change of
control for that purpose. Dividends, if any, are paid on restricted
shares. Such restricted stock holdings vest as follows, subject to
continued employment:
December 1998................................... 11,945
On or before December 1999...................... 13,998
(2) Denominated in shares of C-TEC Common Stock. In connection with the
Distribution, each C-TEC option held by the Named Executive Officers and
all other holders thereof will be adjusted as noted below so that
following the Distribution each such Executive Officer and other
holders will hold options to purchase shares of C-TEC Common Stock,
Company Common Stock and Cable Michigan Common Stock, respectively.
The number of shares subject to, and the exercise price of, such
resulting options will be adjusted to take into account the
Distribution and to ensure that the aggregate intrinsic value of the
resulting C-TEC, RCN and Cable Michigan options immediately after the
Distribution is equal to the aggregate intrinsic value of the C-TEC
options immediately prior to the Distribution.
(3) Includes the following amounts for the last fiscal year: (i) Mr. McCourt:
$396 - Company paid life insurance; $5,082 - 401(k) Company match;
(ii) Mr. Godfrey: $396 - Company paid life insurance; $4,589 - 401(k)
Company match; (iii) Mr. Mahoney: $396 - Company paid life
insurance; $5,082 - 401(k) Company match; (iv) Mr. Haverkate: $392
- Company paid life insurance; $3,249 - 401(k) Company match; (v)
Mr. Adams: $363 - Company paid life insurance; $3,490 - 401(k)
Company match.
Option Grants, Stock Related Plans. No C-TEC stock options
were granted, during the fiscal year ending December 31, 1996, to the Chief
Executive Officer or any other Named Executive Officer. In addition to the
adjusted options referred to above, the Company anticipates that, in
connection with the Distribution, the Company will adopt one or more
compensation plans relating to Company Common Stock and that additional
stock options relating to Company Common Stock may be granted in the future
to certain executive officers and other key employees. See "--RCN Stock
Plans."
The following table sets forth the fiscal year-end value of
unexercised options covering C-TEC Common Stock held by each Named Executive
Officer.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End C-TEC Option Values(1)
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money Options
Options at at
December 31, 1996(2) December 31, 1996(2)(3)
-------------------------------------------- ------------------------------------------
Exercisable (#) Unexercisable (#) Exercisable($) Unexercisable($)
--------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
David C. McCourt..... 150,000 350,000 $331,250 $887,500
Michael J. Mahoney... 40,000 60,000 -- --
Bruce C. Godfrey..... 28,000 42,000 -- --
Mark Haverkate....... 17,000 43,000 4,813 19,250
Michael A. Adams..... 18,000 37,000 2,750 11,000
</TABLE>
- ---------------
(1) No C-TEC stock options were exercised by the Named Executive Officers
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.
Effect of Distributions 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 created with an aggregate
equivalent value of restricted shares of Common Stock of C-TEC, the Company
and Cable Michigan. 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 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. Mahoney,
$29,124; Mr. Godfrey, $10,874; Mr. Haverkate, $41,894; and Mr. Adams,
$7,249.
Directors' Compensation
Non-employee Directors of the Company will receive a retainer
of $900 per month and will be paid $1,000 for each board meeting attended.
The Committee Chairmen and other committee members will be paid $500 and $300,
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 awards 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.
RCN Stock Plans
In connection with and prior to the Distribution, the Company
Board intends to adopt the RCN Corporation 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 RCN 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 5,000,000 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 1,000,000 shares of
RCN 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
approximately 150.
The 1997 Plan may be administered by the full 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.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with and contingent upon the Distribution, RCN
will establish a qualified savings plan under Section 401(k) of the Code (the
"401(k) Plan") that will also qualify as an ESOP under Sections 401(a) and
4975(e)(7) of the Code (the "ESOP"). Under the ESOP, employees of the Company
Businesses who make Section 401(k) contributions and certain other employees
will be allocated shares of Company Common Stock. If, within five years after
the Distribution, the ESOP portion of the 401(k) Plan does not hold shares
representing at least 3% percent of the number of shares of Company Common
Stock outstanding immediately after the Distribution as increased by the
number of shares issuable to BECO pursuant to the Exchange Agreement
(collectively, "Outstanding Company Common Stock") with a market value at such
time of not less than $24 million, RCN will issue to the ESOP, in exchange for
a note from the ESOP (the "ESOP Note"), the amount of Company Common Stock
necessary to increase the ESOP's holdings of Company Common Stock to that
level, provided, however, that RCN is not obligated to issue shares to the
ESOP in excess of 5% of the number of shares of Outstanding Company Common
Stock. Dividends on the Company Common Stock held by ESOP that secure the
ESOP Note will be allocated to the accounts of ESOP participants as the ESOP
Note is paid off by the ESOP. It is anticipated that the ESOP Note will be
paid off either through additional Company contributions of cash to the ESOP
or through dividends, if any, on the Company Common Stock acquired by the
ESOP in connection with the issuance of the ESOP Note.
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 (3) Shares (3)
- ----------------------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Directors and Named
Executive Officers
James Q. Crowe 416 * 0 0 416 *
Richard R. Jaros 380 * 0 0 380 *
Thomas May 0 0 0 0 0 0
Walter Scott, Jr. 416 * 0 0 416 *
Michael B. Yanney 411 * 0 0 411 *
Michael A. Adams 9,778(4) * 0 0 9,778 *
Bruce C. Godfrey 19,736(4) * 0 0 19,736 *
Mark Haverkate 23,168(4) * 400 * 23,568 *
David C. McCourt 44,676(4)(5) * 6,000 * 50,676 *
Michael J. Mahoney 22,099(4) * 0 0 22,099 *
Thomas P. O'Neill, III 0 0 0 0 0 0
Alfred Fasola 0 0 0 0 0 0
Eugene Roth 1,175 * 5,600 * 6,775 *
Stuart Graham 437 * 4,650 * 5,087 *
All Directors and Executive
Officers as a Group
(14 persons) (4)(5) 122,692 * 16,650 * 139,342 *
5% Stockholders
Kiewit Telecom
Holdings, Inc. (6) 11,226,262 48.4% 2,094,223 48.6% 13,320,485 48.5%
Mario J. Gabelli Group (7) 1,576,037 6.8% 681,195 15.8% 2,257,232 8.2%
</TABLE>
- ---------------
* 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 RCN 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 participants will be credited with an aggregate
equivalent value of restricted shares of C-TEC, RCN and Cable Michigan
Common Stock. The holdings indicated include Share Units and Matching
Shares. The table below shows in respect of each executive officer the
number of shares of C-TEC 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>
<CAPTION>
Share Units Total Shares
Acquired Under the Purchased and
ESPP Total Shares Acquired and
Shares Purchased in Lieu of Current Purchased and Restricted Restricted Matching
Outright Compensation Acquired Matching Shares Shares
---------------- ------------------ ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Michael A. Adams.... 762 4,508 5,270 4,508 9,778
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
Michael J. Mahoney.. 8,483 6,808 15,291 6,808 22,099
</TABLE>
(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 RCN, 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 68131.
(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., all of whose
address is One Corporate Center, Rye, New York 10580-1434.
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 Named 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
Name of Beneficial Owner Class C Shares Class C Shares Class D Shares Class D Shares
- ------------------------------------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
James Q. Crowe............................ -- -- 134,369 *
Richard R. Jaros.......................... 25,772 * 121,128 *
Thomas May................................ -- -- -- --
Walter Scott, Jr.......................... 250,000 2.5% 3,393,374 13.8%
Michael B. Yanney......................... -- -- -- --
Michael A. Adams.......................... -- -- -- --
Bruce C. Godfrey.......................... -- -- -- --
Mark Haverkate............................ -- -- -- --
David C. McCourt.......................... -- -- 1,500 *
Michael J. Mahoney........................ -- -- -- --
Thomas P. O'Neill, III.................... -- -- -- --
Alfred Fasola............................. -- -- -- --
Eugene Roth............................... -- -- -- --
Stuart Graham............................. -- -- -- --
All Directors and Executive Officers as
a Group (14 persons)..................... 275,772 2.7% 4,054,279 15.4%
</TABLE>
- ---------------
* Less than 1% of the outstanding of the class.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company
is based upon the Company's Amended and Restated Certificate of Incorporation
(the "Certificate 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 Certificate of Incorporation and Bylaws, which are filed as
exhibits to the Form 10.
The Company's Certificate of Incorporation authorizes the
issuance of 100 million shares of Company Common Stock, par value $1.00 per
share, 200 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 25 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 one
share of C-TEC Common Equity, it is anticipated that there will be
approximately 27,484,628 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 Certificate
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 Certificate 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 Certificate 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 Delaware General Corporation Law, the
Certificate 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 Certificate 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
Certificate 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 Delaware General Corporation Law only in the case of a corporation
having a classified board, the Certificate 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 acquirer obtains such voting power. Accordingly, these provisions could
have the effect of discouraging a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company.
Stockholder Action by Written Consent; Special Meetings. The
Certificate 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 Certificate 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 Certificate of Incorporation, the
Company Board will have the authority, without further stockholder approval,
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 acquirer 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
Certificate of Incorporation provides that the Company Board may adopt, amend
or repeal any provision of the Bylaws. The Certificate 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
Certificate 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.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless (i) prior to such
date either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85 percent of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for purposes of
determining the number of shares outstanding, shares owned by (A) persons who
are both directors and officers and (B) employee stock plans in certain
circumstances), or (iii) on or after such date the business combination is
approved by the board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3 percent of the outstanding voting stock which is not owned by the
interested stockholder. A "business combination" includes a merger,
consolidation, asset sale, or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15 percent or more of the corporation's voting stock. The
restrictions imposed by Section 203 will not apply to a corporation if, among
other things, (i) the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203 or
(ii) 12 months have passed after the corporation, by action of its
stockholders holding a majority of the outstanding stock, adopts an amendment
to its certificate of incorporation or bylaws expressly electing not to be
governed by Section 203. The Company has not elected out of Section 203 and,
therefore, the restrictions imposed by Section 203 will apply to the Company.
Prior to the Distribution, the Company Board will approve of Kiewit Telecom
becoming an interested shareholder and, consequently, Section 203 would not
apply to any business combination with Kiewit Telecom.
Liability and Indemnification of Directors and Officers
Certain provisions of the Delaware General Corporation Law and
the Company's Certificate 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 Certificate 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 Delaware law. Under existing Delaware law,
directors would not be personally liable to the Company or its stockholders
for monetary damages for breach of their fiduciary duties as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) any transaction
from which the director derived improper personal benefit or (iv) the unlawful
payment of dividends or unlawful stock repurchases or redemptions. 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 Certificate 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 corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified and held
harmless by the Corporation to the fullest extent permitted by Delaware 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 Delaware
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 Delaware 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 Certificate 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 the Company's
and 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
RCN Corporation
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-25
Consolidated Statements of Operations for the Six and Three Months Ended
June 30, 1997 and 1996 (unaudited)....................................... F-27
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996 (unaudited)....................................... F-28
Notes to Consolidated Financial Statements............................... F-29
Megacable, S.A. de C.V.
Report of Independent Accountants........................................ F-30
Consolidated Balance Sheets at December 31, 1996 and 1995................ F-31
Consolidated Income Statements for the years ended December 31, 1996
and 1995................................................................. F-33
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996 and 1995......................................... F-34
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995............................................................ F-35
Notes to Consolidated Financial Statements............................... F-36
<PAGE>
Liberty Cable Television, Inc. and Affiliates *
Report of Independent Accountants
Combined Balance Sheets at December 31, 1994 and 1995
Combined Statements of Operations for the years ended December 31, 1994
and 1995
Combined Statements of Cash Flows for the years ended December 31, 1994
and 1995
Combined Statements of Changes in Shareholders' Deficit for the years ended
December 31, 1994 and 1995
Notes to Combined Financial Statements
Freedom New York, LLC *
Condensed Balance Sheet at September 30, 1996 (unaudited)
Condensed Statement of Operations for the period March 6, 1996 to
September 30, 1996 and for the three months ended September 30, 1996
(unaudited)
Condensed Statements of Cash Flows for the period March 6, 1996 to
September 30, 1996 (unaudited)
- ---------------
* The financial statements of Liberty Cable Television, Inc. and affiliates
and of Freedom New York, LLC listed above are incorporated herein by
reference to Item 7(a) of C-TEC's Current Report on Form 8-K dated
November 15, 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of RCN Corporation:
We have audited the consolidated financial statements of RCN
Corporation 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 RCN Corporation and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial
statements effective January 1, 1994, the Company changed its method of
accounting for postemployment benefits.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
June 30, 1997
RCN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments............................................ $61,843 $37,998
Short-term investments......................................................... 46,831 120,487
Accounts receivable - affiliates............................................... 12,614 14,186
Accounts receivable, net of reserve for doubtful accounts of $861 in 1996
and $606 in 1995.............................................................. 10,413 11,206
Unbilled revenues.............................................................. 844 560
Material and supply inventory, at average cost................................. 1,140 327
Prepayments and other.......................................................... 4,556 1,987
Deferred income taxes.......................................................... 4,371 4,513
-------- --------
Total current assets................................................................. 142,612 191,264
-------- --------
Notes receivable - affiliates........................................................ 155,481 181,981
Property, plant and equipment
Hybrid fiber/coaxial plant..................................................... 161,433 157,320
Other property, plant and equipment............................................ 58,924 16,053
-------- --------
Total property, plant and equipment.................................................. 220,357 173,373
Accumulated depreciation............................................................. 84,529 71,293
-------- --------
Net property, plant and equipment.................................................... 135,828 102,080
-------- --------
Investments.......................................................................... 76,547 77,113
Intangible Assets, Net............................................................... 93,471 88,032
Deferred Charges and Other Assets.................................................... 24,146 9,140
-------- --------
Total Assets......................................................................... $628,085 $649,610
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt........................................... $ -- $25,750
Accounts payable - affiliates.................................................. 4,880 6,234
Accounts payable............................................................... 13,642 10,687
Advance billings and customer deposits......................................... 6,859 6,143
Advanced taxes................................................................. 1,950 --
Accrued interest............................................................... 5,041 5,038
Accrued contract settlements................................................... 3,565 6,629
Accrued cable programming expense.............................................. 3,188 4,535
Accrued expenses............................................................... 18,167 10,291
-------- --------
Total current liabilities............................................................ 57,292 75,307
-------- --------
Long-Term Debt....................................................................... 131,250 135,250
Notes Payable - affiliates........................................................... 11,854 5,552
Deferred Income Taxes................................................................ 28,245 36,072
Deferred Investment Tax Credits...................................................... -- 102
Other Deferred Credits............................................................... 3,290 3,258
Minority Interest.................................................................... 5,389 --
Commitments and Contingencies........................................................
Common Shareholder's Equity.......................................................... 390,765 394,069
-------- --------
Total Liabilities and Shareholder's Equity........................................... $628,085 $649,610
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
RCN CORPORATION
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............................................................... $104,910 $ 91,997 $ 59,500
Costs and Expenses, excluding depreciation and amortization......... 79,107 75,003 49,747
Depreciation and amortization....................................... 38,881 22,336 9,803
-------- -------- --------
Operating (loss).................................................... (13,078) (5,342) (50)
Interest income..................................................... 25,602 29,001 21,547
Interest expense.................................................... (16,046) (16,517) (16,669)
Other (expense) income, net......................................... (546) (304) 1,343
-------- -------- --------
(Loss) Income Before Income Taxes................................... (4,068) 6,838 6,171
Provision for income taxes.......................................... 979 1,119 2,340
-------- -------- --------
(Loss) Income Before Minority Interest and Equity in
Unconsolidated Entities............................................ (5,047) 5,719 3,831
Minority Interest in (income) loss of consolidated entities......... 1,340 (144) (95)
Equity in (loss) of unconsolidated entities......................... (2,282) (3,461) --
-------- -------- --------
(Loss) Income Before Cumulative Effect of Accounting Principle
Changes............................................................ (5,989) 2,114 3,736
Cumulative effect on prior years of changes in accounting
principles for postemployment benefits............................. -- -- (83)
-------- -------- --------
Net (loss) Income................................................... $ (5,989) $ 2,114 $ 3,653
======== ======== ========
Unaudited pro forma net income (loss) per common share.............. $ (0.22)
</TABLE>
See accompanying notes to consolidated financial statements.
RCN CORPORATION AND SUBSIDIARIES
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 Income (loss)............................................... $(5,989) $2,114 $3,653
Gain on pension curtailment/settlement.......................... (3,437) -- --
Cumulative effect of accounting principle changes............... -- -- 83
Depreciation and amortization................................... 38,881 22,336 9,803
Deferred income taxes and investment tax credits, net........... (6,477) 6,696 (205)
Provision for losses on accounts receivable..................... 1,788 614 854
Equity in loss of unconsolidated entities....................... 2,282 3,461 --
Minority interest............................................... (1,340) 144 95
Net change in certain assets and liabilities, net of acquisitions
of businesses:
Accounts receivable and unbilled revenues....................... (3,780) (5,550) (2,142)
Material and supply inventory................................... (814) 777 (3)
Accounts payable................................................ 2,954 3,983 1,567
Accrued expenses................................................ 4,283 2,783 9,317
Accounts receivable affiliates.................................. 1,572 11,860 (7,812)
Accounts payable affiliates..................................... (5,448) (419) (519)
Other, net...................................................... 597 529 (4,102)
Other........................................................... (1,241) (769) (4,301)
-------- ------- --------
Net cash provided by operating activities............................. 23,831 48,559 6,288
-------- ------- --------
Cash Flows from Investing Activities
Additions to property, plant and equipment........................... (40,369) (29,854) (12,042)
Purchase of short-term investments.............................. (75,091) (238,257) (127,245)
Sales and maturities of short-term investments.................. 149,086 245,112 --
Acquisitions, net of cash acquired.............................. (30,090) (121,147) (1,298)
Purchase of loan receivable..................................... (13,088) -- --
Other........................................................... 175 (2,057) 434
-------- ------- --------
Net cash used in investing activities................................. (9,377) (146,203) (140,151)
-------- ------- --------
Cash Flows from Financing activities
Redemption of Long-term debt.................................... (44,750) (28,741) (37,033)
Issuance of Long-term debt...................................... 19,000 19,300 13,033
Change in affiliate notes, net.................................. 32,802 (6,130) 5,159
Tranfers from C-TEC............................................. 78,550 132,707 298,759
Transfers (to) C-TEC............................................ (76,211) (148,339) --
-------- ------- --------
Net cash provided by (used in) financing activities................... 9,391 (31,203) 279,918
-------- ------- --------
Net increase (decrease) in cash and temporary cash investments........ 23,845 (128,847) 146,055
Cash and temporary cash investments at beginning of year.............. 37,998 166,845 20,790
-------- ------- --------
Cash and temporary cash investments at end of year.................... $ 61,843 $37,998 $166,845
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<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.................................................... $16,046 $16,404 $16,780
Income Taxes................................................ 549 497 580
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing
Activities:
In 1996, C-TEC acquired an 80.1% interest in Freedom New York, L.L.C. The
acquisition was accounted for as a purchase. A summary of the acquisition is
as follows:
Cash paid....................................... $28,906
Liabilities assumed............................. 7,621
Deferred tax asset recognized................... (167)
Minority interest recognized.................... 6,188
-------
Fair value of assets acquired................... $42,548
=======
In 1995, C-TEC acquired all the outstanding Common Stock of
Twin County Trans Video, Inc. and a related covenant not to compete. The
consideration for the acquisition was as follows:
Cash paid (including $1,000 deposit in 1994)............ $37,313
Issuance of 5% Promissory Note.......................... 4,000
Capital contribution by stockholder..................... 39,493
Liabilities assumed..................................... 16,364
Deferred tax liability incurred......................... 33,797
--------
Fair value of assets acquired........................... $130,967
========
In 1996, the $4,000 promissory note was canceled and the
Company paid cash of $500 in settlement of certain purchase price adjustments.
See accompanying notes to consolidated financial statements.
RCN CORPORATION
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>
Cumulative
Shareholder's Translation
Common Stock Net Investment Adjustment Total
------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1993............... $ 1 $ 74,328 -- $ 74,329
Net Income.......................... 3,653 3,653
Transfers from C-TEC................ 294,865 294,865
------------- ------------- ----------- --------
Balance, December 31, 1994............... 1 372,846 -- 372,847
Net Income.......................... 2,114 2,114
Transfers from C-TEC................ 21,714 21,714
Cumulative Translation Adjustment... (2,606) (2,606)
------------- ------------- ----------- --------
Balance, December 31, 1995............... 1 396,674 (2,606) 394,069
Net Income.......................... (5,989) (5,989)
Transfers from C-TEC................ 3,134 3,134
Cumulative Translation Adjustment... (449) (449)
------------- ------------- ----------- --------
Balance, December 31, 1996............... $ 1 $ 393,819 $ (3,055) $390,765
============= ============= =========== ========
</TABLE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
RCN Corporation is currently a wholly owned subsidiary of
C-TEC Corporation ("C-TEC"). On February 13, 1997, C-TEC announced its
intention to separate its operations along business lines into three separate,
publicly traded companies (the "restructuring"). C-TEC also announced its
intention to distribute to its shareholders by December 31, 1997, subject to
certain conditions, all of its interest in RCN Corporation. The consolidated
financial statements of RCN Corporation include the accounts of entities
which, prior to their planned contribution to RCN Corporation pursuant to the
restructuring, were consolidated with C-TEC. These entities include RCN
Telecom Services, which provides competitive telephone, video and Internet
services in Boston and New York City, C-TEC's New York (outside New York
City), New Jersey and Pennsylvania cable television operations and certain of
C-TEC's long distance telephone operations (collectively, the "Company").
Investments accounted for by the equity method include a 40% interest in
Megacable S.A. de C.V., a Mexican cable television system operator.
The consolidated financial statements have been prepared using
the historical basis of assets and liabilities and historical results of
operations. All material intercompany transactions and balances have been
eliminated.
C-TEC's corporate services group has historically provided
substantial support services such as finance, cash management, legal, human
resources, insurance and risk management and its financial statements are
included in the consolidated financial statements of the Company. The
corporate office allocates the cost for these services pro rata among the
business units supported 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
remaining with the Company after allocation to C-TEC's other business units
are not necessarily indicative of the costs that would have been incurred by
the Company on a stand-alone basis. Also included in the Company's
consolidated financial statements are the financial statements of the
corporate financial services company which invests excess cash of, and
advances funds to the Company and C-TEC. The financial services company
charges interest expense on outstanding advances and pays interest income on
excess cash invested for affiliates.
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. SEGMENT INFORMATION
The Company is developing advanced fiber optic networks to
provide a wide range of telecommunications services in the Northeastern United
States. Such networks are networks that are capable of providing a full range
of high speed, high capacity telecommunications services, including voice,
video programming and data services including Internet access. The Company
intends to provide these services singly or in bundled services packages
primarily to residential customers in high-density areas and also seeks to
serve certain commercial accounts on or near its networks. In 1997, the
Company commenced providing service through advance fiber optic network
facilities in New York City and Boston. Through 1996, the revenue from
services provided over such networks has not been material. The Company also
has hybrid fiber/coaxial operations in New York (outside New York City), New
Jersey and Pennsylvania, wireless video operations in New York City and
certain other operations, including long distance telephone. As the
development of the Company's advanced fiber networks continues, in the future
the Company will reflect such operations as a separate segment. The Company
expects that the operating and net losses and negative cash flows from this
business will rise in the future as it expands and develops its network and
customer base. There can be no assurance that RCN will achieve or sustain
profitability or positive cash flows from operating activities in the future.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Hybrid Fiber/Coaxial
Sales................................................... $ 84,096 $ 66,404 $ 45,937
Operating income before depreciation and amortization... 40,094 28,458 22,279
Depreciation and amortization........................... 33,131 20,723 8,583
Operating income........................................ 6,963 7,735 13,696
Identifiable assets..................................... 335,285 359,401 214,413
Advanced Fiber, Wireless Video and Other Operating
Sales................................................... $20,768 $25,528 $ 13,514
Operating income before depreciation and amortization... (11,711) (8,416) (11,542)
Depreciation and amortization........................... 4,970 904 650
Operating (loss)........................................ (16,681) (9,320) (12,192)
Identifiable assets..................................... 87,419 14,491 7,013
Corporate
Sales................................................... $ 46 $ 65 $ 49
Operating income before depreciation and amortization... (2,580) (3,048) (984)
Depreciation and amortization........................... 780 709 570
Operating (loss)........................................ (3,360) (3,757) (1,554)
Identifiable assets..................................... 205,381 275,718 347,160
Consolidated
Sales................................................... $104,910 $ 91,997 $ 59,500
Operating income before depreciation and amortization... 25,803 16,994 9,753
Depreciation and amortization........................... 38,881 22,336 9,803
Operating (loss)........................................ (13,078) (5,342) (50)
Identifiable assets..................................... 628,085 649,610 568,586
</TABLE>
3. 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.
Short Term Investments - Management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date in
accordance with Statement of Financial Accounting Standards No. 115 -
"Accounting for Certain Investments in Debt and Equity Securities." At
December 31, 1996 and 1995, marketable debt and equity securities have been
categorized as available for sale.
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:
Building............................................ 10 to 45 years
Hybrid Fiber/Coaxial Distribution Equipment......... 8 to 22.5 years
Other Equipment..................................... 4 to 10 years
Depreciation on other property, plant and equipment is provided
on the straight-line basis over the useful lives of the property ranging and
dispositions. Major replacements and betterments are capitalized.
Repairs of all property, plant and equipment and minor
replacements and renewals are charged to expense as incurred.
Intangible Assets - Intangible assets are amortized on a
straight-line basis over the expected period of benefit ranging from 2 to 10
years.
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 established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill 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 future cash flows expected 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 - Local telephone service revenue is
recorded as earned based on tariffed rates. Long distance telephone services
revenues are recorded based on minutes of traffic processed and tariffed rates
or contracted fees. Revenues from cable programming services are recorded in
the month the service is provided. Internet access service revenues are
recorded based on contracted fees.
Advertising Expense - Advertising costs are expensed as
incurred. Advertising expense charged to operations was $1,441, $862 and $991
in 1996, 1995 and 1994, respectively.
Earning (Loss) Per Share - The Company is currently a wholly
owned subsidiary of 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 27,474,000 shares of common equity outstanding, based
upon a distribution ratio of one share of Company common equity for each
share of C-TEC common equity owned. Such distribution ratio is subject to
final determination.
Income Taxes - C-TEC Corporation and its subsidiaries report
income for federal tax purposes on a consolidated 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 return even if such
losses and credits could not have been used on a separate return basis.
Income tax expense is allocated to subsidiaries 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.
Foreign Currency Translation - The Company has a 40%
interest in Megacable, S.A. de C.V., a Mexican cable television operator. For
purposes of determining its equity in the earnings of Megacable, the Company
translates the revenues and expenses of Megacable into U.S. dollars at the
average exchange rates that prevailed during the period. Therefore, the U.S.
dollar value of these items on the income statement fluctuates from period to
period depending upon the value of the dollar against the peso. Assets and
liabilities are translated into U.S. dollars at the rates in effect at the
end of the fiscal period. The Company's share of the gains or losses that
result from this process are shown in the cumulative translation adjustment
account in the common shareholders' equity section of the balance sheet. The
Company's proportionate share of gains and losses resulting from transactions
of Megacable, which are made in currencies different from its own, are
included in income as they occur.
4. BUSINESS COMBINATIONS
The following business combinations were transacted by wholly
owned subsidiaries of C-TEC. The acquired businesses will be transferred to
the Company in connection with the restructuring.
On August 30, 1996, FNY Holding Company, Inc., a subsidiary of
C-TEC ("FNY") acquired from Kiewit Telecom Holdings (formerly RCN
Corporation), C-TEC's controlling shareholder, an 80.1% interest in Freedom
New York, L.L.C. and all related rights and liabilities ("Freedom") for cash
consideration of approximately $29,000. In addition, FNY assumed liabilities
of approximately $7,600. (In March 1996, Freedom had acquired the wireless
cable television business of Liberty Cable Television.) The acquisition was
accounted for as a purchase, and accordingly, Freedom is included in the
Company's consolidated financial statements since the date of September 1996.
The full fair value of assets acquired and liabilities assumed has been
reflected in the Company's financial statements with minority interest
reflecting the separate 19.9% ownership.
FNY allocated the purchase price paid on the basis of the fair
value of property, plant and equipment and identifiable assets acquired and
liabilities assumed. There was no excess cost over fair value of net assets
acquired.
Contingent consideration of $15,000 was payable in cash and was
to be based upon the number of net eligible subscribers, as defined, in
excess of 16,563 delivered to the Company. The contingent consideration is
not included in the acquisition cost total above but was to have been
recorded when and if the future delivery of subscribers occurred (Note 18).
In addition, FNY paid $922 to Kiewit Telecom Holdings which represents an
amount to compensate for foregone interest on the amount invested by Kiewit
Telecom Holdings in Freedom. This amount has been charged to operations.
On May 15, 1995, C-TEC Cable Systems, Inc., a wholly owned
subsidiary of C-TEC ("C-TEC Cable"), acquired 40% of the outstanding common
stock of Twin County Trans Video, Inc. ("Twin County") in exchange for cash of
approximately $26,300, including a $1,000 deposit made in 1994, and a $4,000,
5% promissory note of C-TEC Cable. In addition, C-TEC Cable paid $11,000 in
consideration of a noncompete agreement and assumed liabilities of
approximately $16,400. The remaining shares were subject to an escrow
agreement, pending completion of the merger, and were required to be voted
under the direction of C-TEC Cable. As of May 15, 1995, C-TEC Cable also
assumed management of Twin County. As a result, C-TEC Cable had control of
Twin County and accordingly Twin County is fully consolidated in the Company's
financial statements since May 1995, the date of the original acquisition.
The remaining outstanding common stock of Twin County was acquired in
September 1995 in exchange for $52,000 stated value redeemable convertible
preferred stock of C-TEC. The preferred stock has a stated dividend rate of
5%, beginning January 1, 1996. The fair value of the preferred stock, as
determined by an independent appraiser is $39,500 which is recorded as
additional paid-in capital to the Company. In 1996, the $4,000 promissory
note was canceled and C-TEC Cable paid cash of $500 in settlement of certain
purchase price adjustments.
C-TEC Cable has allocated the purchase price paid for Twin
County on the basis of the fair value of property, plant and equipment and
identifiable intangible assets acquired and liabilities assumed. The excess
of the consideration for the acquisition over the fair value of the net assets
acquired of approximately $16,700 has been allocated to goodwill and is being
amortized over a period of approximately 10 years.
In January 1995, RCN International Holdings Inc. (formerly
C-TEC International, Inc.), a wholly owned subsidiary of C-TEC, purchased a
40% equity position in Megacable, S.A. de C.V. ("Megacable"). The aggregate
consideration for the purchase was cash of $84,115. The Company accounts for
its investment by the equity method of accounting. The original excess cost
over the underlying equity in the net assets is approximately $94,000, which
is being amortized on a straight-line basis over 15 years.
In January 1995, C-TEC Cable purchased the assets of Higgins
Lake Cable, Inc. for cash of approximately $4,750.
In June 1995, C-TEC invested approximately $2,220 for a
one-third interest in a partnership which intends to provide alternative
access telephone service to commercial subscribers. C-TEC transferred this
investment to C-TEC Cable in 1996 at net book value of $1,977.
In November 1995, the Company purchased the assets used in the
provision of residential telephone services in New York by RealCom Office
Communications, Inc. for approximately $1,050.
The following unaudited pro forma summary presents information
as if the acquisitions of Freedom and Twin County had occurred at the
beginning of 1995. The pro forma information is provided for information
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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Sales......................................................................... $110,116 $107,576
(Loss) from continuing operations before extraordinary items and
accounting changes........................................................... $(10,484) $(14,181)
Net (loss).................................................................... $(10,484) $(14,181)
Pro Forma Earnings Per Share:
(Loss) from continuing operations before extraordinary items and
accounting changes........................................................... $ (0.38) $ (0.52)
Net loss...................................................................... $ (0.38) $ (0.52)
</TABLE>
5. SHORT-TERM INVESTMENTS
Short-term investments, stated at cost, include the following
at December 31, 1996 and 1995:
1996 1995
---------- -----------
Federal Agency notes.......... $ -- $ 7,911
Commercial Paper.............. 8,823 9,454
Corporate debt securities..... 38,008 103,122
---------- -----------
Total......................... $ 46,831 $ 120,487
========== ===========
At December 31, 1996, corporate debt securities with an
amortized cost of $34,008 have contractual maturities of one to three years.
All remaining corporate debt securities have contractual maturities of three
to five years.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at
December 31:
1996 1995
---------- -----------
Hybrid fiber/coaxial plant................ $ 182,296 $ 142,689
Buildings and land........................ 2,645 2,491
Furniture, fixtures and vehicles.......... 17,466 14,997
Other..................................... 17,950 13,196
---------- -----------
Total property, plant and equipment....... 220,357 173,373
Less accumulated depreciation............. (84,529) (71,293)
---------- -----------
Property, plant and equipment, net........ $ 135,828 $ 102,080
========== ===========
Depreciation expense was $19,372, $13,236 and $8,431 for the
years ended December 31, 1996, 1995 and 1994, respectively.
7. INVESTMENTS
Investments at December 31 are as follows:
1996 1995
--------- ----------
Megacable, S.A. de C.V............ $ 74,232 $ 77,113
Partnership....................... 2,315 --
--------- ----------
Total Investments................ $ 76,547 $ 77,113
========= ==========
Investments carried on the equity method consist of the
following at December 31:
Percentage Owned
-----------------------
1996 1995
--------- ----------
Megacable, S.A. de C.V......... 40.00% 40.00%
Partnership Interest........... 33.33% --
The basis of the Company's investment in Megacable, S.A. de
C.V. exceeded its underlying equity in the net assets of Megacable when
acquired by approximately $94,000 which excess is being amortized on a
straight-line basis over 15 years. At December 31, 1996 the unamortized
excess over the underlying equity in the net assets was $82,166. The Company
recorded its proportionate share of income (losses) and amortization of excess
cost over net assets of ($2,190) and ($3,061) in 1996 and 1995, respectively.
The aggregate foreign currency transactions included in the
results of operations through the Company's proportionate share of income
(losses) of Megacable were gains (losses) of approximately $247 in 1996 and
($932) in 1995.
The following table reflects the summarized financial position
and results of operations of Megacable, S.A. de C.V. as of and for the years
ended December 31, 1996 and 1995:
1996 1995
------- -------
Assets.......................................... $67,672 $63,150
Liabilities..................................... $ 6,455 $ 9,372
Stockholders' Equity............................ $61,217 $53,778
Sales........................................... $23,225 $20,841
Costs and Expenses.............................. $15,689 $15,078
Foreign Currency Translation Gains (Losses)..... $ 618 $(2,329)
Net Income...................................... $10,226 $ 5,802
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
Amortization period 1996 1995
------------------- ------- -------
Franchises and subscriber lists. 2-10 years $78,747 $73,966
Noncompete agreements........... 5-8 years 11,209 14,380
Goodwill........................ 10 years 16,830 18,373
Building access rights.......... 4 years 14,894 --
Other intangibles............... 2-10 years 519 1,228
------- -------
Total intangibles............... 122,199 107,947
Less accumulated amortization... (28,728) (19,915)
------- -------
Intangible assets, net.......... $93,471 $88,032
======= =======
Amortization expense charged to operations in 1996, 1995 and
1994 was $19,509, $9,100 and $1,372, respectively.
9. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Note and interest receivable - Mazon Corporativo, S.A. de C.V.................. $15,310 $ --
Debt issuance costs............................................................ 309 495
Prepaid pension costs.......................................................... 2,967 3,569
Prepaid professional services.................................................. 3,439 3,113
Other.......................................................................... 2,121 1,963
------- --------
Total.......................................................................... $24,146 $ 9,140
======= ========
</TABLE>
10. DEBT
a. Long-Term Debt
Long-term debt outstanding at December 31 is as follows:
1996 1995
-------- --------
Senior Credit Notes 9.65% due 1999....... $131,250 $150,000
Revolving Credit Agreement............... -- 7,000
Promissory Note - 5% due 2003............ -- 4,000
-------- --------
Total.................................... 131,250 161,000
Due within one year...................... -- (25,750)
-------- --------
Total Long-Term Debt..................... $131,250 $135,250
======== ========
In 1989, in order to complete the August 29, 1989 Michigan
Cable Television acquisition, C-TEC Cable entered into a private placement of
Senior Secured Notes for $150,000 and a $70,000 Revolving Secured Credit
Agreement, which was voluntarily reduced to $60,000 in 1990 and which, in
accordance with its terms, reduced on a quarterly basis, through original
scheduled maturity in September 1996. In August 1996, C-TEC Cable obtained an
amendment and waiver related to this Revolving Secured Credit Agreement which
extended final maturity to December 1996 and increased the amount of available
borrowings. Additionally, the restrictive covenant relating to limitations on
the amount of capital expenditures was waived for the year ending December 31,
1996. C-TEC Cable had borrowings of $7,000 (6.7% weighted average interest
rate) as of December 31, 1995. The Senior Secured Notes are collateralized
by the stock of subsidiaries of C-TEC Cable. On September 1, 1996 and on each
September 1 thereafter, a mandatory principal repayment is required on the
Senior Secured Notes. The Senior Secured Notes contain restrictive covenants
which, among other things, require maintenance of a specified debt to cash
flow ratio. In April 1997, C-TEC obtained three committed credit facilities
aggregating $395,000, subject to certain conditions. These facilities contain
restrictive covenants which generally require the borrower to maintain certain
debt to cash flow and interest coverage ratios and place certain limitations
on additional debt and investments. C-TEC does not believe that these
covenants will materially restrict its activities. Two of the facilities,
aggregating $270,000, are unsecured and will not become obligations of the
Company. The third facility, in the amount of $125,000 will be collateralized
by the stock of the New Jersey and New York cable subsidiaries and will become
a future obligation of the Company. C-TEC intends to borrow against these
facilities in order to refinance the existing Cable Group Senior Secured Notes
and to fund its network expansion plans, primarily RCN Telecom Services, in
the future.
The Cable Group Senior Secured Notes were classified as
long-term at December 31, 1996 since the Company has the intent and the
ability to refinance this obligation on a long-term basis through available
credit facilities.
In connection with the acquisition of Twin County Trans Video,
Inc., C-TEC Cable issued a $4,000 promissory note at 5% due in May 2003. The
note was unsecured. In September 1996, the note was canceled in settlement of
certain purchase price adjustments.
Contractual maturities of long-term debt are as follows:
Year Ending December 31 Aggregate Amounts
- ----------------------- -----------------
1997 $43,750 (Expected to be refinanced)
1998 $43,750
1999 $43,750
b. Short-Term debt
At December 31, 1996, C-TEC Cable had unused lines of credit
for $5,500 at prime (8.25% at December 31, 1996). Short-term unsecured
borrowings may be made under these lines of credit. The amounts available
under these lines of credit are reduced by outstanding letters of credit
($3,060 at December 31, 1996). All unused lines of credit are cancelable at
the option of the banks. There are no commitment or facility fees associated
with maintaining availability of the above-mentioned lines of credit.
11. INCOME TAXES
The provision for income taxes is reflected in the Consolidated
Statements of Operations as follows:
1996 1995 1994
------- -------- ------
Current:
Federal........................... $ 5,730 $(5,713) $2,445
State............................. 1,102 375 485
------- ------- ------
Total Current...................... 6,832 (5,338) 2,930
------- ------- ------
Deferred:
Federal........................... (4,751) 7,016 (565)
State............................. (1,000) (377) 165
------- ------- ------
Total Deferred..................... (5,751) 6,639 (400)
------- ------- ------
Amortization of ITC................ (102) (182) (190)
------- ------- ------
Total provision for income taxes... $ 979 $ 1,119 $2,340
======= ======= ======
At December 31, 1996 and 1995, the Company had tax related
balances due to affiliate of $545 and $26, respectively.
Temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at December 31, are as follows:
1996 1995
------- -------
Net operating loss carryforwards............. $ 2,130 $742
Alternative minimum tax credits.............. -- 368
Employee benefit plans....................... 882 961
Reserve for bad debt......................... 693 519
Start-up costs............................... -- 1,110
Investment in unconsolidated entity.......... 4,771 2,399
Accruals for nonrecurring charges
and contract settlements................... 2,299 3,125
Other, net................................... 2,107 1,507
-------- --------
Total deferred tax assets.................... 12,882 10,731
-------- --------
Property, plant and equipment................ (15,019) (15,555)
Intangible asset............................. (16,817) (23,256)
All other.................................... (1,229) (1,457)
-------- --------
Total deferred liabilities................... (33,065) (40,268)
-------- --------
Subtotal..................................... (20,183) (29,537)
Valuation allowance.......................... (3,691) (2,022)
-------- --------
Total deferred taxes......................... $(23,874) $(31,559)
======== ========
In the opinion of management, based on the future turnaround of
existing temporary differences for the consolidated taxpaying group, primarily
depreciation, and its expectation of future operating results, the Company will
more likely than not be able to realize substantially all of its deferred tax
assets.
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 valuation allowance relates primarily to state net
operating loss carryforwards generated by certain subsidiaries.
The net change in the valuation allowance for deferred tax
assets during 1996 was an increase of $1,669.
State net operating losses will expire as follows:
1997 $ 142
1998 90
1999 90
2000 163
2001 552
2002 23
2003 59
2010 89
2011 922
------
Total $2,130
======
The provision (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>
<CAPTION>
For the Years Ended December 31
-----------------------------------
1996 1995 1994
--------- ------ ------
<S> <C> <C> <C>
(Loss) Income before provision for income taxes and cumulative
effect of change in accounting principle.............................. $ (5,010) $3,233 $6,076
========= ====== ======
Federal income tax benefit at statutory rate........................... $ (1,753) $1,131 $2,127
State income taxes net of federal income tax benefit................... 66 (33) 422
Investment tax credits amortized....................................... (102) (50) (190)
Amortization of goodwill............................................... 779 388 2
Estimated nondeductible expenses....................................... 1,564 (93) 19
Adjustment to prior year accrual....................................... 421 (161) 20
Other, net............................................................. 4 (63) (60)
--------- ------ ------
Total provision for income taxes $ 979 $1,119 $2,340
========= ====== ======
</TABLE>
In 1995, C-TEC, 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, the Company's taxes payable for prior years increased
approximately $566. The amount accrued in previous years was sufficient to
satisfy the above adjustment. No additional accrual during 1995 was required.
In 1996, estimated non-deductible expenses relate primarily to
charges in connection with the possible restructuring of the Company.
12. PENSIONS AND EMPLOYEE BENEFITS
The Company'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 the
Company 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.
Substantially, all employees of C-TEC's Pennsylvania cable television
operations (formerly Twin County Trans Video, Inc.) were covered by an
underfunded plan which was merged into C-TEC's overfunded plan on February 28,
1996.
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)
------ ------ ------
Benefits earned during the year (service cost) 2,365 1,656 1,685
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%
The Company's allocable share of the consolidated net periodic
pension cost (credit), based on the Company's proportionate share of
consolidated annualized salaries as of the valuation date, was approximately
$158, $251 and $(188) 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 the Company
will no longer accrue benefits under the defined benefit pension plans 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.
The Company's allocable share of this gain was $3,437. This gain results
primarily from the reduction of the related projected benefit obligation. The
curtailed plan has assets in excess of the projected benefit obligation. Such
excess amounts to $3,917 which, along with unrecognized items of $1,148
results in prepaid pension cost of $2,769, which is included in "Prepayments
and other" in the accompanying 1996 consolidated balance sheet.
The following table sets forth the plans' funded status and
amounts recognized in the C-TEC's balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -----------------------------------------
Under-funded Plan Over-funded Plan
----------------- -----------------
<S> <C> <C> <C>
Plan assets at fair value...................................... $55,325 $471 $60,108
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested...................................................... 32,372 1,122 34,152
Nonvested................................................... 1,704 20 2,104
------- ------- -------
Total......................................................... 34,076 1,142 36,256
Effect of increases in compensation............................ 6,042 718 8,687
------- ------- -------
Plan assets in excess of (less than) projected benefit plan.... 15,207 (1,389) 15,165
Unrecognized transition asset.................................. (3,463) -- (4,432)
Unrecognized prior service cost................................ 2,438 -- 2,969
Unrecognized net gain.......................................... (11,215) (146) (10,133)
------- ------- -------
Prepaid (accrued) pension cost................................. $ 2,967 $(1,535) $ 3,569
======= ======= =======
</TABLE>
Prepaid pension cost is included in "Deferred Charges and Other
Assets" in the accompanying consolidated balance sheets. Accrued pension cost
is included in "Other Deferred Credits" in the accompanying 1995 consolidated
balance sheet.
C-TEC's pension plan has assets in excess of the accumulated
benefit obligation. Plan assets include cash, 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 the Company who are not covered by collective bargaining
agreements. Contributions made by the Company to the 401(k) plan are based on
a specific percentage of employee contributions. Contributions charged to
expense were $354, $268 and $262 in 1996, 1995 and 1994 respectively.
The Company provides certain postemployment benefits to former
or inactive employees of the Company 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 Postemployment Benefits" ("SFAS 112"). SFAS 112
requires accrual of the cost of postemployment 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
postemployment benefit cost. The net periodic postemployment benefit cost was
approximately $539, $(106) and $416 in 1996, 1995 and 1994, respectively.
13. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31,
1996 related to its 1997 construction budget.
b. Total rental expense, primarily for office space and pole
rentals, was $3,632, $2,846 and $1,491 for 1996, 1995 and 1994, respectively.
At December 31, 1996, rental commitments under noncancelable leases, excluding
annual pole rental commitments of approximately $759 that are expected to
continue indefinitely, are as follows:
Year Aggregate Amounts
---- -----------------
1997 $2,866
1998 $2,729
1999 $2,637
2000 $2,606
2001 $3,709
Thereafter $4,247
c. In 1992, C-TEC entered into a restated data processing
agreement for the provision of data processing services and products including
the general management of C-TEC's data processing operations and installation
and enhancement of software systems. The Company pays a monthly fee of $31,
with provision for monthly increases based on increases in the usage of
services over base volumes and for annual increases based on increases in the
Consumer Price Index. The agreement expires December 1997.
d. The Company has outstanding letters of credit aggregating
$3,060 at December 31, 1996.
e. The Company has entered into various noncancelable contracts
for network services. Future obligations under these agreements are as
follows:
Year Network Services
----- ----------------
1997 $6,062
1998 $9,000
1999 $5,500
f. 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 additional challenges to its rates.
The 1994 statement of operations includes charges aggregating approximately
$650 relating to cable rate regulation liabilities. Such charges were not
significant in 1996 and 1995.
g. 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.
h. The Company has agreed to indemnify Cable Michigan 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 Cable Michigan and C-TEC and their
respective subsidiaries against 30% 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, Cable Michigan 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 Cable Michigan 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 30% by the Company and 20% by Cable
Michigan.
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.
14. AFFILIATE AND RELATED PARTY TRANSACTIONS:
The Company had the following transactions with affiliates
during the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Corporate office costs allocated to affiliates..................... $12,362 $10,009 $8,498
Cable staff and customer service costs allocated to Cable
Michigan.......................................................... 3,577 2,952 3,528
Interest income on affiliate notes................................. 15,119 17,340 16,841
Interest expense on affiliate notes................................ 354 279 96
Long-distance terminating access charges from C-TEC................ 728 862 939
Royalty fees charged by C-TEC...................................... 859 533 435
Revenue from engineering services.................................. 296 2,169 8
Other affiliate revenues........................................... -- 6 20
Other affiliate expenses........................................... 1,980 2,090 1,238
</TABLE>
At December 31, 1996 and 1995, the Company has accounts
receivable from affiliates of $12,614 and $14,186, respectively, for these
transactions. At December 31, 1996 and 1995, the Company has accounts payable
to affiliates of $4,880 and $6,234, respectively, for these transactions.
The Company has notes receivable of $7,914 in 1996 and $17,604
in 1995 from advances by the Company's corporate financial services company to
C-TEC. The Company also has notes receivable of $147,567 and $164,377 at
December 31, 1996 and 1995, respectively, from C-TEC primarily related to the
acquisition by C-TEC of its Michigan cable operations and its subsequent
operations.
The Company has notes payable of $11,854 in 1996 and $5,552 in
1995 from excess cash advanced by C-TEC to the Company's corporate financial
services company for investment.
15. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain financial instruments potentially subject the Company
to concentrations of credit risk. These financial instruments consist
primarily of trade receivables, cash and temporary cash investments, and
short-term investments.
The Company places its cash and temporary investments with high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution. The Company also periodically evaluates the
credit worthiness 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 a large, geographically dispersed customer base.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the
short maturity of these instruments.
b. Short-term investments
Short-term investments consist of commercial paper, corporate
debt securities and in 1995, federal agency notes. Short-term investments are
carried at amortized cost which approximates fair value due to the short
period of time to maturity.
c. Long-term investments and note and interest receivable
Long-term investments consist of investments accounted for
under the equity method for which disclosure of fair value is not required.
The note and interest receivable are carried at cost plus accrued interest
which management believes approximates fair value.
d. Long-term debt
The fair value of fixed rate long-term debt was estimated
based on the Company's current incremental borrowing rate for debt of the
same remaining maturities. The fair value of floating rate debt is
considered to be equal to the carrying value since the debt reprices 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, it would obtain similar rates in the current market.
e. Letters of credit
The contract amount of letters of credit represents a
reasonable estimate of their value since such instruments reflect fair value
as a condition of their underlying purpose and are subject to fees
competitively determined in the marketplace.
The estimated carrying fair value of the Company's financial
instruments are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and temporary cash investments......... $61,843 $61,843 $37,998 $37,998
Short-term investments...................... $46,831 $46,831 $120,487 $120,487
Note and interest receivable................ $15,310 $15,310 -- --
Financial Liabilities:
Fixed rate long-term debt:
Senior Secured Notes...................... $131,250 $137,459 $150,000 $160,737
Promissory Note - 5%...................... -- -- $4,000 $3,370
Floating rate long-term debt:
Revolving Credit Agreement................ -- -- $7,000 $7,000
Unrecognized financial instruments:
Letters of credit........................... $3,060 $3,060 $2,658 $2,658
</TABLE>
17. 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.
<TABLE>
<CAPTION>
1996 First Quarter Second Quarter Third Quarter Fourth Quarter
- ---- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales.................................... $24,165 $24,852 $26,746 $29,147
Operating income before depreciation
and amortization........................ $ 4,199 $ 7,777 $ 7,496 $ 6,331
Operating income......................... $(4,621) $(1,233) $(1,711) $(5,513)
1995 First Quarter Second Quarter Third Quarter Fourth Quarter
- ---- -------------- -------------- ------------- --------------
Sales.................................... $19,553 $25,523 $23,720 $23,201
Operating income before depreciation
and amortization........................ $ 3,166 $ 5,993 $ 3,890 $ 3,945
Operating income......................... $ 592 $ 2,004 $(2,280) $(5,658)
</TABLE>
18. SUBSEQUENT EVENTS
On March 21, 1997, the Company paid $15,000 in full
satisfaction of contingent consideration payable for the acquisition of
Freedom (Note 4). Additionally, pursuant to the terms of the Freedom
Operating Agreement, the assets of RCN Telecom Services of New York, Inc., a
wholly-owned subsidiary of RCN, were contributed to Freedom, in which the
Company had an 80.1% ownership interest prior to such contribution.
Subsequent to this contribution, the Company paid $15,000 to acquire the
minority ownership of Freedom. These amounts will primarily be allocated to
excess cost over fair value of net assets acquired and are expected to be
amortized over a period of approximately six years. The Company also paid
$10,000 to terminate a marketing services agreement between Freedom and an
entity controlled by Freedom's former minority owners. The Company charged
this amount to operations for the quarter ended March 31, 1997.
Certain of the Company's direct and indirect subsidiaries,
namely, C-TEC Cable Systems, Inc. ("Cable Systems"), ComVideo Systems, Inc.
("ComVideo") and C-TEC Cable Systems of New York, Inc. ("Cable Systems New
York") (collectively, the "Borrowers"), have 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"), which was effective as of July 1, 1997 (the "Closing
Date"). The first is a five-year revolving credit facility in the amount of
$25 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 existing indebtedness of the Borrowers,
(ii) to finance an equity investment by Cable Systems in RCN Telecom Services,
Inc. (a member of the RCN Group), (iii) to finance permitted acquisitions,
and (iv) for capital expenditures, working capital and general corporate
purposes. Borrowings under the Credit Agreement 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 Borrowers contained in the
Credit Agreement and related pledge agreements must be true. Each Borrower is
jointly and severally liable for all borrowings and other obligations under
the Credit Facilities. The Credit Facilities will not be available until the
stock of Cable Systems New York is released from a lien securing indebtedness
of Cable Systems (in a principal amount of approximately $132 million) owing
to a group of institutional investors, and is pledged to the lenders under the
Credit Agreement. Cable Systems anticipates prepaying that other indebtedness
prior to the Distribution Date, using proceeds of intercompany debt repaid to
it by Cable Michigan, proceeds of a Credit Facility borrowing and other cash
on hand, at which point such stock will be released from such lien.
The interest rate on the Credit Facilities will be, at the
election of the Borrowers, 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 Borrowers until June 30, 2002.
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................................ $3,750
2000................................ $11,250
2001................................ $16,250
2002................................ $17,500
2003................................ $19,374
2004................................ $21,250
2005................................ $10,626
The Borrowers have 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 Borrowers are 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 Cable Systems of 100% of the stock in ComVideo (which will
be given only after approval from the appropriate regulatory authority in New
Jersey is granted) and in Cable Systems New York; (ii) a first priority
pledge by ComVideo of 100% of its partnership interests in Home Link
Communications of Princeton, L.P. ("Home Link") at such time that ComVideo
has acquired 100% of the partnership interests in Home Link (at which time
Home Link will become a Borrower) and subject also to approval of the
appropriate regulatory authority in New Jersey being granted; (iii) a first
priority pledge by each Borrower of 100% of the stock owned by it in each
other material subsidiary of such Borrower created after the Closing Date; and
(iv) a first priority pledge by RCN of 100% of the stock of Cable Systems
(which will be given within 30 days of the Distribution Date). In addition,
the Borrowers are subject to a prohibition on granting other negative pledges
to other parties on the assets of Cable Systems and certain of its
subsidiaries (subject to customary exceptions). The stock and assets of C-TEC
Cable Systems of Pennsylvania, Inc., RCN Telecom Services, Inc. and RCN
International, Inc. are excluded from the security arrangements.
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, making of capital expenditures
and transactions with affiliates and requires the Company to maintain certain
financial ratios.
RCN CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, 1997
-------------
Unaudited
<S> <C>
ASSETS
Current Assets
Cash and temporary cash investments........................................................ $41,478
Short-term investments..................................................................... 4,003
Accounts receivable - affiliates........................................................... 16,577
Accounts receivable, net of reserve for doubtful accounts of $1,809........................ 13,999
Unbilled revenues.......................................................................... 1,109
Material and supply inventory, at average cost............................................. 1,323
Prepayments and other...................................................................... 1,731
Deferred income taxes...................................................................... 4,468
--------
Total current assets........................................................................ 84,688
--------
Notes receivable - affiliates............................................................... 145,592
Property, plant and equipment
Hybrid fiber/coaxial plant............................................................... 166,919
Other property, plant and equipment...................................................... 73,534
--------
Total property, plant and equipment......................................................... 240,453
Accumulated depreciation.................................................................... 95,457
--------
Net property, plant and equipment........................................................... 144,996
--------
Investments................................................................................. 72,135
Intangible Assets, Net...................................................................... 121,030
Deferred Charges and Other Assets........................................................... 25,209
--------
Total Assets................................................................................ $593,650
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable - affiliates.............................................................. $9,726
Accounts payable........................................................................... 13,520
Advance billings and customer deposits..................................................... 8,482
Accrued taxes.............................................................................. 900
Accrued interest........................................................................... 4,293
Accrued contract settlements............................................................... 3,127
Accrued cable programming expense.......................................................... 3,339
Accrued expenses........................................................................... 19,748
--------
Total current liabilities.................................................................. 63,135
--------
Long-Term Debt.............................................................................. 131,250
Notes payable - affiliates.................................................................. 13,346
Deferred Income Taxes....................................................................... 26,913
Other Deferred Credits...................................................................... 4,151
Commitments and Contingencies...............................................................
Common Shareholders' Equity................................................................. 341,454
Minority Interest........................................................................... 13,401
--------
Total Liabilities and Shareholders' Equity.................................................. $593,650
--------
</TABLE>
See accompanying note to consolidated financial statements.
RCN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ------------------------
1997 1996 1997 1996
------- ------- -------- --------
Unaudited Unaudited
<S> <C> <C> <C> <C>
Sales.......................................................... $60,706 $49,017 $31,029 $24,852
Costs and expenses, excluding depreciation and
amortization.................................................. 55,703 37,041 30,179 17,075
Depreciation and amortization.................................. 25,455 17,830 13,265 9,010
Nonrecurring charges........................................... 10,000 -- -- --
------- ------- -------- -------
Operating (loss)............................................... (30,452) (5,854) (12,415) (1,233)
Interest Income................................................ 9,761 13,591 4,608 6,800
Interest expense............................................... (7,129) (7,758) (3,699) (3,833)
Other (expense) income, net.................................... 600 (461) 633 (530)
------- ------- -------- -------
(Loss) Income Before Income taxes.............................. (27,220) (482) (10,873) 1,204
(Benefit) provisions for income taxes.......................... (7,143) 321 (2,344) 357
------- ------- -------- -------
(Loss) Before Minority Interest and Equity in Unconsolidated
Entities ..................................................... (20,077) (803) (8,529) 847
Minority interest in loss (income) of consolidated entities.... 1,388 (90) 479 (45)
Equity in (loss) of unconsolidated entities.................... (1,561) (1,299) (756) (542)
-------- ------- -------- -------
Net Income (loss).............................................. $(20,250) $(2,192) $ (8,806) $ 260
======== ======= ======== =======
Unaudited pro forma net income (loss) per common share......... $ (0.74) $ (0.08) $ (.32) $ (.01)
</TABLE>
See accompanying note to consolidated financial statements.
RCN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1997 1996
------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................................ $4,283 $4,254
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.............................. (20,914) (16,510)
Purchase of loan receivable............................................. -- (13,088)
Purchases of short-term investments..................................... -- (47,578)
Sales and maturities of short-term investments.......................... 42,934 114,242
Acquisitions............................................................ (30,475) --
Proceeds from sale of partnership interest.............................. 1,900 --
Other................................................................... (1,423) (203)
--------- ---------
Net cash (used in) provided by investing activities (7,978) 36,863
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Long-Term Debt............................................ -- (7,000)
Transfers from C-TEC.................................................... 26,496 36,600
Transfer (to) C-TEC..................................................... (54,547) (21,030)
Change in affiliate notes, net.......................................... 11,381 30,485
---------- ---------
Net cash (used in) provided by financing activities...................... (16,670) 39,055
---------- ---------
Net (decrease) increase in cash and temporary cash investments........... (20,365) 80,172
Cash and temporary cash investments at beginning of year................. 61,843 37,998
---------- ---------
Cash and temporary cash investments at June 30,.......................... $ 41,478 $ 118,170
========= =========
See accompanying note to consolidated financial statements.
</TABLE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL 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.
1. Results for the first quarter of 1996 have been restated from amounts
previously reported to reflect a more accurate allocation of total 1996
intercompany eliminations on a quarterly basis. Sales have been decreased by
$10; operating income has been decreased by $2,338, and net income has been
decreased by $1,532.
2. In September 1996, RCN and BECO, through wholly owned subsidiaries,
entered into a letter of intent to form a joint venture to utilize 126 fiber
miles of BECO's fiber optic network to deliver RCN's comprehensive
communications package in Greater Boston. The venture, in the form of an
unregulated entity with a term expiring in the year 2060, was formed pursuant
to a joint venture agreement dated December 23, 1996 (the "Boston Joint Venture
Agreement") providing for the organization and operation of RCN-BECOCOM,
LLC ("RCN-BECOCOM"). RCN-BECOCOM is a limited liability company organized
to own and operate an advanced fiber optic telecommunications network (the
"Network") and to provide, in the market in and around Boston,
Massachusetts (the "Boston Market"), voice, video and data services, as
well as the communications support component of energy related customer
services offered by BECO (collectively, the "Boston Services"). RCN owns
51% of the equity interest in RCN-BECOCOM and BECO owns the remaining 49%
interest.
The BECO joint venture had no activity through May 1997; and
therefore, had no effect on the financial statements through that date. The
joint venture began operations in June 1997. At and for the quarter ended June
30, 1997, the joint venture did not have a material impact on the consolidated
financial statements of RCN. At June 30, 1997, the joint venture had assets
of $30,056. For the three months ended June 30, 1997, the joint venture had
sales of $86, operating income of $(1,072) and net income of $(1,096). RCN
has consolidated the BECO joint venture on its financial statements at and for
the quarter ended June 30, 1997, as a result of its majority ownership; day to
day control as provided for in the joint venture management agreement; and its
actual exercise of control in the joint venture operations.
MEGACABLE, S.A. DE C.V. AND SUBSIDIARIES
REPORT ON AUDITS OF
CONSOLIDATED
FINANCIAL STATEMENTS
for the years ended
December 31, 1996 and 1995
Report of Independent Accountants
To the Board of Directors and Stockholder of Megacable, S.A. de
C.V. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Megacable, S.A. de C.V., and Subsidiaries, as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows, for the years then ended. 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
in the United States. 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.
As described in Note 2, the Company and its subsidiaries
maintain their accounting records in Mexican pesos, in accordance the Mexican
Tax Laws and generally accepted accounting principles. The consolidated
statements referred to above have been prepared in conformity with generally
accepted accounting principles as applied in the United States and,
accordingly, include adjustments not recorded on the companies' books.
Besides, the financial statements performed were translated to U.S. dollars
according to FASB 52.
In our opinion the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Megacable, S.A. de C.V. and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of its operations, changes in
stockholders' equity and its cash flows, for the years then ended in
conformity with generally accepted accounting principles as applied in the
United States.
Guadalajara, Jalisco, Mexico COOPERS & LYBRAND
February 14, 1997 Victor M. Mendivil E., C.P.A.
MEGACABLE, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.................... $29,616,659 $25,885,757
Receivables:
Trade...................................... 358,296 606,116
Sundry debtors and other................... 519,603 391,913
Inventories.................................. 2,685,824 1,800,600
----------- -----------
Total current assets..................... 33,180,382 28,684,386
Investment.................................... 314,456 326,357
Property, systems and equipment, net.......... 12,848,919 9,857,945
Goodwill, net................................. 19,389,406 21,066,999
Deferred income tax........................... 2,092,674 2,099,531
----------- -----------
Total assets............................. $67,825,837 $62,035,218
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. 1,245,780 700,737
Accrued taxes and expenses................... 1,129,236 1,435,105
Current portion of long-term debt............ 485,748 2,792,874
----------- -----------
Total current liabilities................ 2,860,764 4,928,716
Long-term liabilities:
Long-term debt............................... 3,714,369 4,442,990
----------- -----------
Total liabilities........................ 6,575,133 9,371,706
----------- -----------
Commitments and contingencies
Stockholders' equity.......................... 61,179,148 52,656,924
Minority interest............................. 71,556 6,588
----------- -----------
Total stockholders' equity .............. 61,250,704 52,663,512
----------- -----------
Total liabilities and stockholders' equity $67,825,837 $62,035,218
=========== ===========
MEGACABLE, S.A.DE C.V. AND SUBSIDIARIES
Consolidated Income Statement
for the years ended December 31, 1996 and 1995
1996 1995
----------- ----------
Revenues..................................... $23,243,686 $20,841,223
Cost and expenses............................ 13,057,161 12,687,179
Depreciation and amortization................ 2,654,568 2,391,200
----------- ----------
15,711,729 15,078,379
----------- ----------
Operating income........................ 7,531,957 5,762,844
----------- ----------
Other income (expenses), net:
Interest, net............................... 2,330,650 3,934,137
Gains/(losses) on foreign exchange, net..... 629,941 (2,328,982)
----------- ----------
2,960,591 1,605,155
----------- ----------
Income before income taxes.............. 10,492,548 7,367,999
----------- ----------
Income taxes:
Income taxes, asset tax and profit sharing
to personnel.............................. 3,334,881 419,372
Benefit for amortization of fiscal losses... (3,052,791) (419,372)
Deferred income tax......................... (20,070) 1,370,798
----------- ----------
262,020 1,370,798
----------- ----------
Income before minority interest......... 10,230,528 5,997,201
Minority interest............................ 9,544 195,630
----------- ----------
Net income.............................. $10,220,984 $5,801,571
=========== ==========
MEGACABLE, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Cumulative
Translation Accumulated
Capital Stock Adjustment Deficit Total
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance December 31, 1994........ $ 1,610,837 $ 13,398,137 $ (40,227,310) $ (25,218,336)
Common stock issued.............. 84,115,456 -- -- 84,115,456
Net income....................... -- -- 5,801,571 5,801,571
Translation adjustment........... -- (12,041,767) -- (12,041,767)
-------------- ------------ -------------- -------------
Balance December 31, 1995........ 85,726,293 1,356,370 (34,425,739) 52,656,924
Net income....................... -- -- 10,220,984 10,220,984
Translation adjustment........... -- (1,698,760) -- (1,698,760)
-------------- ------------ -------------- -------------
Balance December 31, 1996........ $ 85,726,293 $ (342,390) $ (24,204,755) $ 61,179,148
============== ============ ============== =============
</TABLE>
MEGACABLE, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $10,220,984 $5,801,571
Depreciation....................................................... 1,505,976 1,432,066
Goodwill amortization.............................................. 1,148,592 959,134
Deferred income tax................................................ 6,857 876,116
Net changes in assets and liabilities:
Receivables...................................................... 120,130 (323,228)
Inventories...................................................... (885,224) 486,037
Accounts payable................................................. 545,043 (167,236)
Accrued taxes.................................................... (240,901) (1,295,136)
----------- -----------
Net cash provided by operating activities........................ 12,421,457 7,769,324
----------- -----------
Cash flows used by investing activities:
Purchases of property, systems and equipment....................... (4,850,261) (349,809)
Acquisitions....................................................... -- (4,354,262)
Purchase of investments............................................ -- (92,160)
----------- -----------
Net cash used in investing activities............................ (4,850,261) (4,796,231)
----------- -----------
Cash flows provided (used) by financing activities:
Increase in capital stock.......................................... -- 84,115,456
Long-term debt..................................................... (3,035,747) (49,826,477)
----------- -----------
Net cash provided by (used in) financing activities.............. (3,035,747) 34,288,979
----------- -----------
Foreign currency translation adjustment ............................ (804,547) (12,041,767)
----------- -----------
Net increase in cash and cash equivalents........................... 3,730,902 25,220,305
At the beginning of the year........................................ 25,885,757 665,452
----------- -----------
At the end of the year.............................................. $29,616,659 $25,885,757
=========== ===========
</TABLE>
MEGACABLE, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Nature of Business:
The Company was incorporated on June 15, 1993. The main
business activity of Megacable, S.A. de C.V. and its subsidiaries, is the
installation, operation, maintenance and exploitation of distribution systems
of television signals, through physical lines, for which the Federal
Government grants concessions. These concessions are granted for 15 years
with an option to renew.
2. Accounting Policies:
The significant accounting policies are summarized as follows:
Principles of Consolidation:
The Company and its subsidiaries maintain their accounting
records in the local currency which is the Mexican Peso, and in accordance
with tax laws and generally accepted accounting principles applicable to
Mexico. The consolidated statements have been prepared in conformity with
generally accepted accounting principles as applied in the United States. The
consolidated financial statements include the accounts of Megacable, S.A. de
C.V. and its wholly-owned and majority owned subsidiaries after elimination of
significant intercompany accounts and transactions. The financial statements
have been translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translations" using
the rates of exchange prevailing as of December 31, 1996 and 1995,
respectively. The items of income and expense, were translated into U.S.
dollars at the average rates in effect during the year. The exchange gain or
loss resulting from the translation of the financial statements to U.S.
dollars at year-end has been credited to stockholders' equity effective
January 1,1997, since the three year cumulative rate of inflation at December
31,1996 will exceed 100 percent, Mexico will be treated for accounting
purposes as having a highly inflationary economy. Therefore, the U.S. Dollar
will be treated as the functional currency and translation adjustments will be
included in income.
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 Cash Equivalents:
The Company considers highly liquid investments with an
original maturity of three months or less to be cash and cash equivalents.
They are carried at cost, which approximates market value.
Inventories:
Inventories are valued at acquisition cost, in accordance with
the average cost method, which is lower than market value.
Investments:
The Company accounts for its 15% investment in Productora y
Comercializadora de Television, S.A. de C.V. (PCTV), the Company that supplies
the T.V. signal to the cable television concessionaires on the cost method.
Property, Systems and Equipment:
Property, systems and equipment reflects the original cost of
acquisition or construction.
Systems repair and maintenance is charged to income as
incurred. Major improvements are capitalized. The gain or loss on the sale or
retirement of assets is recognized in other income (expense).
Depreciation:
Depreciation is calculated on the straight-line basis over
their estimated useful lives.
Goodwill:
The investments in subsidiaries are valued at their acquisition
cost and are restated through the equity method, taking as the base the
restated financial statements of those companies.
Goodwill consists of amounts allocated upon acquisitions and
include the excess of cost over the book value of net tangible assets.
Goodwill is amortized on a straight-line basis over the expected benefit
period.
Deferred Income Taxes:
The Company and its subsidiaries reflects the future tax
consequences of differences between the tax basis of assets and liabilities
and their financial reporting amounts at each year end, in accordance with the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
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 established 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 by 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 future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected 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 expected to be held and used is based on the fair
value less cost to sell. No impairment loss was recognized by the Company in
1995 as a result of adoption of SFAS 121.
3. Inventories:
1996 1995
---------- ----------
Materials and equipment......... $2,368,884 $1,759,107
Advances to suppliers........... 248,187 39,791
Goods in transit................ 68,753 1,702
---------- ----------
$2,685,824 $1,800,600
========== ==========
4. Property, Systems and Equipment, Net:
<TABLE>
<CAPTION>
Estimated Useful
Lives 1996 1995
---------------- ------------- ------------
(years)
<S> <C> <C> <C>
Land.................................................. -- $185,823 $188,335
Buildings............................................. 20 44,580 45,811
Cable signal control and distribution systems......... 9 14,636,740 11,271,206
Automobiles and trucks................................ 10 1,003,715 749,156
Office furniture and equipment........................ 11 907,975 565,744
Improvements to leased property....................... 19 579,297 136,556
----------- -----------
17,358,130 12,956,808
Less accumulated depreciation......................... (4,509,211) (3,098,863)
----------- -----------
$12,848,919 $ 9,857,945
=========== ===========
</TABLE>
Total depreciation charged to income, amounts $1,505,976 and
$1,432,066 in 1996 and 1995, respectively.
5. Goodwill, Net:
Goodwill consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Excess of cost over fair value of shares acquired................. $22,233,320 $22,847,065
Less accumulated amortization..................................... (2,843,914) (1,780,066)
----------- -----------
$19,389,406 $21,066,999
=========== ===========
</TABLE>
6. Deferred Income Tax:
The Company and each of its subsidiaries file individual income
tax returns. Carryforwards and temporary differences which give rise to
deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Deferred tax assets (liability):
New operating loss carryforwards................................................... $1,986,013 $3,009,103
Difference between the accumulated depreciation for MEX-GAAP and for U.S.
GAAP............................................................................... 106,661 (909,572)
---------- ----------
Deferred taxes, net............................................................. $2,092,674 $2,099,531
========== ==========
</TABLE>
<TABLE>
<CAPTION>
7. Long-Term Debt:
<S> <C> <C>
Mercantile purchase and sale contract for the purchase from individuals of
shares of its subsidiary "Organizacion Mexicana de Servicios" for
US$5,050,000, with monthly interest due dates and maturities principal 15
and 30 months after the signing of the contract; the final payment due in
March 1998. The interest rate is equal to the prime rate; the average rate
during the year was 8.25%....................................................... $2,500,000 $5,050,000
Capital lease agreement with Arrendadora Banamex, for US$2,185,864 with
monthly maturities; the final payment due June 2000. The interest rates
are variable points); the average rate during the year was 12.34% Capital
Stock:............................................................................. 1,700,117 2,185,864
---------- ----------
4,200,117 7,235,864
Less current portion shown under current liabilities............................... (485,748) (2,792,874)
---------- ----------
$3,714,369 $4,442,990
========== ==========
</TABLE>
8. Capital Stock
Fixed minimum capital without the right of withdrawal,
represented by 47,250,000 common Series B shares with full voting rights, and
by 45,250,000 Series D shares with limited voting rights and preferred
dividends, all of them registered and without expression of par value. No more
than 49% may be subscribed or acquired freely and indistinctly by foreign
investors. As of this date, 7,500,000 shares are pending of subscription. In
the Extraordinary Stockholders' Meeting held on December 16, 1994 it was
approved that they be offered to the investing public through a public
offering, after registration on and authorization of the Mexican Stock
Exchange.
9. Retained Earnings:
In accordance with current tax laws, dividends paid in cash
and/or in kind arising from net tax profit, are not subject to dividend
withholding tax. All other dividends are subject to withholding at a dividend
tax rate of 34%.
10. Income Tax and Asset Tax:
Several differences both temporary and permanent do exist
between accounting and tax figures, which determined a net reduction of the
income before provision, as follows:
As of fiscal year 1996, Megacable, S.A. de C.V. is allowed to
consolidate its tax results with the one of its subsidiaries companies, except
for the ones listed below, which will be included in the consolidation in the
coming years, as follows:
Income before income taxes.................................... $10,492,548
-----------
Plus (less):
Amortization of Goodwill.................................... 1,148,592
Inflationary fiscal loss of the debits, net................. (4,909,501)
Depreciation for tax purposes in excess of book depreciation (1,018,957)
Purchases over the consumption.............................. (88,015)
Other....................................................... (574,545)
-----------
(5,442,426)
Net income for tax purposes................................... 5,050,122
Less amortization of fiscal Losses............................ (5,050,122)
-----------
--
===========
As of the fiscal year 1996, Megacable, S.A. de C.V. is allowed
to consolidate its tax results with the one of the its subsidiaries companies,
except for the ones listed below, which will be included in the consolidation
in the coming years, as follows:
Year
--------------
Mega Control de Mexico.......................... 1997
TV Cable del Golfo.............................. 1997
Megacable Communicaciones de Mexico............. 1998
Telemetropoli................................... Not Applicable
Telecable Internacional......................... Not Applicable
At December 31, 1996, the Company had consolidated loss
carryforwards amounting to $8,792,623, adjusted for inflation for utilization
against future income. An amount of $8,636,972 of these loss carryforwards
expire in 2004.
Asset tax is supplementary to income tax and is the minimum tax
to be paid when the Company is not liable for the payment of income tax, or
income taxes are lower than the asset tax the Company is liable for. Asset tax
adjusted for inflation is recoverable against any outstanding income tax
liability.
At December 31, 1996, the following asset tax was paid, which
is recoverable in future taxable periods:
<TABLE>
<CAPTION>
Year in which the Company was liable Year in which the term for recovery
for the payment of asset tax Amount adjusted for inflation expires.
------------------------------------ ------------------------------ -----------------------------------
<S> <C> <C>
1994 $12,791 2004
1995 21,619 2005
</TABLE>
11. Foreign Currency Position:
As of December 31, there are assets and liabilities in U.S.
dollars as follows:
Thousands of U.S. dollars
---------------------------
1996 1995
--------- -------
Assets................................... $23,849 $21,959
Liabilities.............................. 5,372 7,970
------- -------
Net asset position in foreign policy.. $18,477 $13,989
======= =======
As of December 31, 1996 and 1995, the exchange rate equivalent
to pesos was $7.8509 and $7.64 per dollar, respectively. As of December 31,
1994, 1993, 1992, the exchange rate equivalent was $4.995, $3.107, and $3.329,
respectively.
/TEXT>
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:
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