==============================================================================
As filed with the Securities and Exchange Commission on July 9, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------
FORM 10
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>
<S> <C> <C>
Item Location In Information Statement
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 Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and the Registrant(*)
3.1 Amended and Restated Articles of Incorporation of the Registrant(*)
3.2 Amended and Restated Bylaws of the Registrant(*)
4.1 Credit Agreement dated 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(*)
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
<FN>
(*) To be filed by amendment
(**) Exhibits and schedules which have not been filed with Exhibit 4.1 will be
provided to the Commission by the Registrant upon request
</TABLE>
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: July 9, 1997
<PAGE>
[C-TEC Corporation Letterhead]
, 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 and Boston (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
[____________], 1997. In the RCN Distribution, you will receive [___] shares
of RCN Common Stock for every [___] shares of C-TEC Common Equity you hold on
the record date. In the Cable Michigan Distribution, you will receive [___]
shares of Cable Michigan Common Stock for every [___] 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>
Preliminary and Subject to Completion, Dated July 9, 1997
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 [
] , 1997 (the "Record Date") on the basis of [ ] shares of
Company Common Stock for every [ ] shares of C-TEC Common Equity
held of record on the Record Date. No consideration will be paid to C-TEC or
the Company by C-TEC stockholders for the shares of Company Common Stock
received in the Distribution. Following the Distribution, C-TEC will own no
shares of Company Common Stock or other securities of the Company. See "The
Distribution."
The Distribution is currently expected to be effected on or
about [ ], 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 and Boston (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 to be entered into
prior to the Distribution Date 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. Application will be made to list the Company
Common Stock 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 , 1997.
TABLE OF CONTENTS
Page
----
INTRODUCTION.................................................................1
SUMMARY......................................................................2
RISK FACTORS................................................................11
THE DISTRIBUTION............................................................20
RELATIONSHIP AMONG THE COMPANY, C-TEC AND CABLE MICHIGAN....................23
TRADING MARKET..............................................................28
DIVIDENDS...................................................................29
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.......................30
PRO FORMA CAPITALIZATION....................................................37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.............................38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................39
DESCRIPTION OF THE CREDIT AGREEMENT.........................................46
BUSINESS....................................................................49
MANAGEMENT..................................................................74
EMPLOYEE STOCK OWNERSHIP PLAN...............................................80
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT............................................81
DESCRIPTION OF CAPITAL STOCK................................................83
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS.............................84
INDEPENDENT AUDITORS........................................................86
ADDITIONAL INFORMATION......................................................86
INTRODUCTION
On [ ], 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 [ ] shares of Company
Common Stock for every [ ] shares of C-TEC Common Equity owned of
record on the Record Date. It is expected that certificates representing
shares of Company Common Stock will be mailed on the Distribution Date or as
soon thereafter as practicable to holders of C-TEC Common Equity.
Prior to the Distribution Date, 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. Since it formally commenced operation of these
facilities, RCN has built or acquired through long term lease arrangements
approximately 300 route miles of fiber optic cable and added approximately
1,200 customer connections to its advanced fiber optic networks. In addition,
during the same period the Company added approximately 11,100 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 May 31, 1997, RCN had an aggregate of approximately 232,100 connections
(local telephone, video programming or Internet access) among all facilities,
approximately 46,600 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 aging infrastructure, 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:
o 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.
o 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.
o 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. See
"Business--Strategic Relationships."
o 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
advanced fiber optic networks. RCN intends to convert as many of those
customers as is economically feasible to advanced fiber optic networks.
As of May 31, 1997, RCN had approximately 232,100 customer
connections. This amount includes approximately 46,600 connections in the New
York City and Boston markets (approximately 1,200 advanced fiber connections,
approximately 37,200 wireless video service connections and approximately
7,200 resold telephone and other connections). Also included within the total
customer connections as of May 31, 1997 were approximately 182,000 hybrid
fiber/coaxial cable connections. RCN had revenues of $104.9 million for the
year ended December 31, 1996 and $29.7 million for the three months ended
March 31, 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 177,000 subscribers and 615,000 homes passed by its systems as
of March 31, 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 $6.8
million for the three months ended March 31, 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:
o 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.
o 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.
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.
o 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.
o Existing Customer Base in Attractive Markets. RCN benefits
from an existing base of 227,600 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 40,600 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 [
], 1997, it is estimated that
approximately [ ] 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
[ ] stockholders of record,
although some of the shares may be
registered in nominee names
representing an additional number of
stockholders.
Distribution Ratio.................. [ ] shares of Company Common
Stock for every [ ] shares of
C-TEC Common Equity held of record
on the Record Date.
Record Date......................... [ ] , 1997 (4 p.m. New
York time).
Distribution Date................... [ ], 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. Application will be made
to list the Company Common Stock
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.
No Fractional Shares................ [No fractional shares of Company Common
Stock will be distributed. All
fractional share interests will be
aggregated and sold by the
Distribution Agent on behalf of
stockholders and the cash proceeds
distributed to those stockholders
otherwise entitled to a fractional
interest. See "The Distribution--
Description of the Distribution."]
Relationship with C-TEC
and Cable Michigan After
the Distribution.............. In connection with the Distributions,
C-TEC, the Company and Cable
Michigan will enter into the
Distribution Agreement and the Tax
Sharing Agreement 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
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.)
[Organizational Chart]
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 three month periods ended March 31, 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>
Three Months Ended March 31, 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.............................. $29,677 $24,175 $104,910 $91,997 $59,500 $49,504 $44,030
Costs and expenses, excluding
depreciation and amortization.... 25,524 17,638 79,107 75,003 49,747 30,821 25,725
Depreciation and amortization...... 12,191 8,820 38,881 22,336 9,803 9,922 9,984
Nonrecurring charges............... 10,000 -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Operating (loss) income............ (18,038) (2,283) (13,078) (5,342) (50) 8,761 8,321
Interest income.................... 5,153 6,791 25,602 29,001 21,547 1,922 2,375
Interest expense................... (3,431) (3,925) (16,046) (16,517) (16,669) (1,167) (3,007)
Other (expense) income, net........ (32) 68 (546) (304) 1,343 1,195 6,015
(Benefit) provision for income
taxes............................ (4,800) 769 979 1,119 2,340 167 5,203
Minority interest in (income) loss
of consolidated entities......... 909 (45) 1,340 (144) (95) (85) (43)
Equity in (loss) of
unconsolidated entities.......... (805) (757) (2,282) (3,461) -- -- --
Cumulative effect of changes in -- -- -- -- (83) 1,628 --
accounting principles............
-------- ------- -------- ------- ------- ------- -------
Net (loss) income.................. $(11,444) $(920) $(5,989) $2,114 $3,653 $12,087 $8,458
======== ======= ======== ======= ======= ======= =======
Balance Sheet Data:
Total assets....................... $645,248 $633,322 $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............... 362,449 388,142 390,765 394,069 372,847 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 three months ended
March 31, 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 March 31, 1997 as if the Distribution had occurred on March 31, 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>
Three Months Ended Year Ended
March 31, 1997 December 31, 1996
------------------ -----------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Sales..................................................... $29,677 $104,910
Costs and expenses, excluding depreciation
and amortization........................................ 25,524 79,107
Depreciation and amortization............................. 12,191 38,881
Nonrecurring charges................................. 10,000 --
-------- --------
Operating (loss).......................................... (18,038) (13,078)
Interest income........................................... 1,984 10,475
Interest expense.......................................... (1,865) (8,380)
Other (expense) income, net............................... (32) (546)
-------- --------
(Loss) before income taxes................................ (17,951) (11,529)
(Benefit) for income taxes................................ (5,356) (1,632)
Minority interest in loss of consolidated
entities................................................ 909 1,340
Equity in (loss) of unconsolidated entities............... (805) (2,282)
-------- --------
Net (Loss)................................................ $(12,491) $(10,839)
======== ========
Balance Sheet Data:
Total assets.............................................. $600,681 N/A
Total long-term debt (including current
portion)................................................ 110,000 N/A
Stockholders' equity...................................... 412,943 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 and the Company's intention to connect certain
wireless video and resale telephone customers to its advanced fiber networks
and statements regarding 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, effects of
regulatory reform, effects of 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 significant
(excluding capital costs associated with the development of additional
markets). 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. The extent of the Company's leverage may have
the following consequences: (i) limit the ability of the Company to obtain
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes, (ii) require that a substantial
portion of the Company's cash flows from operations be dedicated to the
payment of principal and interest on its indebtedness and therefore not be
available for other purposes; (iii) limit the Company's flexibility in
planning for, or reacting to, changes in its business; (iv) place the Company
at a competitive disadvantage vis-a-vis less leveraged competitors and (v)
render the Company more vulnerable in the event of a downturn in its business.
The Company anticipates that, in light of the amount of existing indebtedness,
it will continue to have substantial leverage for the foreseeable future.
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. The Company also has in place
arrangements to act as a reseller of NYNEX and Bell Atlantic local telephone
services and arrangements to lease NYNEX and Bell Atlantic unbundled local
loop and T-1 facilities. 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 NYNEX, 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 LECs (including NYNEX 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 NYNEX and
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 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 will 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 will apply for
listing of the Company Common Stock on NASDAQ. A condition to C-TEC's
obligation to consummate the Distributions is 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. 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. 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, Kiewit Telecom will also effectively
control C-TEC and Cable Michigan. Certain of the executive officers and
directors of the Company will also be officers and directors of C-TEC and
Cable Michigan. These relationships may lead to conflicts of interest.
Possibility of Substantial Sales of Common Stock
The Distribution will involve the distribution of an aggregate
of approximately [ ] 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. See "Business--Strategic
Relationships--Relationship with MFS/WorldCom".
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") and (iv) 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 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.
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 [ ], 1997, the C-TEC Board of
Directors set the Record Date as [ ], 1997, the Distribution Date as
[ ], 1997, and the distribution ratios as [ ] shares of the
Company's Common Stock for every [ ] shares of C-TEC Common Equity
held as of the Record Date and [ ] shares of CCS Michigan Common
Stock for every [ ] 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 [__________], 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 [__________], 1997 (the "Record
Date"). The Distribution will be made on the basis of [_____] shares of
Company Common Stock for every [_____] shares of C-TEC Common Equity
outstanding on the Record Date. The actual total number of shares of Company
Common Stock to be distributed will depend on the number of shares of C-TEC
Common Equity outstanding on the Record Date. Based upon the number of shares
of C-TEC Common Equity outstanding on [__________], 1997, approximately [_____]
shares of Company Common Stock will be distributed to holders of C-TEC Common
Equity, which will constitute all of the shares of Company Common Stock owned
by C-TEC. As a result of the Distribution, 100% of the outstanding shares of
Company Common Stock will be distributed to holders of C-TEC Common Equity.
The shares of Company Common Stock will be fully paid and nonassessable, and
the holders thereof will not be entitled to preemptive rights. See
"Description of Capital Stock." Certificates representing the shares of the
Company Common Stock will be mailed on the Distribution Date or as soon as
practicable thereafter to holders of C-TEC Common Equity.
[No certificates or scrip representing fractional shares of
Company Common Stock will be issued to holders of C-TEC Common Equity as part
of the Distribution. The Distribution Agent will aggregate fractional shares
into whole shares and sell them in the open market at then prevailing prices
on behalf of holders who otherwise would be entitled to receive fractional
share interests, and such persons will receive instead a cash payment in the
amount of their pro rata share of the total sale proceeds thereof. Proceeds
from sales of fractional shares will be paid by the Distribution Agent based
upon the average gross selling price per share of Company Common Stock of all
such sales. See "Certain Federal Income Tax Consequences." Such sales are
expected to be made as soon as practicable after the Distribution Date. None
of C-TEC , the Company or the Distribution Agent will guarantee any minimum
sale price for the fractional shares of Company Common Stock, and no interest
will be paid on the proceeds of such shares.]
Concurrently with the Distribution, C-TEC will distribute to
the holders of C-TEC Common Equity 100% of the shares of common stock of
C-TEC's wholly owned subsidiary 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) Except as described below with respect to fractional shares,
a Holder will not recognize gain or loss as a result of the Distribution.
Cash received in lieu of a fractional share will be treated as received in
redemption of such fractional share. Gain or loss will be recognized to the
recipient Holder to the extent of the difference between the Holder's basis in
the fractional share and the amount received for the fractional share.
Provided the fractional share interest is held as a capital asset by the
recipient Holder, such gain or loss will constitute capital gain or loss.
(ii) A Holder will apportion its tax basis for its C-TEC Common
Equity among such C-TEC Common Equity, shares of common stock of 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) Generally no gain or loss will be recognized to C-TEC as
a result of the Distribution, except, for example, to the extent of 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 will enter 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) both before and after giving effect to the Distributions,
C-TEC is not and would not be insolvent, (B) after giving effect to the
Distributions, C-TEC would be able to pay its liabilities as they mature and
become absolute, and C-TEC would not have unreasonably small capital with
which to engage in its business and (C) the Distributions will be permitted
under Section 1551 of the Pennsylvania Business Corporations Act; (iv) C-TEC's
Board of Directors shall have approved the Distributions and shall not have
abandoned, deferred or modified the Distributions at any time prior to the
Distribution Date; (v) (A) the Company's Board of Directors, as named in this
Information Statement, shall have been elected by C-TEC, as sole stockholder
of the Company, and the Company's 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 (it being understood that the consummation of the steps
in the Internal Restructuring that are permitted but not required are not a
condition to the Distribution).
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) both before and after giving
effect to the distribution, the distributing company is not and would not be
insolvent, (B) after giving effect to the distribution, the distributing
company would be able to pay its liabilities as they mature and become
absolute, and the distributing company would not have unreasonably small
capital with which to engage in its business and (C) 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 or relates to the
management or conduct prior to the effective time of the Distribution of the
businesses of C-TEC and its subsidiaries 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 and (x) 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 $6,376,000.
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 and (xv) other miscellaneous
administrative services. The fee per year for services (ii)-(xii) and (xv)
will be 4.0% of the revenues of the Cable Michigan Group plus a direct
allocation of certain consolidated cable 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 $4,418,000. The direct charge for customer service
listed in item (i) along with the billing service listed in item (xiii) and
the cable guide service listed in item (xiv) will be a pro rata share (based
on subscribers) of the expenses incurred by the Company to provide such
customer service and to provide such billing service for all relevant members
of the Company and all relevant members of the Cable Michigan Group.
C-TEC has agreed to provide or cause to be provided to the
Company Group and the Michigan Group certain financial data processing
services for a transitional period after the Distribution. The fees for such
services will be an allocated portion (based on relative usage) of the cost
incurred by the Company to provide such services to all three groups. Based
on this allocation arrangement, the fee for such financial data processing
services to the Company Group and the Cable Michigan Group would have been
approximately $372,000 and $69,000, 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 and programming
administration services provided by RCN to Cable Michigan may not be
terminated by RCN on less than one year advance notice to Cable Michigan. A
service recipient may also terminate individual services by giving 60 days
notice to the applicable service provider.
In addition, RCN has agreed to obtain programming from third
party suppliers for Cable Michigan, the costs of which will be reimbursed to
RCN by Cable Michigan. In those circumstances where RCN purchases third party
programming on behalf of both the RCN Group and the Cable Michigan Group, such
costs will be shared by each Group on a pro rata basis based on each Group's
number of subscribers. Such programming arrangements are to commence on the
Distribution Date and will terminate on 60 days notice by Cable Michigan or on
not less than one year advance notice by RCN to Cable Michigan.
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. 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 other
specified items, including certain arms-length commercial arrangements.
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.
Tax Sharing Agreement
The 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 or the Cable Michigan 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.
Notwithstanding the above, if as a result of the acquisition of
all or a portion of the capital stock or assets of Cable Michigan, the
Distribution or the Cable Michigan Distribution fails to qualify as a tax-free
distribution under Section 355 of the Code, then Cable Michigan will be liable
for any and all increases in tax 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 will apply for listing of
the Company Common Stock 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 _____ shares
of Company Common Stock will be outstanding immediately following the
Distribution, which options will be granted pursuant to the Company's plans.
See "Management -- Executive Compensation". Shares of Company Common Stock
issued upon exercise of all such options will be registered on Form S-8 under
the Securities Act and will, therefore, 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. Except
for the shares registered on this Registration Statement in connection with
the Distribution and common equity offered pursuant to employee benefit plans,
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
three months ended March 31, 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 March 31, 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 March 31, 1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Unaudited Pro Forma Condensed
Consolidated Financial Statements. The Unaudited Pro Forma Consolidated
Financial Statements should be read in conjunction with the historical
Financial Statements and Notes thereto included elsewhere in this Information
Statement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Unaudited Pro Forma Consolidated Financial
Statements are provided for information purposes only and should not be
construed to be indicative of the Company's results of operations or financial
condition had the Distribution and the transactions and events described above
been consummated on the dates assumed, may not reflect the results of
operations or financial condition which would have resulted had the Company
been operated as a separate, independent Company during such period, and are
not necessarily indicative of the Company's future results of operations or
financial condition.
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 Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C>
Sales........................................................ $104,910 $104,910
Cost and expenses, excluding depreciation and amortization... 79,107 79,107
Depreciation and amortization................................ 38,881 38,881
-------- --------
Operating (loss)............................................. (13,078) (13,078)
Interest Income.............................................. 25,602 $(15,127)(1) 10,475
Interest expense............................................. (16,046) (7,461)(2)
15,127 (3) (8,380)
Other (expense), net......................................... (546) (546)
-------- -------- --------
(Loss) before income taxes................................... (4,068) (7,461) (11,529)
(Benefit) provision for income taxes......................... 979 (2,611)(4) (1,632)
(Loss) before minority interest and equity in unconsolidated
entities.................................................... (5,047) (4,850) (9,897)
Minority interest in loss of consolidated entities........... 1,340 1,340
Equity in (loss) of unconsolidated entities.................. (2,282) (2,282)
-------- -------- --------
(Loss) before extraordinary item............................. $ (5,989) $ (4,850) $(10,839)
======== ======== ========
Unaudited pro forma net (loss) per common share before
extraordinary item.......................................... [$ )]
Weighted average number of common shares outstanding......... [ ](5)
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN Corporation
Unaudited Pro Forma Consolidated Statement of Operations
Three Months Ended March 31, 1997
($ in thousands, except per share
amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C>
Sales........................................................ $29,677 $29,677
Cost and expenses, excluding depreciation and amortization... 25,524 25,524
Depreciation and amortization................................ 12,191 12,191
Nonrecurring charges......................................... 10,000 10,000
-------- ------- -------
Operating (loss)............................................. (18,038) (18,038)
Interest income.............................................. 5,153 $(3,169)(1) 1,984
Interest expense............................................. (3,431) (1,865)(2)
3,431 (3) (1,865)
Other (expense) income, net.................................. (32) (32)
-------- ------- -------
(Loss) before income taxes................................... (16,348) (1,603) (17,951)
(Benefit) for income taxes................................... (4,800) (556)(4) (5,356)
(Loss) before minority interest and equity in unconsolidated
entities.................................................... (11,548) (1,047) (12,595)
Minority interest in loss of consolidated entities........... 909 909
Equity in (loss) of unconsolidated entities.................. (805) (805)
-------- ------- -------
Net (loss)................................................... $(11,444) $(1,047) $(12,491)
======== ======= ========
Unaudited pro forma net (loss) per common share.............. [($ )]
Weighted average number of common shares outstanding......... [ ](5)
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN Corporation
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
Adjustments Pro Forma for
Historical for Distribution Distribution
---------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments........................ $ 40,130 $174,998 (6) $215,128
Short-term investments..................................... 13,007 13,007
Accounts receivable affiliates............................. 13,343 (13,343)(7) --
Accounts receivable, net of reserve for doubtful accounts
of $1,736................................................ 11,332 11,332
Unbilled revenues.......................................... 1,297 1,297
Material and supply inventory, at average cost............. 1,117 1,117
Prepayments and other...................................... 2,096 1,677 (8) 3,773
Deferred income taxes...................................... 4,579 4,579
-------- -------- --------
Total current assets........................................ 86,901 163,332 250,233
Notes receivable - affiliates............................... 205,184 (110,000)(9)
(95,184)(7) --
Property, Plant and Equipment
Hybrid Fiber/Coaxial Cable plant........................... 163,741 163,741
Other property, plant and equipment........................ 63,894 63,894
-------- -------- --------
Total property, plant and equipment......................... 227,635 -- 227,635
Accumulated depreciation................................... 89,948 89,948
-------- -------- --------
Net property, plant and equipment.......................... 137,687 -- 137,687
-------- -------- --------
Investments................................................. 75,834 75,834
Intangible assets, net...................................... 115,268 115,268
Deferred Charges and other assets........................... 24,374 728 (10)
(279)(11)
(3,164)(12) 21,659
-------- -------- --------
Total Assets................................................ $645,248 $(44,567) $600,681
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable affiliates................................ $10,393 $(10,393)(7)
Accounts payable........................................... 11,754 $11,754
Advance billings and customer deposits..................... 9,026 9,026
Accrued taxes.............................................. 206 (1,785)(13)
(98)(11)
1,677 (8) --
Accrued interest........................................... 1,109 (1,088)(14) 21
Accrued contract settlements............................... 3,347 3,347
Accrued expenses........................................... 20,770 20,770
-------- -------- --------
Total current liabilities.................................. 56,605 (11,687) 44,918
-------- -------- --------
Long-Term Debt.............................................. 131,250 (131,250)(14) --
110,000 (15) 110,000
Notes payable affiliates.................................... 62,124 (62,124)(7)
Deferred Income Taxes....................................... 29,453 29,453
Other Deferred Credits...................................... 3,367 3,367
Commitments and Contingencies...............................
Common Shareholder's Equity................................. 362,449 (181)(11)
(3,315)(13)
90,000 (16)
(36,010)(7) 412,943
-------- -------- --------
Total Liabilities and Shareholder's Equity.................. $645,248 $(44,567) $600,681
======== ======== ========
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 $3,169 for the three months
ended March 31, 1997 and $15,127 for the year ended December 31, 1996, net
of income taxes of $(1,109) for the three months ended March 31, 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 $1,865 for the three months ended March 31, 1997 and $7,461 for
the year ended December 31, 1996, net of income taxes of $(652) for the
three months ended March 31, 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 $3,431 for the three months ended March 31, 1997 and $15,127 for
the year ended December 31, 1996 and related income taxes of $1,205 for the
three months ended March 31, 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>
<CAPTION>
Quarter Year
Ended Ended
March 31, December 31,
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)...................................... $1,205 $5,294
Incurrence of interest expense and amortization of debt issuance costs on new
third party debt (see Note 2).................................................. (652) (2,611)
Elimination of interest income on outstanding intercompany notes (see (1,109) (5,294)
Note 1)...........................................................................
------ -------
Total........................................................................ $ (556) $(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 [ ], 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 $132,338 of existing third party debt (See Note 14);
(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 15); (v) the
transfer of $3,164 of pre-paid pension costs (See Note 12); (vi) incurrence
of $728 of debt issuance costs related to new third party debt (See Note
10); and (viii) payment of $5,100 in respect of a prepayment penalty on
existing third-party debt (See Note 13).
(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 15).
(11) Adjustment to reflect the write-off of unamortized debt issuance costs of
$279 net of income taxes of $98 in connection with the assumed
repayment of existing outstanding third party debt (see Note 14).
(12) 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 $3,164 from RCN's books to C-TEC.
(13) Adjustment to reflect the penalty of approximately $5,100 (excluding an
income tax benefit of approximately $1,785), on the assumed prepayment of
existing outstanding third party debt (see Note 14).
(14) Adjustment to reflect the assumed repayment of third-party debt of
$131,250 and accrued interest of $1,088, 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).
(15) Adjustment to reflect the assumed incurrence of new third party debt of
$110,000 by the Company.
(16) Adjustment to reflect the assumed contribution by C-TEC, of equity
capital of $90,000 to the Company from new C-TEC borrowings.
PRO FORMA CAPITALIZATION
Prior to the Distribution Date, the Company and the Company
Businesses have been operated as part of C-TEC. The following table sets
forth the capitalization of the Company as of March 31, 1997, and as adjusted
to give effect to the Distribution and the related transactions and events
described in the notes hereto and the Notes to the Unaudited Pro Forma
Consolidated Balance Sheet included in this Information Statement as if the
Distribution and such transactions and events had been consummated on March
31, 1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Pro Forma Capitalization. The Pro
Forma Capitalization table below should be read in conjunction with the
historical Financial Statements and Notes thereto included elsewhere in this
Information Statement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Consolidated
Financial Statements." The Pro Forma Capitalization table below is provided
for information purposes only and should not be construed to be indicative of
the Company's capitalization or financial condition had the Distribution and
such related transactions and events been consummated on the date assumed, may
not reflect the capitalization or financial condition which would have
resulted had the Company been operated as a separate, independent Company
during such period, and are not necessarily indicative of the Company's future
capitalization or financial condition.
<TABLE>
<CAPTION>
March 31, 1997
($ in thousands)
---------------------------------------
Pro Forma
Historical for Distribution
---------- ----------------
<S> <C> <C>
Cash, temporary cash investments and short-term investments $ 53,137 $228,135
======== ========
Long-term debt.................................................... 131,250 110,000
Notes payable-affiliates.......................................... 62,124 --
-------- --------
Total indebtedness................................................ 193,374 110,000
-------- --------
Common shareholder's equity....................................... 362,449 412,943
-------- --------
Total capitalization........................................ $555,823 $522,943
======== ========
</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 three month periods ended March 31, 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>
Three Months Ended March 31, 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.............................. $ 29,677 $ 24,175 $104,910 $ 91,997 $ 59,500 $ 49,504 $ 44,030
Costs and expenses, excluding
depreciation and amortization.... 25,524 17,638 79,107 75,003 49,747 30,821 25,725
Depreciation and amortization...... 12,191 8,820 38,881 22,336 9,803 9,922 9,984
Nonrecurring charges........... 10,000 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating (loss) income............ (18,038) (2,283) (13,078) (5,342) (50) 8,761 8,321
Interest income.................... 5,153 6,791 25,602 29,001 21,547 1,922 2,375
Interest expense................... (3,431) (3,925) (16,046) (16,517) (16,669) (1,167) (3,007)
Other (expense) income, net........ (32) 68 (546) (304) 1,343 1,195 6,015
(Benefit) provision for income
taxes............................ (4,800) 769 979 1,119 2,340 167 5,203
Minority interest in (income) loss
of consolidated entities......... 909 (45) 1,340 (144) (95) (85) (43)
Equity in (loss) of
unconsolidated entities.......... (805) (757) (2,282) (3,461) -- -- --
Cumulative effect of changes in
accounting principles............... -- -- -- -- (83) 1,628 --
-------- -------- -------- -------- -------- -------- --------
Net (loss) income.................. $(11,444) $ (920) $ (5,989) $ 2,114 $ 3,653 $ 12,087 $ 8,458
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Total assets....................... $645,248 $633,322 $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............... 362,449 388,142 390,765 394,069 372,847 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 three months ended March 31, 1997
and 1996:
<TABLE>
<CAPTION>
Three Months ended March 31, Year ended December 31,
---------------------------- ---------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Sales
Hybrid Fiber/Coaxial.................... $21,964 $20,486 $84,096 $66,404 $45,937
Advanced Fiber, Wireless Video and Other
Operating.............................. 7,708 3,689 20,768 25,528 13,514
Corporate............................... 5 -- 46 65 49
------- ------- -------- ------- -------
Total................................ $29,677 $24,175 $104,910 $91,997 $59,500
======= ======= ======== ======= =======
</TABLE>
Operating Income Before Depreciation and Amortization:
<TABLE>
<CAPTION>
Three Months ended March 31, Year ended December 31,
---------------------------- ---------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Hybrid Fiber/Coaxial................ $ 10,091 $ 9,331 $40,094 $28,458 $ 22,279
Advanced Fiber, Wireless Video and
Other Operating................... (5,095) (2,701) (11,711) (8,416) (11,542)
Corporate........................... (10,843) (93) (2,580) (3,048) (984)
-------- ------- ------- ------- --------
Total............................. $ (5,847) $ 6,537 $25,803 $16,994 $ 9,753
======== ======= ======= ======= ========
</TABLE>
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months
Ended March 31, 1996
For the three months ended March 31, 1997, operating income
before depreciation and amortization was $(5,847) as compared to $6,537 for
the three months ended March 31, 1996. Sales increased 22.8% to $29,677 for
the first quarter of 1997 from $24,175 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
three months ended March 31, 1997, sales were $29,677, an increase of $5,502,
primarily due to higher Hybrid Fiber/Coaxial sales of $1,478 and higher
Advanced Fiber, Wireless Video and Other Operating sales of $4,019. The
increase in Hybrid Fiber/Coaxial sales principally results from higher
basic service revenue resulting from approximately 4,318 additional
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") which
resulted in Wireless Video sales of $2,531 for the three months ended March
31, 1997. The remaining increase in sales in the Advanced Fiber, Wireless
Video and Other Operating segment occurred due to higher sales of long
distance.
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 three months ended March 31, 1997, costs
and expenses, excluding depreciation, amortization, and nonrecurring charges,
were $25,524, an increase of $7,886 or 44.7%. The increase is primarily
attributable to higher Advanced Fiber, Wireless Video and Other Operating
costs and expenses, excluding depreciation and amortization, of
approximately $6,400, resulting from the Freedom Acquisition in August 1996
which contributed $4,400 of the increase. The remaining increase in
Advanced Fiber, Wireless Video and Other Operating costs and expenses,
excluding depreciation and amortization, of approximately $2,000 is
primarily related to expansion of the long distance business. Hybrid
Fiber/Coaxial costs and expenses, excluding depreciation and amortization,
increased approximately $700 primarily due to higher basic programming
costs resulting from higher rates, additional channels and subscriber
increases.
Depreciation and Amortization. Depreciation and amortization
expense is comprised principally of depreciation relating to the Company's
Hybrid Fiber/Coaxial facilities. For the three months ended March 31, 1997,
depreciation and amortization increased $3,371 or 38.2% to $12,191 for the
three month period ended March 31, 1997 as compared to $8,820 for the
comparable period in 1996. The increase is due to the additional depreciation
and amortization resulting from the Freedom Acquisition. In addition, during
the three months ended March 31, 1997 the Company incurred $319 in
depreciation related to the Company's advanced fiber optic networks in New
York City and Boston as compared to $189 for the comparable period in 1996.
In future periods, depreciation and amortization are expected
to exceed amounts recorded in 1996 and during the three months ended March 31,
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 non-capitalizable costs incurred in connection with a series of
transactions in March 1997 which resulted in the Company having a 100%
ownership interest in Freedom.
Interest Income. For the three months ended March 31, 1997,
interest income was $5,153, a decrease of $1,638 or 24.1% 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 three months ended March 31, 1997,
interest expense was $3,431, a decrease of $494 or 12.6% primarily due to the
required principal payment of $18,750 on long-term debt in December 1996.
Income Tax. Income tax expense decreased $5,569 primarily due
to the decrease of $15,755 in operating income.
Minority Interest. Minority interest in the loss of
consolidated entities increased $954 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. The Pennsylvania cable system
serves approximately 74,000 subscribers in the Greater Lehigh Valley area
of Pennsylvania. The Pennsylvania cable system accounts for $13,530 of the
increase in sales as a result of the consolidation of its results for a
full year in 1996 as compared to eight months (from the date of acquisition
in May 1995) 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.
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 $23,225, operating income
before depreciation and amortization of $10,183 and net income of $10,226. 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.
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 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............................. 90,000
New third-party debt........................................... 110,000
Cash on hand................................................... 50,000
Operating cash flow of Hybrid Fiber/Coaxial.................... 100,000
Anticipated capital contribution by BECO....................... 110,000
--------
$570,000
========
In order to further fund its anticipated capital requirements
through the end of 1999, the Company is considering the incurrence of
additional debt. 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.
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 first quarter of 1997, the Company's net cash used in
operating activities was $1,144, comprised primarily of a net loss of $11,144
adjusted by non-cash depreciation and amortization of $12,191, other non-cash
items totaling $(770) and working capital changes of $(989). Net cash used in
investing activities of $4,755 consisted primarily of additions to property,
plant and equipment of $7,459 and acquisitions of $30,079 (primarily
acquisition of the minority interest of Freedom) partially offset by sales and
maturities of short-term investments of $33,925. Net cash used in financing
activities of $15,814 consisted of transfers to C-TEC of $16,381 partially
offset by a change in affiliate notes of $567.
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 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). 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. 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 $ 3,750,000
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. Since it formally commenced
operation of these facilities, RCN has built or acquired through long term
lease arrangements approximately 300 route miles of fiber optic cable and added
approximately 1,200 customer connections to its advanced fiber optic networks.
In addition, during the same period the Company added approximately 11,100
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 May 31, 1997, RCN had an aggregate of approximately 232,100
connections (local telephone, video programming or Internet access) among all
facilities, approximately 46,600 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 aging infrastructure, 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:
o 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.
o 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.
o 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. See "--Strategic
Relationships."
o 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
advanced fiber optic networks. RCN intends to convert as many of those
customers as is economically feasible to advanced fiber optic networks.
As of May 31, 1997, RCN had approximately 232,100 customer
connections. This amount includes approximately 46,600 connections in the New
York City and Boston markets (approximately 1,200 advanced fiber connections,
approximately 37,200 wireless video service connections and approximately
7,200 resold telephone and other connections). Also included within the total
customer connections as of May 31, 1997 were approximately 182,000 hybrid
fiber/coaxial cable connections. RCN had revenues of $104.9 million for the
year ended December 31, 1996 and $29.7 million for the three months ended
March 31, 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 177,000 subscribers and
615,000 homes passed by its systems as of March 31, 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 $6.8 million for the three months ended March 31,
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:
o 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.
o 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.
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.
o 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.
o Existing Customer Base in Attractive Markets. RCN benefits
from an existing base of 227,600 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 40,600 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, coupled 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 success that
the incumbent cable companies had experienced in hindering 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 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.
RCN has leased certain facilities owned by the incumbent LECs (unbundled local
loops and T-1 facilities) to provide voice services. RCN has 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 5/31/97
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Connections(1)
Advanced Fiber Optic Networks
Voice........................................ -- -- -- 337
Video..................................... -- -- -- 821
Internet.................................. -- -- -- 75
------- ------- ------- -------
Subtotal................................. -- -- -- 1,233
Other(2).................................. 4,993 5,106 7,909 8,237
Resold Voice................................... 1,750 1,875 2,315 3,441
Wireless Video ................................ 31,078 35,056 35,707 37,194
------- ------- ------- -------
Total RCN Telecom 37,821 42,037 45,931 50,015
------- ------- ------- -------
Hybrid Fiber/Coaxial Cable Operations.......... 177,844 179,932 180,169 182,033
------- ------- ------- -------
Total connections 215,665 221,969 226,100 232,138
======= ======= ======= =======
<FN>
- ------------
(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 (4,479 connections at
May 31, 1997).
</TABLE>
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 May 31, 1997, RCN had approximately 300 telephone service connections on
its advanced fiber networks and approximately 3,400 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 May 31, 1997 RCN Commercial had
approximately 15,200 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 May 31, 1997, RCN had approximately 800 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 37,200
connections attributable to the wireless video system and approximately
182,000 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 or will own or have 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 agreed to reimburse
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
September 30, 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, all 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.
The Delivery Platforms
Overview of Advanced Fiber Networks
RCN's advanced fiber optic networks in Boston and New York City
are designed to support voice, video and data services via a switched,
fiber-rich network architecture. These full service advanced fiber optic
networks 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 May 31, 1997, RCN has connected 354 buildings
(306 in NYC and 48 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 and RCN's arrangements to lease NYNEX
and 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 voice network 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's 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.
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, March 31,
--------------------------------------------------------------- ---------
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed............................ 115,394 118,216 119,761 282,836 283,940 287,877
Basic Subscribers....................... 83,068 87,660 92,140 176,131 179,932 180,169
Basic Penetration....................... 72.0% 74.2% 76.9% 62.3% (1) 63.4% 62.6%
Average Monthly Revenue per Subscriber
For Last Month of the Period........... $41.48 $40.98 $37.67 $36.73 (1) $39.99 $41.69
<FN>
- ------------
(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.
</TABLE>
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 28,420 and 74,299 connections at May 31, 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. NYNEX, 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 NYNEX, 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
NYNEX cover its service areas in the states of Massachusetts, New York,
Vermont, New Hampshire, Maine and Rhode Island, and its agreement with Bell
Atlantic covers its service areas in the states of 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.
Resale Arrangements
Resale of NYNEX/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 May 31,
1997, RCN had 3,441 customers for local telephone services provided through
agreements to act as a reseller of NYNEX and 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 NYNEX
and 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 and NYNEX 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 advanced fiber optic networks in Boston and New York City.
Through its 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. 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 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 May 31, 1997, RCN has obtained 468
access agreements covering over 93,721 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 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, which services customers on the advanced fiber optic network as
well as on the hybrid fiber/coaxial cable systems. 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 March 31, 1997 these systems passed approximately 615,000 homes
and served approximately 177,000 subscribers. Megacable had revenues of $23.2
million for the year ended December 31, 1996 and $6.8 million for the three
months ended March 31, 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 Three Months
December 31, Ended March 31,
--------------------------- -----------------------------
1995 1996 1996 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue 20,841 23,225 5,110 6,764
EBITDA 8,154 10,183 2,136 2,991
EBITDA Margin 39% 44% 42% 44%
Net Income 5,802 10,226 2,034 2,144
RCN Equity in Earnings of Megacable (1) (3,061) (2,190) (757) (712)
Accumulated Cash 25,886 29,617 26,833 30,724
Total Assets 63,150 67,672 64,943 70,575
Total Liabilities 9,372 6,455 9,500 7,185
Net Worth 52,664 61,251 55,443 63,390
Subscribers 177,317 178,664 168,227 177,011
<FN>
- ------------
(1) Represents RCN's portion of the Megacable net income and the amortization
of imputed goodwill.
</TABLE>
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 applied for a license
from the Mexican government to allow it to build a fiber optic network in
Mexico City. MCM intends to use this network to provide local voice and high
speed data services, principally to commercial customers in that 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 NYNEX 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 NYNEX 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 NYNEX, 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 NYNEX and 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 and NYNEX 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 May 31, 1997, the Company had 984 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 RCN
Board of Directors 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's Board of Directors 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's Board of Directors 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's Board of Directors 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
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 will serve as Chairman and Chief Executive
Officer of the Company as well as a director, as of the Distribution. Mr.
McCourt will also serve as a director and Chairman of Cable Michigan as of the
Distribution. In addition, he will remain as a director and Chairman 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 will be the President and Chief Operating
Officer, as well as a director, of the Company as of the Distribution. 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 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 Executive 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 has been appointed President and Chief Executive
Officer of Kiewit Diversified Group, Inc., a wholly owned subsidiary of Peter
Kiewit Sons' Inc. ("PKS"). Mr. Crowe was Chairman of the Board 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 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 WorldCom, Inc., PKS,
a construction and mining company, and California Energy 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 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.
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.
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 Kiewit Diversified Group, Inc. 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 has been a Partner at Rosenn, Jenkins and Greenwald
(Attorneys) since 1964 and is also a director of the Pennsylvania Regional
Board 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 the company, being appointed Vice
President of Operations in 1997. Mr. Graham has also been President and
Chief Executive Officer of Slattery Associates, Inc. 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
---------------------- Stock Securities All Other
Name and Principal Position Year Salary ($) Bonus ($) Awards ($)(1) Underlying Options Compensation
- --------------------------- ---- -------- -------- ------------- ------------------ -----------
<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 Chief 1995 183,731 150,000 67,000 -- 4,790
Business Development 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
<FN>
- ------------
(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 treated in an equitable
manner. 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
will be adjusted as noted below so that following the Distribution each
Named Executive Officer 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; $3,490 - 401(k)
Company match.
</TABLE>
Option Grants, Stock Related Plans. No C-TEC stock options
were granted, during the fiscal year ending December 31, 1996, to the Chief
Executive Officer or any other Named Executive Officer. In addition to the
adjusted options referred to above, the Company anticipates that, in
connection with the Distribution, the Company will adopt one or more
compensation plans relating to Company Common Stock and that additional stock
options relating to Company Common Stock will be granted to certain executive
officers and other key employees. See "--RCN Stock Plans."
The following table sets forth the fiscal year-end value of
unexercised options covering C-TEC Common Stock held by each Named Executive
Officer.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End C-TEC Option Values(1)
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money Options
Unexercised Options at at
December 31, 1996(2) December 31, 1996(2)(3)
--------------------------------------- -----------------------------------------
Exercisable (#) Unexercisable (#) Exercisable($) 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.
RCN Stock Plans
[Disclosure regarding new RCN stock-related plans and
pre-distribution grants -- to come.]
Effect of Distributions on Equity-Related Benefits
In connection with the Distribution, each C-TEC option held by
the Named Executive Officers and certain other executive officers who after
the Distribution will be performing services for each of C-TEC, RCN and Cable
Michigan, will be adjusted so that following the Distribution each such
executive officer 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. The exercise price and number
of shares of C-TEC options held by each person who after the Distribution will
be performing services for only one of C-TEC, RCN or Cable Michigan will
relate only to the common stock of that person's employer and will be adjusted
to reflect the Distribution and to ensure that the aggregate intrinsic value
of the resulting C-TEC, RCN or Cable Michigan options immediately after the
Distribution, as the case may be, are equal to the related 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 in an equitable manner in connection with the Distribution. 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.
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.
Following the Distribution, the Company expects to establish a Compensation
Committee, all the members of which will be non-employee directors.
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 pursuant to employee stock options outstanding as of
the date of this Distribution and the number of shares issuable to BECO
pursuant to the Exchange Agreement (collectively, "Outstanding Company Common
Stock") with a market value 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 May 31, 1997 (or as of the
dates specified in the explanatory footnote in the case of one of the
five-percent stockholders) with respect to the number of shares of C-TEC
Common Stock and C-TEC Class B Common Stock beneficially owned by (i) each
person or entity known by the Company to own more than five percent of the
outstanding C-TEC Common Stock or of the outstanding C-TEC Class B Common
Stock, (ii) each director of the Company, (iii) each of the Named Executive
Officers of the Company and (iv) all directors and officers of the Company as
a group. Also set forth below are the number of shares of Company Common
Stock that each such person or entity would own immediately after the
Distribution on a pro forma basis. To the Company's knowledge, unless
otherwise indicated, each person or entity has sole voting and investment
power with respect to the shares set forth opposite the person's or entity's
name.
<TABLE>
<CAPTION>
COMPANY COMMON
C-TEC CLASS B STOCK
C-TEC COMMON STOCK(1) COMMON STOCK PRO FORMA
-------------------------------- ---------------------------- ----------------------------
Number of Number of Number of
Shares Percent of Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding Beneficially Outstanding
Name of Beneficial Owner Owned Shares (2) Owned Shares Owned Shares (3)
- ------------------------ ------------ ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Directors and Named
Executive Officers
James Q. Crowe 387 * 0 *
Richard R. Jaros 351 * 0 *
Thomas May 0 * 0 *
Walter Scott, Jr. 387 * 0 *
Michael B. Yanney 373 * 0 *
Michael A. Adams 9,244(4) * 0 *
Bruce C. Godfrey 19,702(4) * 0 *
Mark Haverkate 22,540(4) * 400 *
David C. McCourt 42,544(4)(5) * 6,000 *
Michael J. Mahoney 22,071(4) * 0 *
Thomas P. O'Neill, I 0 * 0 *
Alfred Fasola 0 * 0 *
Eugene Roth 1,175 * 5,957 *
Stuart Graham 408 * 4,650 *
All Directors and
Executive Officers as
a Group (14 persons) 119,182 * 17,007 *
5% Stockholders
Kiewit Telecom
Holdings, Inc.(6) 8,226,262 41.5% 5,094,223 67.0%
Mario J. Gabelli
Group(7) 1,576,037 7.94% 681,195 11.4%
</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 C-TEC Matching Shares, but excludes C-TEC 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. 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 and C-TEC Class B Common Stock purchased outright,
Share Units relating to C-TEC Common Stock acquired by each such
executive officer in lieu of current compensation, and the forfeitable
Matching Shares of C-TEC Common Stock held by each such executive
officer:
<TABLE>
<CAPTION>
Share Units
Acquired Total Shares
Under the ESPP Purchased and
Shares in lieu of Total Shares Acquired and
Purchased Current Purchased Restricted Restricted
Outright Compensation and Acquired Matching Shares Matching Shares
---------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Adams........... 762 4,241 5,003 4,241 9,244
Bruce C. Godfrey........... 5,756 6,973 12,729 6,973 19,702
Mark Haverkate............. 15,314 3,127 19,237 13,813 22,940
David C. McCourt........... 14,636 16,959 31,595 6,959 48,554
Michael J. Mahoney......... 8,483 6,794 15,277 6,794 22,071
</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) Kiewit Telecom is owned 90% by Kiewit Diversified Group, Inc. and 10% by
David C. McCourt, Chairman and Chief Executive Officer of C-TEC and
RCN. Kiewit Diversified Group, Inc. is a wholly owned subsidiary of
PKS. Prior to the Distribution, Kiewit Telecom will convert a number
of the shares of C-TEC Class B Common Stock it owns into C-TEC Common
Stock so that it will be entitled to cast less than 50% of the votes
that all shares of C-TEC Common Equity are entitled to cast on matters
presented to C-TEC shareholders. The address for Kiewit Telecom,
Kiewit Diversified Group 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
March 31, 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 May 31, 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 0.3% 121,128 0.5%
Thomas May................................. -- -- -- --
Walter Scott, Jr........................... 250,000 2.7% 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 3% 650,371 14.3%
<FN>
- ------------
* Less than 1% of the outstanding of the class.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company
is based upon the Company's Amended and Restated 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, 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 [__________], 1997
and the distribution ratio of [_____] shares of Company Common Stock for every
[_____] shares of C-TEC Common Equity, it is anticipated that there will be
approximately [_____] 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.
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 Stock, 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
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>
RCN CORPORATION
INDEX TO FINANCIAL STATEMENTS
RCN Corporation
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the three years ended December 31,
1996
Consolidated Statements of Cash Flows for the three years ended December 31,
1996
Consolidated Statements of Changes in Stockholder's Equity for the three years
ended December 31, 1996
Notes to Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1997 (unaudited)
Consolidated Statements of Operations for the Three Months Ended March 31,
1997 and 1996 (unaudited)
Condensed Consolidated Statements of cash Flows for the Three Months Ended
March 31, 1997 and 1996 (unaudited)
Megacable, S.A. de C.V.
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Income Statements for the years ended December 31, 1996 and
1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1995
Notes to Consolidated Financial Statements
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 __ 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)
December 31, 1996 1995
- ------------------------------------------------------------------------------
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
Accrued taxes 1,950 -
Accrued interest 5,041 5,038
Accrued contract settlements 3,565 6,629
Accrued expenses 21,355 14,826
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
RCN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
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) income (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 $3,653
=========================================================================================================
Unaudited pro forma net income (loss) per common share ($.22)
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars) 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
Transfers from (to) C-TEC, net 2,339 (15,632) 298,759
------ ------- -------
Net cash provided by (used in) financing activities 9,391 (31,203) 279,918
------ ------- -------
Net increase (decrease) in cash and temporary cash 23,845 (128,847) 146,055
investments
------ ------- -------
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>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
For the Years Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
Supplemental disclosures of cash flow
information cash paid during the
year for:
Interest $16,046 $16,404 $16,780
Income Taxes $ 549 $ 497 $ 580
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>
Shareholder's Cumulative
Common Net Translation
Stock Investment Adjustment Total
------ ------------- ----------- -----
<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 (Loss) (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>
See accompanying notes to consolidated financial statements
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.
For the Year Ended December 31,
1996 1995 1994
---- ---- ----
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
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:
Buildings..............................................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
from 2 to 10 years. Gain or loss is recognized on major retirements
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
related to those assets to be held and used and as for long-lived
assets and certain identifiable intangibles to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the Company estimates the
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 an assumed
distribution 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.
December 31,
Years Ended 1996 1995
---- ----
Unaudited
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 $ (.38) $ (.52)
Net loss $ (.38) $ (.52)
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 Interest 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 1996 1995
period ---- ----
------------
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:
1996 1995
---- ----
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
====== =====
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 $1,669.
The provision (benefit) for income taxes is different from the
amounts computed by applying the U.S. statutory federal tax rate of
35%. The differences are as follows:
For the Years Ended
December 31
--------------------------
1996 1995 1994
---- ---- ----
(Loss) Income before provision
for income taxes and
cumulative effect of change
in accounting principle ($ 5,009) $ 3,233 $ 6,077
======= ======= =======
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
======= ======= =======
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 $ 2,365 $ 1,656 $ 1,685
(service cost)
Interest cost on projected
benefit obligation 3,412 3,083 2,734
Actual return on plan assets (3,880) (12,897) 5,635
Other components - net (1,456) 8,482 (10,744)
----- ------ ------
Net periodic pension cost (credit) $ 441 $ 324 $ (690)
===== ====== ======
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension
cost (credit):
December 31,
------------
1996 1995 1994
---- ---- ----
Discount rate 7.5% 7.0% 8.0%
Expected long-term rate of return
on plan assets 8.0% 8.0% 8.0%
Weighted average long-term rate of
compensation increases 6.0% 6.0% 6.0%
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:
1996 1995
---- ------------------
Under- Over-
funded funded
Plan Plan
---- ----
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
====== ===== ======
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:
Network
Year 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:
1996 1995 1994
---- ---- ----
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
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
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
a. 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 Fair Carrying Fair
Amount Value Amount 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.
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Sales $24,175 $25,245 $26,330 $29,160
Operating income
before depreciation
and amortization 6,537 7,655 7,177 4,434
Operating income $(2,284) $(1,355) $(2,404) $(7,035)
First Second Third Fourth
1995 Quarter Quarter Quarter 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)
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 $ 3,750,000
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 and requires the Company to maintain
certain financial ratios.
RCN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
March 31,
Unaudited 1997
- -----------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary cash investments $40,130
Short-term investments 13,007
Accounts receivable - affiliates 13,343
Accounts receivable, net of reserve for
doubtful accounts of $1,736 11,332
Unbilled revenues 1,297
Material and supply inventory, at average cost 1,117
Prepayments and other 2,096
Deferred income taxes 4,579
- -----------------------------------------------------------------------
Total current assets 86,901
- -----------------------------------------------------------------------
Notes receivable - affiliates 205,184
- -----------------------------------------------------------------------
Property, plant and equipment
Hybrid fiber/coaxial plant 163,741
Other property, plant and equipment 63,894
- -----------------------------------------------------------------------
Total property, plant and equipment 227,635
Accumulated depreciation 89,948
- -----------------------------------------------------------------------
Net property, plant and equipment 137,687
- -----------------------------------------------------------------------
Investments 75,834
- -----------------------------------------------------------------------
Intangible Assets, Net 115,268
- -----------------------------------------------------------------------
Deferred Charges and Other Assets 24,374
- -----------------------------------------------------------------------
Total Assets $645,248
- -----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable - affiliates $10,393
Accounts payable 11,754
Advance billings and customer deposits 9,026
Accrued taxes 206
Accrued interest 1,109
Accrued contract settlements 3,347
Accrued expenses 20,770
- -----------------------------------------------------------------------
Total current liabilities 56,605
- -----------------------------------------------------------------------
Long-Term Debt 131,250
- -----------------------------------------------------------------------
Notes payable - affiliates 62,124
- -----------------------------------------------------------------------
Deferred Income Taxes 29,453
- -----------------------------------------------------------------------
Other Deferred Credits 3,367
- -----------------------------------------------------------------------
Commitments and Contingencies
- -----------------------------------------------------------------------
Common Shareholders' Equity 362,449
- -----------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $645,248
- -----------------------------------------------------------------------
RCN CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
Unaudited
For the period ended March 31, 1997 1996
- -----------------------------------------------------------------------------
Sales $29,677 $24,175
- -----------------------------------------------------------------------------
Costs and expenses, excluding depreciation
and amortization 25,524 17,638
Depreciation and amortization 12,191 8,820
Nonrecurring charges 10,000 ---
- -----------------------------------------------------------------------------
Operating (loss) (18,038) (2,283)
- -----------------------------------------------------------------------------
Interest income 5,153 6,791
Interest expense (3,431) (3,925)
Other (expense) income, net (32) 68
- -----------------------------------------------------------------------------
(Loss) Income Before Income Taxes (16,348) 651
- -----------------------------------------------------------------------------
(Benefit) provision for income taxes (4,800) 769
- -----------------------------------------------------------------------------
(Loss) Before Minority Interest and Equity in
Unconsolidated Entitites (11,548) (118)
- -----------------------------------------------------------------------------
Minority interest in loss (income) of
consolidated entities 909 (45)
Equity in (loss) of unconsolidated entities (805) (757)
- -----------------------------------------------------------------------------
Net (loss) $(11,444) $(920)
- -----------------------------------------------------------------------------
Unaudited pro forma net income (loss) per common ($.42) ($.03)
share
RCN CORPORATION
Condensed Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
(Unaudited)
Quarter Ended March 31 1997 1996
NET CASH PROVIDED BY OPERATING ACTIVITIES $(1,144) $5,929
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (7,459) (6,936)
Purchase of loan receivable - (13,088)
Purchases of short-term investments - (35,412)
Sales and maturities of short-term investments 33,925 60,060
Acquisitions (30,079) -
Other (1,142) (98)
--------------------
Net cash (used in) provided by investing activities (4,755) 4,526
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of long-term debt - (3,000)
Transfers from (to) C-TEC, net (16,381) (4,926)
Change in affiliate notes, net 567 8,984
--------------------
Net cash (used in) provided by financing activities (15,814) 1,058
--------------------
Net (decrease) increase in cash and temporary cash (21,713) 11,513
investments
Cash and temporary cash investments at
beginning of year 61,843 37,998
--------------------
Cash and temporary cash investments at March 31, $40,130 $49,511
=====================
<PAGE>
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.
COOPERS & LYBRAND
Victor M. Mendivil E., C.P.A.
Guadalajara, Jalisco, Mexico
February 14, 1997
MEGACABLE, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS 1996 1995
---- ----
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 Statements
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>
Capital Cumulative Accumulated
Stock Translation Deficit
Adjustment 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
1996 1995
---- ----
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 asset 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
========== ==========
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 wiill
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>
Estimated
Useful
Lives (Years) 1996 1995
-------------- ---- ----
<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:
1996 1995
---- ----
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
========== ==========
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:
1996 1995
---- ----
Deferred tax assets (liability):
Net 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
========= =========
7. Long-Term Debt:
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 of
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
(LIBOR + 5.875 points); the average rate
during the year was 12.34% 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
========= =========
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:
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 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:
Year
----
Mega Control de Mexico 1997
TV Cable del Golfo 1997
Megacable Communicaciones de Mexico 1998
Telemetropoli Not applicable
Telecable Inernacional 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:
Year in which
the Company
was liable Year in which
for the Amount the term for
payment of adjusted for recovery
asset tax inflation expires
--------- ------------ -------------
1994 $ 12,791 2,004
1995 21,619 2,005
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 currency $ 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.
<PAGE>
/TEXT>
EXHIBIT 4.1
==============================================================================
CREDIT AGREEMENT
dated as of June 30, 1997,
by and among
C-TEC CABLE SYSTEMS, INC.,
COMVIDEO SYSTEMS, INC.,
and
C-TEC CABLE SYSTEMS OF NEW YORK, INC.
as Borrowers,
the Lenders referred to herein,
and
FIRST UNION NATIONAL BANK,
as Administrative Agent
==============================================================================
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS........................................ 1
SECTION 1.1 Definitions........................................ 1
SECTION 1.2 General............................................ 15
SECTION 1.3 Other Definitions and Provisions................... 15
ARTICLE II REVOLVING CREDIT FACILITY.......................... 15
SECTION 2.1 Revolving Credit Loans............................. 15
SECTION 2.2 Procedure for Advances of Loans.................... 16
SECTION 2.3 Repayment of Loans................................. 16
SECTION 2.4 Revolving Credit Notes............................. 18
SECTION 2.5 Permanent Reduction of the Revolving Credit
Commitment......................................... 18
SECTION 2.6 Termination of Revolving Credit Facility........... 19
ARTICLE III TERM LOAN FACILITY................................. 19
SECTION 3.1 Term Loan.......................................... 19
SECTION 3.2 Procedure for Advance of Term Loan................. 19
SECTION 3.3 Repayment of Term Loan............................. 20
SECTION 3.4 Optional Prepayments of Term Loan.................. 21
SECTION 3.5 Mandatory Prepayments of Term Loans................ 21
SECTION 3.6 Term Notes......................................... 21
ARTICLE IV GENERAL LOAN PROVISIONS............................ 21
SECTION 4.1 Interest........................................... 21
SECTION 4.2 Notice and Manner of Conversion or Continuation of
Loans.............................................. 24
SECTION 4.3 Fees............................................... 24
SECTION 4.4 Manner of Payment.................................. 25
SECTION 4.5 Crediting of Payments and Proceeds................. 25
SECTION 4.6 Adjustments........................................ 25
SECTION 4.7 Nature of Obligations of Lenders Regarding Loans;
Assumption by the Administrative Agent............. 26
SECTION 4.8 Changed Circumstances.............................. 27
SECTION 4.9 Indemnity.......................................... 29
SECTION 4.10 Capital Requirements............................... 29
SECTION 4.11 Taxes.............................................. 30
SECTION 4.12 Change of Lending Office; Replacement Lenders...... 32
ARTICLE V CLOSING; CONDITIONS OF CLOSING AND BORROWING....... 33
SECTION 5.1 Closing............................................ 33
SECTION 5.2 Conditions to Closing and Initial Loans............ 33
SECTION 5.3 Additional Conditions to the Initial Loans......... 36
SECTION 5.4 Conditions to All Loans............................ 36
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE
BORROWERS.......................................... 37
SECTION 6.1 Representations and Warranties..................... 37
SECTION 6.2 Survival of Representations and Warranties, Etc.... 44
ARTICLE VII FINANCIAL INFORMATION AND NOTICES.................. 44
SECTION 7.1 Financial Statements and Projections............... 44
SECTION 7.2 Officer's Compliance Certificate................... 45
SECTION 7.3 Accountants' Certificate........................... 45
SECTION 7.4 Other Reports...................................... 46
SECTION 7.5 Notice of Litigation and Other Matters............. 46
SECTION 7.6 Accuracy of Information............................ 47
ARTICLE VIII AFFIRMATIVE COVENANTS.............................. 47
SECTION 8.1 Preservation of Corporate Existence and Related
Matters............................................ 47
SECTION 8.2 Maintenance of Property............................ 48
SECTION 8.3 Insurance.......................................... 48
SECTION 8.4 Accounting Methods and Financial Records........... 48
SECTION 8.5 Payment and Performance of Obligations............. 48
SECTION 8.6 Compliance With Laws and Approvals................. 48
SECTION 8.7 Environmental Laws................................. 48
SECTION 8.8 Compliance with ERISA.............................. 49
SECTION 8.9 Compliance With Agreements......................... 49
SECTION 8.10 Additional Subsidiaries............................ 49
SECTION 8.11 Required Governmental Approvals.................... 50
SECTION 8.12 Conduct of Business................................ 51
SECTION 8.13 Visits and Inspections............................. 51
ARTICLE IX FINANCIAL COVENANTS................................ 51
SECTION 9.1. Leverage Ratio..................................... 51
SECTION 9.2. Interest Coverage Ratio............................ 51
SECTION 9.3. Adjusted Fixed Charge Coverage Ratio............... 52
ARTICLE X NEGATIVE COVENANTS................................. 52
SECTION 10.1 Limitations on Debt................................ 52
SECTION 10.2 Limitations on Liens............................... 53
SECTION 10.3 Limitations on Loans, Advances, Investments and
Acquisitions....................................... 54
SECTION 10.4 Limitations on Mergers and Liquidation............. 55
SECTION 10.5 Limitations on Sale of Assets...................... 56
SECTION 10.6 Limitations on Restricted Payments................. 56
SECTION 10.7 Limitations on Exchange and Issuance of Capital
Stock.............................................. 57
SECTION 10.8 Transactions with Affiliates....................... 57
SECTION 10.9 Certain Accounting Changes......................... 58
SECTION 10.10 Restrictive Agreements............................. 58
ARTICLE XI DEFAULT AND REMEDIES............................... 58
SECTION 11.1 Events of Default.................................. 58
SECTION 11.2 Remedies........................................... 62
SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc.... 63
ARTICLE XII THE ADMINISTRATIVE AGENT........................... 63
SECTION 12.1 Appointment........................................ 63
SECTION 12.2 Delegation of Duties............................... 64
SECTION 12.3 Exculpatory Provisions............................. 64
SECTION 12.4 Reliance by the Administrative Agent............... 64
SECTION 12.5 Notice of Default.................................. 65
SECTION 12.6 Non-Reliance on the Administrative Agent and Other
Lenders............................................ 65
SECTION 12.7 Indemnification.................................... 65
SECTION 12.8 The Administrative Agent in Its Individual Capacity 66
SECTION 12.9 Resignation of the Administrative Agent; Successor
Administrative Agent............................... 66
ARTICLE XIII MISCELLANEOUS...................................... 66
SECTION 13.1 Notices............................................ 67
SECTION 13.2 Expenses; Indemnity................................ 68
SECTION 13.3 Set-off............................................ 68
SECTION 13.4 Governing Law...................................... 69
SECTION 13.5 Consent to Jurisdiction............................ 69
SECTION 13.6 Binding Arbitration; Waiver of Jury Trial.......... 69
SECTION 13.7 Reversal of Payments............................... 70
SECTION 13.8 Injunctive Relief.................................. 70
SECTION 13.9 Accounting Matters................................. 71
SECTION 13.10 Successors and Assigns; Participations............. 71
SECTION 13.11 Amendments, Waivers and Consents................... 74
SECTION 13.12 Performance of Duties.............................. 74
SECTION 13.13 All Powers Coupled with Interest................... 74
SECTION 13.14 Survival of Indemnities............................ 74
SECTION 13.15 Titles and Captions................................ 75
SECTION 13.16 Severability of Provisions......................... 75
SECTION 13.17 Counterparts....................................... 75
SECTION 13.18 Term of Agreement.................................. 75
EXHIBITS
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Term Loan Note
Exhibit C-1 - Form of Notice of Revolving Credit Borrowing
Exhibit C-2 - Form of Notice of Term Loan Borrowing
Exhibit D - Form of Notice of Payment
Exhibit E - Form of Notice of Conversion/Continuation
Exhibit F - Form of Officer's Certificate
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Notice of Account Designation
Exhibit I-1 - Form of Cable Systems Pledge Agreement
Exhibit I-2 - Form of ComVideo Pledge Agreement
Exhibit I-3 - Form of Parent Pledge Agreement
Exhibit J - Form of Joinder Agreement
Exhibit K - Form of Subordination Terms for Parent
Subordinated Debt
SCHEDULES
Schedule 1.1(a) - Lenders and Commitments
Schedule 1.1(b) - Plan of Reorganization
Schedule 6.1(a) - Jurisdictions of Organization and
Qualification
Schedule 6.1(b) - Subsidiaries and Capitalization
Schedule 6.1(d) - Required Government Approvals
Schedule 6.1(i) - ERISA Plans
Schedule 6.1(l) - Material Contracts
Schedule 6.1(m) - Labor and Collective Bargaining Agreements
Schedule 6.1(s) - Debt and Guaranty Obligations
Schedule 6.1(t) - Litigation
Schedule 6.1(u) - FCC Licenses, PUC Authorizations and CATV Franchises
Schedule 10.2 - Existing Liens
Schedule 10.3 - Existing Loans, Advances and Investments
CREDIT AGREEMENT, dated as of the 30th day of June, 1997, by and among
C-TEC CABLE SYSTEMS, INC., COMVIDEO SYSTEMS, INC. and C-TEC CABLE SYSTEMS OF
NEW YORK, INC., (collectively, the "Borrowers"), the Lenders who are or may
become a party to this Agreement, and FIRST UNION NATIONAL BANK, as
Administrative Agent for the Lenders.
STATEMENT OF PURPOSE
The Borrowers have requested, and the Lenders have agreed, to extend
certain credit facilities to the Borrowers on the terms and conditions of this
Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, such
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following terms when used in this
Agreement shall have the meanings assigned to them below:
"Adjusted Operating Cash Flow" means, with respect to any Person for any
period, the total of the following for such period calculated in accordance
with GAAP: (a) Operating Cash Flow less (b) the sum of (i) cash taxes, (ii)
Restricted Payments and (iii) Specified Capital Expenditures.
"Administrative Agent" means First Union in its capacity as
Administrative Agent hereunder, and any successor thereto appointed pursuant
to Section 12.9.
"Administrative Agent's Office" means the office of the Administrative
Agent specified in or determined in accordance with the provisions of Section
13.1.
"Affiliate" means, with respect to any Person, any other Person (other
than a Subsidiary) which directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such first Person or any of its Subsidiaries. The term "control" means
(a) the power to vote ten percent (10%) or more of the securities or other
equity interests of a Person having ordinary voting power, or (b) the
possession, directly or indirectly, of any other power to direct or cause the
direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"Aggregate Commitment" means the aggregate amount of the Lenders'
Commitments hereunder, as such amount may be reduced or modified at any time
or from time to time pursuant to the terms hereof. On the Closing Date, the
Aggregate Commitment shall be $125,000,000.
"Agreement" means this Credit Agreement, as amended, restated or
otherwise modified from time to time.
"Applicable Law" means all applicable provisions of constitutions,
statutes, laws, rules, treaties, regulations and orders of all Governmental
Authorities and all orders and decrees of all courts and arbitrators.
"Applicable Margin" shall have the meaning assigned thereto in Section
4.1(c).
"Assignment and Acceptance" shall have the meaning assigned thereto in
Section 13.10.
"Base Rate" means, at any time, the higher of (a) the Prime Rate or (b)
the Federal Funds Rate plus 1/2 of 1%; each change in the Base Rate shall take
effect simultaneously with the corresponding change or changes in the Prime
Rate or the Federal Funds Rate.
"Base Rate Loan" means any Loan bearing interest at a rate based upon
the Base Rate as provided in Section 4.1(a).
"Borrowers" means Cable Systems, ComVideo, Cable New York and any
Subsidiary thereof that becomes a Borrower pursuant to Section 8.10
(including, without limitation, Home Link) in their capacity as borrowers
hereunder.
"Business Day" means (a) for all purposes other than as set forth in
clause (b) below, any day other than a Saturday, Sunday or legal holiday on
which banks in Charlotte, North Carolina and New York, New York, are open for
the conduct of their commercial banking business, and (b) with respect to all
notices and determinations in connection with, and payments of principal and
interest on, any LIBOR Rate Loan, any day that is a Business Day described in
clause (a) and that is also a day for trading by and between banks in Dollar
deposits in the London interbank market.
"Cable New York" means C-TEC Cable Systems of New York, Inc. and its
successors.
"Cable Systems" means C-TEC Cable Systems, Inc. and its successors.
"Cable Systems Holdings" means the ultimate holding company which, as a
result of the Reorganization, holds, directly or indirectly through one or
more of its Wholly-Owned Subsidiaries, all of the outstanding shares of
capital stock of Cable Systems.
"Cable Systems Pledge Agreement" means the pledge agreement of even date
executed by Cable Systems with respect to the capital stock of Cable New York
in favor of the Administrative Agent for the ratable benefit of itself and the
other Lenders, substantially in the form of Exhibit I-1, as amended, restated
or otherwise modified (including, without limitation, the execution of a
supplement to such agreement pursuant to Section 8.11 by which Cable Systems
will pledge the capital stock of ComVideo to the Administrative Agent for the
ratable benefit of itself and the other Lenders).
"Capital Asset" means, with respect to any Person, any asset that
should, in accordance with GAAP, be classified and accounted for as a capital
asset on a balance sheet of such Person.
"Capital Expenditures" means, with respect to any Person for any period,
the aggregate cost of all Capital Assets acquired by such Person (other than
Capital Assets acquired in accordance with the terms hereof with the proceeds
from casualty insurance or condemnations) during such period determined in
accordance with GAAP.
"Capital Lease" means, with respect to any Person, any lease of any
property that should, in accordance with GAAP, be classified and accounted for
as a capital lease on a balance sheet of such Person.
"CATV Franchise" means any franchise, easement or other authorization
granted by any Governmental Authority pursuant to which a Person has the right
or license to operate a CATV System and any Applicable Law or other document
setting forth all or part of the terms of any such franchise, easement or
other authorization.
"CATV System" means any cable distribution system which receives audio,
video, digital, other broadcast signals or information or telecommunications
by cable, optical, antennae, microwave or satellite transmission and which
amplifies and transmits such signals to Persons who receive such signals.
"CCSM" means Cable Michigan, Inc., and its successors.
"CCSM Credit Facility" means the credit agreement of even date by and
among CCSM, as borrower, First Union, as administrative agent, and the lenders
party thereto, as amended, restated or otherwise modified.
"C-TEC" means C-TEC Corporation, and its successors.
"C-TEC Credit Facility" means the credit agreement of even date by and
among C-TEC, as borrower, First Union, as administrative agent, and the
lenders party thereto, as amended restated or otherwise modified.
"Change in Control" shall have the meaning assigned thereto in Section
11.1(h).
"Closing Date" means the date of this Agreement or such later Business
Day upon which each condition described in Section 5.2 shall be satisfied or
waived in all respects in a manner acceptable to the Administrative Agent, in
its sole discretion.
"Code" means the Internal Revenue Code of 1986, and the rules and
regulations thereunder, each as amended or supplemented from time to time.
"Combined" means, when used in reference to financial statements or
financial statement items of any Person, such statements or items on a
combined basis in accordance with applicable principles of combination under
GAAP.
"Commitment" means, as to any Lender, the sum of such Lender's Revolving
Credit Commitment and Term Loan Commitment.
"Commitment Percentage" means, as to any Lender at any time, the ratio
of (a) the amount of the Commitment of such Lender to (b) the Aggregate
Commitment of all of the Lenders.
"ComVideo" means ComVideo Systems, Inc. and its successors.
"ComVideo Pledge Agreement" means the pledge agreement executed by
ComVideo pursuant to Section 8.11 with respect to the partnership interests of
Home Link in favor of the Administrative Agent for the ratable benefit of
itself and the other Lenders, substantially in the form of Exhibit I-2, as
amended, restated or otherwise modified.
"Consolidated" means, when used with reference to financial statements
or financial statement items of any Person, such statements or items on a
consolidated basis in accordance with applicable principles of consolidation
under GAAP.
"Credit Facility" means the collective reference to the Revolving Credit
Facility and the Term Loan Facility.
"Debt" means, with respect to any Person at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the
deferred purchase price of property or services of any such Person, except
trade payables arising in the ordinary course of business not more than ninety
(90) days past due, (c) all obligations of any such Person as lessee under
Capital Leases, (d) all Debt of any other Person secured by a Lien on any
asset of any such Person, (e) all Guaranty Obligations of any such Person, (f)
all obligations, contingent or otherwise, of any such person relative to the
face amount of letters of credit, whether drawn or not drawn, and banker's
acceptances issued for the account of any such person and (g) all obligations
incurred by any such Person pursuant to Hedging Agreements.
"Default" means any of the events specified in Section 11.1 which with
the passage of time, the giving of notice or both, would constitute an Event
of Default.
"Designated Subsidiaries" means Cable New York, ComVideo, Home Link and
all Subsidiaries of the Borrowers created after the Closing Date.
"Disqualified Stock" means any capital stock of a Person that by its
terms (a) has any scheduled interest or dividend payment, (b) upon the passage
of time or occurrence of any event has any redemption or similar payment due,
(c) is required to be redeemed or repurchased at the option of any holder or
otherwise or (d) is convertible into Debt or is convertible to another
security which contains any such terms.
"Dollars" or "$" means, unless otherwise qualified, dollars in lawful
currency of the United States.
"Eligible Assignee" means, with respect to any assignment of the rights,
interest and obligations of a Lender hereunder, a Person that is at the time
of such assignment (a) a commercial bank organized or licensed under the laws
of the United States or any state thereof, having combined capital and surplus
in excess of $500,000,000, (b) a finance company, insurance company or other
financial institution which in the ordinary course of business extends credit
of the type extended hereunder and that has total assets in excess of
$1,000,000,000, (c) already a Lender hereunder (whether as an original party
to this Agreement or as the assignee of another Lender), (d) the successor
(whether by transfer of assets, merger or otherwise) to all or substantially
all of the commercial lending business of the assigning Lender, or (e) any
other Person that has been approved in writing as an Eligible Assignee by
Cable Systems and the Administrative Agent.
"Employee Benefit Plan" means any employee benefit plan within the
meaning of Section 3(3) of ERISA which (a) is maintained for employees of any
Borrower or any ERISA Affiliate or (b) has at any time within the preceding
six years been maintained for the employees of any Borrower or any current or
former ERISA Affiliate.
"Environmental Laws" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals and
orders of courts or Governmental Authorities, relating to the protection of
human health or the environment, including, but not limited to, requirements
pertaining to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation, handling, reporting, licensing, permitting,
investigation or remediation of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
the rules and regulations thereunder, each as amended or modified from time to
time.
"ERISA Affiliate" means any Person who together with any Borrower is
treated as a single employer within the meaning of Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"Eurodollar Reserve Percentage" means, for any day, the percentage
(expressed as a decimal and rounded upwards, if necessary, to the next higher
1/100th of 1%) which is in effect for such day as prescribed by the Federal
Reserve Board (or any successor) for determining the maximum reserve
requirement (including without limitation any basic, supplemental or emergency
reserves) in respect of Eurocurrency liabilities or any similar category of
liabilities for any Lender.
"Event of Default" means any of the events specified in Section 11.1,
provided that any requirement for passage of time, giving of notice, or both,
has been satisfied.
"FCC" means the Federal Communications Commission or any successor
Governmental Authority.
"FCC License" means any license, permit, consent, certificate of
compliance, franchise, approval, waiver or authorization granted or issued by
the FCC.
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
thereto.
"Federal Funds Rate" means the rate per annum (rounded upwards, if
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds rate as quoted by the Administrative Agent and confirmed in
Federal Reserve Board Statistical Release H.15 (519) or any successor or
substitute publication selected by the Administrative Agent. If, for any
reason, such rate is not available, then "Federal Funds Rate" shall mean a
daily rate which is determined, in the opinion of the Administrative Agent, to
be the rate at which federal funds are being offered for sale in the national
federal funds market at 9:00 a.m. (Charlotte time). Rates for weekends or
holidays shall be the same as the rate for the most immediate preceding
Business Day.
"$15 Million Facility" means a credit facility for up to $15,000,000 in
favor of C-TEC with a maturity of no more than two years, secured by a pledge
of the capital stock of Mercom, Inc. owned by C-TEC, which facility will be
assumed by CCSM as part of the Mercom Contribution.
"First Union" means First Union National Bank, a national banking
association, and its successors.
"Fiscal Year" means the fiscal year of Cable Systems and its Designated
Subsidiaries ending on December 31.
"Fixed Charges" means, with respect to any Person for any period, the
sum of the following for such period calculated in accordance with GAAP: (a)
Interest Expense plus (b) scheduled principal payments with respect to Debt,
other than Parent Subordinated Debt (regardless of whether such amounts were
actually paid).
"GAAP" means generally accepted accounting principles, as recognized by
the American Institute of Certified Public Accountants and the Financial
Accounting Standards Board, consistently applied and maintained on a
consistent basis throughout the period indicated and consistent with prior
financial practice (except for changes in such practice with which the
Borrowers' independent certified public accountants have concurred).
"Governmental Approvals" means all authorizations, consents, approvals,
licenses and exemptions of, registrations and filings with, and reports to,
all Governmental Authorities, including without limitation any FCC License,
PUC Authorization or CATV Franchise.
"Governmental Authority" means any nation, province, state or political
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing, including
without limitation the FCC and any PUC.
"Guaranty Obligation" means, with respect to any Person, without
duplication, any obligation, contingent or otherwise, of any such Person
pursuant to which such Person has directly or indirectly guaranteed any Debt
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of any such Person
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt (whether arising by virtue of partnership arrangements, by
agreement to keep well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement condition or otherwise) or (b)
entered into for the purpose of assuring in any other manner the obligee of
such Debt of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, that the term Guaranty
Obligation shall not include endorsements for collection or deposit in the
ordinary course of business.
"Hazardous Materials" means any substances or materials (a) which are or
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
applicable Environmental Law, (b) which are toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
harmful to human health or the environment and are or become regulated by any
applicable Environmental Law, (c) the presence of which require remediation
under any Environmental Law or common law, (d) the discharge or emission or
release of which requires a permit or license under any Environmental Law or
other Governmental Approval, (e) which are materials consisting of underground
or aboveground storage tanks, whether empty, filled or partially filled with
any substance, or (f) which contain asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
"Hedging Agreement" means any agreement with respect to an interest rate
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection
with hedging the interest rate exposure of the Borrowers under this Agreement,
and any confirming letter executed pursuant to such hedging agreement, all as
amended, restated or otherwise modified.
"Home Link" means Home Link Communications of Princeton, L.P. and its
successors.
"Interest Expense" means, with respect to any Person for any period, the
interest expense as determined for such period in accordance with GAAP (other
than any interest expense with respect to Parent Subordinated Debt).
"Interest Period" shall have the meaning assigned thereto in Section
4.1(b).
"Joinder Agreement" means any Joinder Agreement executed by a Subsidiary
of a Borrower pursuant to Section 8.10 in favor of the Administrative Agent
for the ratable benefit of the Administrative Agent and Lenders and
substantially in the form of Exhibit J, as amended, restated or otherwise
modified.
"Lender" means each Person executing this Agreement as a Lender set
forth on the signature pages hereto and each Person that hereafter becomes a
party to this Agreement as a Lender pursuant to Section 13.10.
"Lending Office" means, with respect to any Lender, the office of such
Lender maintaining such Lender's Commitment Percentage of the Loans.
"Leverage Ratio" means as of any date of determination, the ratio as of
such date determined in accordance with Section 9.1.
"LIBOR" means the rate for deposits in Dollars for a period equal to the
Interest Period selected which appears on the Telerate Page 3750 at
approximately 11:00 a.m. London time, two (2) Business Days prior to the
commencement of the applicable Interest Period. If, for any reason, such rate
is not available, then "LIBOR" shall mean the rate per annum at which, as
determined by the Administrative Agent, Dollars in the amount of $5,000,000
are being offered to leading banks at approximately 11:00 a.m. London time,
two (2) Business Days prior to the commencement of the applicable Interest
Period for settlement in immediately available funds by leading banks in the
London interbank market for a period equal to the Interest Period selected.
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to
the next higher 1/100th of 1%) determined by the Administrative Agent pursuant
to the following formula:
LIBOR Rate = LIBOR
----------------------------------
1.00-Eurodollar Reserve Percentage
"LIBOR Rate Loan" means any Loan bearing interest at a rate based upon
the LIBOR Rate as provided in Section 4.1(a).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to
a Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Loan" means any loan made to any Borrower pursuant to Section 2.1 or
Section 3.1, and all such Loans collectively as the context requires.
"Loan Documents" means, collectively, this Agreement, the Notes, any
Hedging Agreement executed by any Lender, the Cable Systems Pledge Agreement,
the ComVideo Pledge Agreement, the Parent Pledge Agreement and each other
document referenced in Article V or otherwise required to be delivered by or
on behalf of Cable Systems and its Designated Subsidiaries pursuant to this
Agreement, all as may be amended, restated or otherwise modified.
"Material Adverse Effect" means a material adverse effect on the
business, operations or financial condition of Cable Systems and its
Designated Subsidiaries, taken as a whole, or the ability of any Borrower to
perform its obligations under the Loan Documents to which it is a party, or
the ability of any Subsidiary of a Borrower which is party to a Security
Document to perform its obligations under any such document.
"Material Contract" means any written contract or other agreement of
Cable Systems or any of its Designated Subsidiaries (other than one evidencing
Debt, providing for the acquisition or construction of Capital Assets or the
making of any Investment (including by way of merger) permitted by Section
10.3 (and, if applicable, Section 10.4)) involving monetary liability of any
such Person in an amount in excess of $3,000,000 per annum.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which any Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions within the preceding six
years.
"Net Cash Proceeds" means, as applicable with respect to any Person, (a)
with respect to any sale, trade or other disposition of assets, the gross cash
proceeds received by such Person from such sale less the sum of (i) all income
taxes and other taxes assessed by a Governmental Authority as a result of such
sale and any other reasonable fees and expenses incurred in connection
therewith and (ii) the principal amount of, premium, if any, and interest on
any Debt secured by a Lien on the asset (or a portion thereof) sold, which
Debt is required to be and is repaid in connection with such sale, (b) with
respect to any issuance of Debt, the gross cash proceeds received by such
Person therefrom less all legal, underwriting and other reasonable fees and
expenses incurred in connection therewith and the amount thereof applied to
repay existing Debt permitted by Section 10.1 and (c) with respect to any
payment under an insurance policy or in connection with a condemnation
proceeding, the amount of cash proceeds received by such Person from an
insurance company or Governmental Authority net of all reasonable expenses of
collection.
"Net Income" means, with respect to any Person for any period, the net
income (or loss) of such Person for such period determined in accordance with
GAAP; provided, that there shall be excluded from net income the income of any
Person (other than a Wholly-Owned Subsidiary) in which such Person has an
ownership interest, except to the extent received in cash by such Person.
"Notes" means the Revolving Credit Notes and Term Notes.
"Notice of Account Designation" shall have the meaning assigned thereto
in Section 2.2(b).
"Notice of Conversion/Continuation" shall have the meaning assigned
thereto in Section 4.2.
"Notice of Payment" shall have the meaning assigned thereto in Section
2.3(d).
"Notice of Revolving Credit Borrowing" shall have the meaning assigned
thereto in Section 2.2(a).
"Notice of Term Loan Borrowing" shall have the meaning assigned thereto
in Section 3.2(a).
"Obligations" means, in each case, whether now in existence or hereafter
arising: (a) the principal of and interest on (including interest accruing
after the filing of any bankruptcy or similar petition) the Revolving Credit
Loans, (b) the principal and interest on (including interest accruing after
the filing of any bankruptcy or similar petition) the Term Loans and (c) all
other fees and commissions (including attorney's fees), charges, indebtedness,
loans, liabilities, financial accommodations, obligations, covenants and
duties owing by the Borrowers to the Lenders or the Administrative Agent, of
every kind, nature and description, direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, and whether or not evidenced by any note, and whether or not for
the payment of money under or in respect of this Agreement, any Note, any
Hedging Agreement with a Lender or Affiliate thereof or any of the other Loan
Documents.
"Officer's Compliance Certificate" shall have the meaning assigned
thereto in Section 7.2.
"Operating Cash Flow" means, with respect to any Person for any period,
the following, calculated without duplication for such period in accordance
with GAAP: (a) Net Income, plus (b) to the extent deducted in determining Net
Income, (i) income and franchise taxes, (ii) Interest Expense and (iii)
depreciation, amortization (including amortization of goodwill and other
intangibles) and other non-cash charges, minus (c) to the extent included in
determining Net Income, any items of extraordinary, unusual or non-recurring
gain or loss (together with any related provision for taxes on such gain).
For any acquisition or sale by such Person during any period of calculation,
the definition of Operating Cash Flow shall be adjusted on a pro forma basis
in a manner reasonably satisfactory to the Administrative Agent to give effect
to such acquisition or sale as if such acquisition or sale occurred on the
first day of such period.
"Other Taxes" shall have the meaning assigned thereto in Section 4.11(c).
"Parent Pledge Agreement" means the pledge agreement executed by Cable
Systems Holdings pursuant to Section 8.10(c) by which Cable Systems Holdings
will pledge all of the capital stock of Cable Systems to the Administrative
Agent for the ratable benefit of itself and the other Lenders, substantially
in the form of Exhibit I-3, as amended, restated or otherwise modified.
"Parent Subordinated Debt" means any Debt incurred by Cable Systems and
payable to Cable Systems Holdings; provided, that such Debt shall be
subordinated to the Obligations on terms substantially in accordance with
Exhibit K.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
agency.
"Pension Plan" means any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or
Section 412 of the Code and which (a) is maintained for employees of any
Borrower or any ERISA Affiliates or (b) has at any time within the preceding
six years been maintained for the employees of any Borrower or any of their
current or former ERISA Affiliates.
"Person" means an individual, corporation, partnership, limited
liability company, limited liability partnership, association, trust, business
trust, joint venture, joint stock company, pool, syndicate, sole
proprietorship, unincorporated organization, Governmental Authority or any
other form of entity or group thereof.
"Pledge Agreements" means the Cable Systems Pledge Agreement, the
ComVideo Pledge Agreement and the Parent Pledge Agreement.
"Prime Rate" means, at any time, the rate of interest per annum publicly
announced from time to time by First Union as its prime rate. Each change in
the Prime Rate shall be effective as of the opening of business on the day
such change in the Prime Rate occurs. The parties hereto acknowledge that the
rate announced publicly by First Union as its Prime Rate is an index or base
rate and shall not necessarily be its lowest or best rate charged to its
customers or other banks.
"PUC" means any state regulatory agency or body that exercises
jurisdiction over the rates or services or the acquisition, construction or
operation of any CATV System or any person who owns, constructs or operates
any CATV System, in each case by reason of the nature or type of the business
subject to regulation and not pursuant to laws and regulations of general
applicability to Persons conducting business in said state.
"PUC Authorization" means any license, permit, consent, certificate of
compliance, franchise, approval, waiver or authorization granted or issued by
a PUC.
"Rebuild Capital Expenditures" means, with respect to any Person for any
period, Capital Expenditures used to replace, add or retool components
necessary to consolidate facilities, to increase bandwidth or channel
capacity, to provision new services, to improve existing services, or to test
and measure services, networks or bandwidth.
"Register" shall have the meaning assigned thereto in Section 13.10(d).
"Reorganization" means the reorganization described in Schedule 1.1(b),
as such Schedule may be supplemented or otherwise amended with the prior
written approval of the Required Lenders.
"Required Lenders" means, at any date, any combination of holders of at
least fifty-one percent (51%) of the aggregate unpaid principal amount of the
Notes, or if no amounts are outstanding under the Notes, any combination of
Lenders whose Commitment Percentages aggregate at least fifty-one percent
(51%).
"Restricted Payments" means, as to any Person, (a) any declaration or
payment of any dividends upon any of its capital stock, (b) any purchase,
redemption, retirement or other acquisition, whether direct or indirect, of
any shares of its capital stock, (c) any distribution of cash, property or
assets among the holders of its shares of capital stock or (d) any payment of
principal, interest or any other amount with respect to Parent Subordinated
Debt.
"Revolving Credit Commitment" means (a) as to any Lender, the obligation
of such Lender to make the Revolving Credit Loans to the account of the
Borrowers hereunder in an aggregate principal amount not to exceed the amount
set forth opposite such Lender's name on Schedule 1.1(a), as such amounts may
be reduced or modified at any time or from time to time pursuant to the terms
hereof and (b) as to all Lenders, the aggregate commitment of all Lenders to
make Revolving Credit Loans. The Revolving Credit Commitment of all Lenders
as of the Closing Date shall be Twenty-Five Million Dollars ($25,000,000).
"Revolving Credit Facility" means the revolving credit facility
established pursuant to Article II hereof.
"Revolving Credit Loans" means each of the revolving credit loans to be
made to the Borrowers pursuant to Section 2.1.
"Revolving Credit Notes" means the revolving credit notes made by the
Borrowers payable to the order of each Lender, substantially in the form of
Exhibit A, evidencing the Debt incurred by the Borrowers pursuant to the
Revolving Credit Facility, and any amendments and modifications thereto, any
substitutes therefor, and any replacements, restatements, renewals or
extension thereof, in whole or in part.
"Revolving Credit Termination Date" means the earliest of the dates
referred to in Section 2.6.
"Security Documents" means the collective reference to the Pledge
Agreements and each other agreement or writing pursuant to which Cable Systems
or any of its Designated Subsidiaries pledges or grants a security interest in
any property or assets securing the Obligations or any such Person guaranties
the payment and/or performance of the Obligations.
"Solvent" means, as to Cable Systems and its Designated Subsidiaries on
a particular date, that such Persons, taken as a whole and on a Combined
basis, (a) have capital sufficient to carry on their business and transactions
and all business and transactions in which they are about to engage and are
able to pay their debts as they mature, (b) own property having a value, both
at fair valuation and at present fair saleable value, greater than the amount
required to pay their probable liabilities (including contingencies), and (c)
do not believe that they will incur debts or liabilities beyond their ability
to pay such debts or liabilities as they mature.
"Specified Capital Expenditures" means, with respect to any Person for
any period, all Capital Expenditures less all Rebuild Capital Expenditures (if
any) in an amount not to exceed the following, in each case for such Person
for such period:
Rebuild
Period Capital Expenditures
------ --------------------
Third and fourth fiscal quarters in
Fiscal Year 1997 $1,750,000 per quarter
Each fiscal quarter in Fiscal Year 1998 $2,312,500 per quarter
Each fiscal quarter in Fiscal Year 1999 $2,312,500 per quarter
Each fiscal quarter in Fiscal Year 2000 $2,312,500 per quarter
Each fiscal quarter in Fiscal Year 2001 $1,000,000 per quarter
;provided, that the maximum amount of Rebuild Capital Expenditures permitted
to be made by such Person in the first fiscal quarter of any Fiscal Year as
set forth in the above table shall be increased by the amount of Rebuild
Capital Expenditures that such Person was permitted to make in the immediately
preceding Fiscal Year and did not expend in such Fiscal Year (without giving
affect to any carry-over amounts from any prior Fiscal Year); provided,
further, that such permitted carry-over amount shall not exceed twenty percent
(20%) of the maximum Rebuild Capital Expenditures for such immediately
preceding Fiscal Year as set forth in the above table.
"Subsidiary" means as to any Person, any corporation, partnership or
other entity of which more than fifty percent (50%) of the outstanding capital
stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity is at the time, directly or indirectly, owned by or
the management is otherwise controlled by such Person (irrespective of
whether, at the time, capital stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening
of any contingency).
"Taxes" shall have the meaning assigned thereto in Section 4.11(a).
"Termination Event" means: (a) a "Reportable Event" described in
Section 4043 of ERISA (as to which the thirty (30) day notice requirement has
not been waived by the PBGC), or (b) the withdrawal of any Borrower or any
ERISA Affiliate from a Pension Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the
filing of a notice of intent to terminate a Pension Plan under Section 4041(c)
of ERISA, or (d) the institution of proceedings under Section 4042 of ERISA to
terminate, or the appointment of a trustee with respect to, any Pension Plan
by the PBGC, or (e) any other event or condition which would reasonably
constitute grounds under Section 4042(a) of ERISA for the termination of, or
the appointment of a trustee to administer, any Pension Plan, or (f) the
partial or complete withdrawal of any Borrower or any ERISA Affiliate from a
Multiemployer Plan, or (g) the imposition of a Lien pursuant to Section 412 of
the Code or Section 302 of ERISA, or (h) any event or condition which results
in the reorganization or insolvency of a Multiemployer Plan under Sections
4241 or 4245 of ERISA, or (i) any event or condition which results in the
termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.
"Term Loan" means the term loan to be made to the Borrowers pursuant to
Section 3.1.
"Term Loan Commitment" means (a) as to any Lender, the obligation of
such Lender to make the Term Loan to the account of the Borrowers hereunder in
an aggregate principal amount not to exceed the amount set forth opposite such
Lender's name on Schedule 1.1(a), as such amount may be reduced or modified at
any time or from time to time pursuant to the terms hereof and (b) as to all
Lenders, the aggregate commitment of all Lenders to make the Term Loan. The
Term Loan Commitment of all Lenders as of the Closing Date shall be One Hundred
Million Dollars ($100,000,000).
"Term Loan Facility" means the term loan facility established pursuant
to Article III hereof.
"Term Loan Maturity Date" means June 30, 2005.
"Term Notes" means the Term Notes made by the Borrowers payable to the
order of each of the Lenders, substantially in the form of Exhibit B hereto,
evidencing the Debt incurred by the Borrowers pursuant to the Term Loan
Facility, and any amendments, modifications and supplements thereto, any
substitutes therefor, and any replacements, restatements, renewals or
extensions thereof, in whole or in part.
"Total Debt" means, with respect to any Person at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the
deferred purchase price of property or services of any such Person, except
trade payables arising in the ordinary course of business not more than ninety
(90) days past due, (c) all obligations of any such Person as lessee under
Capital Leases and (d) all Guaranty Obligations of any such Person.
"United States" means the United States of America.
"Wholly-Owned" means, with respect to a Subsidiary, a Subsidiary all of
the shares of capital stock or other ownership interests of which are,
directly or indirectly, owned or controlled by any Person and/or one or more
of its Wholly-Owned Subsidiaries.
SECTION 1.2 General. Unless otherwise specified, a reference in
this Agreement to a particular section, subsection, Schedule or Exhibit is a
reference to that section, subsection, Schedule or Exhibit of this Agreement.
Wherever from the context it appears appropriate, each term stated in either
the singular or plural shall include the singular and plural, and pronouns
stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. Any reference herein to "Charlotte
time" shall refer to the applicable time of day in Charlotte, North Carolina.
Unless expressly specified otherwise, any references to the "transactions
contemplated by this Agreement" or the "transactions contemplated hereby" (or
similar references) shall not be a reference to the Reorganization. Unless
expressly specified otherwise, capitalized terms defined in Schedule 1.1(b)
are used herein with the meanings assigned to such terms in such Schedule.
SECTION 1.3 Other Definitions and Provisions.
(a) Use of Capitalized Terms. Unless otherwise defined therein, all
capitalized terms defined in this Agreement shall have the defined meanings
when used in this Agreement, the Notes and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(b) Miscellaneous. The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
ARTICLE II
REVOLVING CREDIT FACILITY
SECTION 2.1 Revolving Credit Loans. Subject to the terms and
conditions of this Agreement, each Lender severally agrees to make Revolving
Credit Loans to the Borrowers on a joint and several basis from time to time
from the Closing Date through the Revolving Credit Termination Date as
requested by the Borrowers in accordance with the terms of Section 2.2;
provided, that (a) the aggregate principal amount of all outstanding Revolving
Credit Loans (after giving effect to any amount requested) shall not exceed
the Revolving Credit Commitment of all Lenders and (b) the principal amount of
outstanding Revolving Credit Loans from any Lender to the Borrowers shall not
at any time exceed such Lender's Revolving Credit Commitment. Each Loan by a
Lender shall be in a principal amount equal to such Lender's Commitment
Percentage of the aggregate principal amount of Revolving Credit Loans
requested on such occasion. Subject to the terms and conditions hereof, the
Borrowers may borrow, repay and reborrow Revolving Credit Loans hereunder
until the Revolving Credit Termination Date.
SECTION 2.2 Procedure for Advances of Loans.
(a) Requests for Borrowing. The Borrowers shall give the
Administrative Agent irrevocable prior written notice in the form attached
hereto as Exhibit C-1 (a "Notice of Revolving Credit Borrowing") not later
than 11:00 a.m. (Charlotte time) (i) on the same Business Day as each Base
Rate Loan and (ii) at least three (3) Business Days before each LIBOR Rate
Loan, of its intention to borrow, specifying (A) the date of such borrowing,
which shall be a Business Day, (B) the amount of such borrowing, which shall
be in an aggregate principal amount of $2,000,000 or a whole multiple of
$500,000 in excess thereof, (C) whether the Loans are to be LIBOR Rate Loans
or Base Rate Loans (provided that LIBOR Rate Loans shall not be available
until three (3) Business Days after the Closing Date) and (D) in the case of a
LIBOR Rate Loan, the duration of the initial Interest Period applicable
thereto. Notices received after 11:00 a.m. (Charlotte time) shall be deemed
received on the next Business Day. The Administrative Agent shall promptly
notify the Lenders of each Notice of Borrowing.
(b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time)
on the proposed borrowing date, each Lender will make available to the
Administrative Agent, for the account of the Borrowers, at the office of the
Administrative Agent in funds immediately available to the Administrative
Agent, such Lender's Commitment Percentage of the Revolving Credit Loans to be
made on such borrowing date. The Borrowers hereby irrevocably authorize the
Administrative Agent to disburse the proceeds of the borrowing requested
pursuant to this Section 2.2 in immediately available funds by crediting or
wiring such proceeds to the deposit account of the Borrowers identified in the
most recent Notice of Account Designation substantially in the form of Exhibit
H (a "Notice of Account Designation") delivered by the Borrowers to the
Administrative Agent or as may be otherwise agreed upon by the Borrowers and
the Administrative Agent from time to time. Subject to Section 4.7 hereof, the
Administrative Agent shall not be obligated to disburse the portion of the
proceeds of any Revolving Credit Loan requested pursuant to this Section 2.2
to the extent that any Lender has not made available to the Administrative
Agent its Commitment Percentage of such Revolving Credit Loan.
SECTION 2.3 Repayment of Loans.
(a) Repayment on Revolving Credit Termination Date. The Borrowers
shall repay the outstanding principal amount of all Revolving Credit Loans in
full, together with all accrued but unpaid interest thereon, on the Revolving
Credit Termination Date.
(b) Mandatory Repayment of Excess Revolving Credit Loans. If at any
time the outstanding principal amount of all Revolving Credit Loans exceeds
the Revolving Credit Commitment, the Borrowers shall repay immediately upon
notice from the Administrative Agent, by payment to the Administrative Agent
for the account of the Lenders, the Revolving Credit Loans in an amount equal
to such excess.
(c) Other Mandatory Repayments.
(i) Sale of Assets. The Borrowers shall make mandatory
principal payments of the Revolving Credit Loans in amounts equal to 100% of
the aggregate Net Cash Proceeds in excess of $2,000,000 received after the
date hereof by Cable Systems or any of its Designated Subsidiaries from any
sale, trade or other disposition of assets permitted by Section 10.5(e);
provided, that (A) such payment shall be made only at such time as such Net
Cash Proceeds required to be paid but not previously applied equal $250,000 or
any whole multiple thereof (at which time the entire unapplied amount shall be
paid) and (B) unless (1) any Default in the payment of any interest or fees
under this Agreement or any Event of Default has occurred and is continuing at
the time of such sale, trade or disposition or (2) such Net Cash Proceeds
result from a sale of capital stock or other equity interest of a Subsidiary
of Cable Systems, no such payment shall be required if and to the extent such
Net Cash Proceeds are reinvested in the business of Cable Systems and its
Designated Subsidiaries within one hundred eighty (180) days after such sale,
trade or disposition.
(ii) Insurance. The Borrowers shall make mandatory principal
payments of the Revolving Credit Loans in amounts equal to 100% of the Net
Cash Proceeds received by Cable Systems or any of its Designated Subsidiaries
from any insurance policy if such Net Cash Proceeds (i) exceed $500,000 in the
aggregate for any loss or series of related losses and (ii) are not reinvested
in the business of Cable Systems and its Designated Subsidiaries within one
hundred eighty (180) days of receipt; provided, that if any Default in the
payment of any interest or fees under this Agreement or any Event of Default
has occurred and is continuing at the time of such receipt, the Borrowers
shall not have the option to make any such reinvestment and shall make such
mandatory payment in accordance with paragraph (iv) of this Section 2.3(c).
(iii) Issuance of Debt. The Borrowers shall make mandatory
principal payments of the Revolving Credit Loans in amounts equal to 100% of
the Net Cash Proceeds from the issuance of any Debt of Cable Systems or any of
its Designated Subsidiaries incurred after the Closing Date (other than any
Loans hereunder or Debt of the character described in Section 10.1 (e)), if
after the issuance of such Debt the Leverage Ratio exceeds 3.5 to 1.0. (For
purposes of determining the Leverage Ratio with respect to this Section
2.3(c)(iii), Total Debt of Cable Systems and its Designated Subsidiaries shall
be calculated on each date Cable Systems or any of its Designated Subsidiaries
receives any such Net Cash Proceeds.)
(iv) Notice; Manner of Payments. Upon the occurrence of any
event triggering the repayment requirement under this Section 2.3(c), Cable
Systems on behalf of the Borrowers shall give prompt written notice of such
event and the amount of the corresponding prepayment to the Administrative
Agent and upon receipt of such notice, the Administrative Agent shall promptly
so notify the Lenders. Each mandatory prepayment required under Section
2.3(c) shall be made within three (3) Business Days of such event and shall be
applied as follows: (i) first, to repay the outstanding principal amount of
Revolving Credit Loans and (ii) second, if any Net Cash Proceeds remain after
the repayment specified in the preceding clause, to prepay the Term Loan in
accordance with Section 3.3.
(d) Optional Repayments. The Borrowers may at any time and from time
to time repay the Revolving Credit Loans, in whole or in part, upon at least
three (3) Business Days' irrevocable notice to the Administrative Agent with
respect to LIBOR Rate Loans and one (1) Business Day irrevocable notice with
respect to Base Rate Loans, in the form attached hereto as Exhibit D (a
"Notice of Payment") specifying the date and amount of repayment and whether
the repayment is of LIBOR Rate Loans, Base Rate Loans, or a combination
thereof, and, if of a combination thereof, the amount allocable to each. Upon
receipt of such notice, the Administrative Agent shall promptly notify each
Lender. If any such notice is given, the amount specified in such notice
shall be due and payable on the date set forth in such notice. Partial
repayments shall be in an aggregate amount of $2,000,000 or a whole multiple
of $500,000 in excess thereof with respect to Base Rate Loans, and $2,000,000
or a whole multiple of $500,000 in excess thereof with respect to LIBOR Rate
Loans. All optional prepayments under this Section shall first be applied to
the outstanding principal balance of the Revolving Credit Loans, then, to the
extent of any excess, to the Term Loans in accordance with Section 3.5.
(e) Limitation on Repayment of LIBOR Rate Loans. Any repayment of any
LIBOR Rate Loan under this Section 2.3 on any day other than on the last day
of the Interest Period applicable thereto shall be accompanied by any amount
required to be paid pursuant to Section 4.9.
SECTION 2.4 Revolving Credit Notes. Each Lender's Revolving
Credit Loans and the obligation of the Borrowers to repay such Revolving
Credit Loans shall be evidenced by a Revolving Credit Note payable to the
order of such Lender. Each Revolving Credit Note shall bear interest on the
unpaid principal amount thereof at the applicable interest rate per annum
specified in Section 4.1.
SECTION 2.5 Permanent Reduction of the Revolving Credit
Commitment.
(a) The Borrowers shall have the right at any time and from time to
time, upon at least five (5) Business Days prior written notice to the
Administrative Agent, to permanently reduce, in whole at any time or in part
from time to time, without premium or penalty, the Revolving Credit Commitment
in an aggregate principal amount not less than $2,000,000 or any whole
multiple of $500,000 in excess thereof.
(b) Each permanent reduction permitted pursuant to this Section 2.5
shall be accompanied by a payment of principal sufficient to reduce the
aggregate principal amount of Revolving Credit Loans to the Revolving Credit
Commitment as so reduced. Any reduction of the Aggregate Commitment to zero
shall be accompanied by payment of all outstanding Obligations payable with
respect to the Revolving Credit Facility and, if such reduction is permanent,
termination of the Revolving Credit Commitment and Revolving Credit Facility.
If the reduction of the Revolving Credit Commitment requires the repayment of
any LIBOR Rate Loan, such reduction may be made only on the last day of the
then current Interest Period applicable thereto unless such repayment is
accompanied by any amount required to be paid pursuant to Section 4.9 hereof.
SECTION 2.6 Termination of Revolving Credit Facility. The
Revolving Credit Facility shall terminate on the earliest of (a) June 30,
2002, (b) the date of termination of the Commitments in whole by the Borrowers
pursuant to Section 2.5(a), and (c) the date of termination of the Commitments
in whole by the Administrative Agent on behalf of the Lenders pursuant to
Section 11.2(a).
ARTICLE III
TERM LOAN FACILITY
SECTION 3.1 Term Loan. Subject to the terms and conditions of
this Agreement, each Lender severally agrees to make a Term Loan to the
Borrowers on a joint and several basis on or within ninety (90) days after the
Closing Date. The Term Loan shall be funded by the Lenders in no more than
two single advances during such ninety (90) day period and each such advance
shall be funded by each Lender in a principal amount equal to such Lender's
Commitment Percentage of the aggregate principal amount of the advance
requested by the Borrowers. The aggregate principal amount of the Term Loan
requested by the Borrowers during such ninety (90) day period shall not exceed
the total Term Loan Commitment. The Term Loan Commitment (or any unused
portion thereof) shall expire on the 90th day after the Closing Date if not
funded on or prior to such date in accordance with its terms.
SECTION 3.2 Procedure for Advance of Term Loan.
(a) Requests for Borrowing. In connection with each advance of the
Term Loan pursuant to Section 3.1, the Borrowers shall give the Administrative
Agent irrevocable prior written notice in the form attached hereto as Exhibit
C-2 (a "Notice of Term Loan Borrowing") not later than 11:00 a.m. (Charlotte
time) (i) on the same Business Day as a Base Rate Loan and (ii) at least three
(3) Business Days before a LIBOR Rate Loan, of its intention to borrow,
specifying (A) the date of such borrowing, which shall be a Business Day, (B)
the amount of such borrowing, (C) whether the Loan is to be a LIBOR Rate Loan
or Base Rate Loan or a combination thereof (provided that LIBOR Rate Loans
shall not be available until three (3) Business Days after the Closing Date)
and the amounts allocable to each (which amounts shall correspond to the
minimum amounts set forth in Section 2.2(a)), and (D) in the case of a LIBOR
Rate Loan, the duration of the initial Interest Period applicable thereto.
Notices received after 11:00 a.m. (Charlotte time) shall be deemed received on
the next Business Day. The Administrative Agent shall promptly notify the
Lenders of receipt of the Notice of Term Loan of Borrowing.
(b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time)
on the proposed borrowing date, each Lender will make available to the
Administrative Agent, for the account of the Borrowers, at the office of the
Administrative Agent in funds immediately available to the Administrative
Agent, such Lender's Commitment Percentage of the Term Loan requested pursuant
to Section 3.2(a). The Borrowers hereby irrevocably authorize the
Administrative Agent to disburse the proceeds of the borrowing requested
pursuant to Section 3.2(a) in immediately available funds by crediting or
wiring such proceeds to the deposit account of the Borrowers identified in the
most recent Notice of Account Designation delivered by the Borrowers to the
Administrative Agent or as may be otherwise agreed upon by the Borrowers and
the Administrative Agent from time to time. Subject to Section 4.7 hereof, the
Administrative Agent shall not be obligated to disburse the portion of the
proceeds of the Term Loans requested pursuant to Section 3.2(a) to the extent
that any Lender has not made available to the Administrative Agent its
Commitment Percentage of such Term Loan.
SECTION 3.3 Repayment of Term Loan. The Borrowers shall repay the
aggregate outstanding principal amount of the Term Loan in consecutive
quarterly installments on the last day of each March, June, September and
December commencing September 30, 1999, in an amount equal to the product of
(a) the principal balance of the Term Loan outstanding on the earlier of (i)
the date when the outstanding Term Loan equals the total Term Loan Commitment
and (ii) the date ninety (90) days after the Closing Date times (b) the
applicable percentage set forth below:
Payment Date Percentage
------------ ----------
September 30, 1999 1.875%
December 31, 1999 1.875%
March 31, 2000 1.875%
June 30, 2000 1.875%
September 30, 2000 3.750%
December 31, 2000 3.750%
March 31, 2001 3.750%
June 30, 2001 3.750%
September 30, 2001 4.375%
December 31, 2001 4.375%
March 31, 2002 4.375%
June 30, 2002 4.375%
September 30, 2002 4.375%
December 31, 2002 4.375%
March 31, 2003 4.375%
June 30, 2003 4.375%
September 30, 2003 5.312%
December 31, 2003 5.312%
March 31, 2004 5.312%
June 30, 2004 5.312%
September 30, 2004 5.313%
December 31, 2004 5.313%
March 31, 2005 5.313%
June 30, 2005 5.313%
If not sooner paid, the Term Loan shall be paid in full, together with accrued
interest thereon and all other outstanding Obligations, on the Term Loan
Maturity Date.
SECTION 3.4 Optional Prepayments of Term Loan. The Borrowers
shall have the right at any time and from time to time, upon at least three
(3) Business Days prior written notice to the Administrative Agent, to prepay
the Term Loan in whole or in part without premium or penalty except as
provided below; provided that any such prepayments shall first be applied to
repay the outstanding principal balance of the Revolving Credit Loans prior to
any prepayments of the Term Loan. Each optional prepayment of the Term Loan
hereunder shall be in an aggregate principal amount of at least $2,000,000 or
any whole multiple of $500,000 in excess thereof, shall be applied to the
outstanding principal installments of the Term Loan on a pro rata basis and be
accompanied by any payment required under Section 4.9.
SECTION 3.5 Mandatory Prepayments of Term Loans. If at any time
(a) no Revolving Credit Loans are then outstanding and any event requiring
mandatory repayment specified in Section 2.3(c) shall occur or (b) amounts
remain after any repayment of Revolving Credit Loans pursuant to Section
2.3(c), then such amount not required to repay the Revolving Credit Loans will
be used to reduce on a pro rata basis the remaining scheduled principal
installments of the Term Loans and shall be accompanied by any amount required
under Section 4.9.
SECTION 3.6 Term Notes. Each Lender's Term Loan and the
obligation of the Borrowers to repay such Term Loan shall be evidenced by a
Term Note payable to the order of such Lender. Each Term Note shall bear
interest on the unpaid principal amount thereof at the applicable interest
rate per annum specified in Section 4.1.
ARTICLE IV
GENERAL LOAN PROVISIONS
SECTION 4.1 Interest.
(a) Interest Rate Options. Subject to the provisions of this Section
4.1, at the election of the Borrowers, the aggregate principal balance of the
Loans or any portion thereof shall bear interest at the Base Rate or the LIBOR
Rate plus, in each case, the Applicable Margin as set forth below (provided
that the LIBOR Rate shall not be available until three (3) Business Days after
the Closing Date). The Borrowers shall select the rate of interest and
Interest Period, if any, applicable to any Loan at the time a Notice of
Revolving Credit Borrowing is given pursuant to Section 2.2 or Notice of Term
Loan Borrowing is given pursuant to Section 3.2 or at the time a Notice of
Conversion/Continuation is given pursuant to Section 4.2. Each Loan or
portion thereof bearing interest based on the Base Rate shall be a "Base Rate
Loan" and each Loan or portion thereof bearing interest based on the LIBOR
Rate shall be a "LIBOR Rate Loan". Any Loan or any portion thereof as to
which the Borrowers have not duly specified an interest rate as provided
herein shall be deemed a Base Rate Loan.
(b) Interest Periods. In connection with each LIBOR Rate Loan, the
Borrowers, by giving notice at the times described in Section 4.1(a), shall
elect an interest period (each, an "Interest Period") to be applicable to such
Loan, which Interest Period shall be a period of one (1), two (2), three (3),
or six (6) months with respect to each LIBOR Rate Loan; provided that:
(i) the Interest Period shall commence on the date of
advance of or conversion to any LIBOR Rate Loan and, in the case of
immediately successive Interest Periods, each successive Interest Period shall
commence on the date on which the next preceding Interest Period expires;
(ii) if any Interest Period would otherwise expire on a day
that is not a Business Day, such Interest Period shall expire on the next
succeeding Business Day; provided, that if any Interest Period with respect to
a LIBOR Rate Loan would otherwise expire on a day that is not a Business Day
but is a day of the month after which no further Business Day occurs in such
month, such Interest Period shall expire on the next preceding Business Day;
(iii) any Interest Period with respect to a LIBOR Rate Loan
that begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the
end of such Interest Period) shall end on the last Business Day of the
relevant calendar month at the end of such Interest Period;
(iv) no Interest Period shall extend beyond the Revolving
Credit Termination Date or the Term Loan Maturity Date, as applicable, and no
interest period shall be selected by the Borrowers which would result in the
repayment of any LIBOR Rate Loan pursuant to Section 3.3 prior to the end of
an Interest Period; and
(v) there shall be no more than ten (10) Interest Periods
outstanding at any time.
(c) Applicable Margin. The Applicable Margin provided for in Section
4.1(a) with respect to the Loans (the "Applicable Margin") shall (i) on the
Closing Date equal the percentages set forth in the certificate delivered
pursuant to Section 5.2(d)(iv) and (ii) for each fiscal quarter thereafter be
determined by reference to the Leverage Ratio as of the end of the fiscal
quarter immediately preceding the delivery of the applicable Officer's
Compliance Certificate as follows:
Applicable Margin Per Annum
Leverage Ratio Base Rate + LIBOR Rate +
-------------- ---------------------------
>4.75x 0.00% 1.250%
>4.25 < 4.75x 0.00% 1.000%
-
>3.50 < 4.25x 0.00% .750%
-
< 3.50x 0.00% .500%
-
Adjustments, if any, in the Applicable Margin shall be made by the
Administrative Agent on the fifth (5th) Business Day after receipt by the
Administrative Agent of quarterly financial statements for Cable Systems and
its Designated Subsidiaries and the accompanying Officer's Compliance
Certificate setting forth the Leverage Ratio of Cable Systems and its
Designated Subsidiaries as of the most recent fiscal quarter end. Subject to
Section 4.1(d), in the event the Borrowers fails to deliver such financial
statements and certificate within the time required by Section 7.2 hereof, the
Applicable Margin shall be the highest Applicable Margin set forth above until
the delivery of such financial statements and certificate.
(d) Default Rate. Upon the occurrence and during the continuance of
an Event of Default, (i) the Borrowers shall no longer have the option to
request LIBOR Rate Loans, (ii) all outstanding LIBOR Rate Loans which are past
due shall bear interest at a rate per annum two percent (2%) in excess of the
rate then applicable to LIBOR Rate Loans until the end of the applicable
Interest Period and thereafter at a rate equal to two percent (2%) in excess
of the rate then applicable to Base Rate Loans, and (iii) all outstanding Base
Rate Loans which are past due shall bear interest at a rate per annum equal to
two percent (2%) in excess of the rate then applicable to Base Rate Loans.
(e) Interest Payment and Computation. Interest on each Base Rate Loan
shall be payable in arrears on the last Business Day of each calendar quarter
commencing September 30, 1997; and interest on each LIBOR Rate Loan shall be
payable on the last day of each Interest Period applicable thereto, and if
such Interest Period extends over three (3) months, at the end of each three
(3) month interval during such Interest Period. Interest for all Base Rate
Loans provided hereunder and all fees shall be computed on the basis of a
365-day year or 366-day year, as applicable, and assessed for the actual
number of days elapsed. All interest for LIBOR Rate Loans provided hereunder
shall be computed on the basis of a 360-day year and assessed for the actual
number of days elapsed.
(f) Maximum Rate. In no contingency or event whatsoever shall the
aggregate of all amounts deemed interest hereunder or under any of the Notes
charged or collected pursuant to the terms of this Agreement or pursuant to
any of the Notes exceed the highest rate permissible under any Applicable Law
which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto. In the event that such a court determines that the Lenders
have charged or received interest hereunder in excess of the highest
applicable rate, the rate in effect hereunder shall automatically be reduced
to the maximum rate permitted by Applicable Law and the Lenders shall at the
Administrative Agent's option promptly refund to the Borrowers any interest
received by the Lenders in excess of the maximum lawful rate or shall apply
such excess to the principal balance of the Obligations. It is the intent
hereof that the Borrowers not pay or contract to pay, and that neither the
Administrative Agent nor any Lender receive or contract to receive, directly
or indirectly in any manner whatsoever, interest in excess of that which may
be paid by the Borrowers under Applicable Law.
SECTION 4.2 Notice and Manner of Conversion or Continuation of
Loans. Provided that no Event of Default has occurred and is then continuing,
the Borrowers shall have the option to (a) convert at any time all or any
portion of its outstanding Base Rate Loans in a principal amount equal to
$2,000,000 or any whole multiple of $500,000 in excess thereof into one or
more LIBOR Rate Loans or (b) upon the expiration of any Interest Period, (i)
convert all or any part of its outstanding LIBOR Rate Loans in a principal
amount equal to $2,000,000 or a whole multiple of $500,000 in excess thereof
into Base Rate Loans or (ii) continue such LIBOR Rate Loans as LIBOR Rate
Loans. Whenever the Borrowers desire to convert or continue Loans as provided
above, the Borrowers shall give the Administrative Agent irrevocable prior
written notice in the form attached as Exhibit E (a "Notice of Conversion/
Continuation") not later than 11:00 a.m. (Charlotte time) three (3) Business
Days before the day on which a proposed conversion or continuation of such
Loan is to be effective specifying (A) the Loans to be converted or continued,
and, in the case of any LIBOR Rate Loan to be converted or continued, the last
day of the Interest Period therefor, (B) the effective date of such conversion
or continuation (which shall be a Business Day), (C) the principal amount of
such Loans to be converted or continued, and (D) the Interest Period to be
applicable to such converted or continued LIBOR Rate Loan. The Administrative
Agent shall promptly notify the Lenders of such Notice of
Conversion/Continuation.
SECTION 4.3 Fees.
(a) Revolving Credit Commitment Fee. Commencing on the Closing Date,
the Borrowers shall pay to the Administrative Agent, for the account of the
Lenders, a non-refundable commitment fee at a rate per annum equal to .20% on
the average daily unused portion of the Revolving Credit Commitment. The
commitment fee shall be payable in arrears on the last Business Day of each
calendar quarter during the term of this Agreement commencing September 30,
1997, and on the Revolving Credit Termination Date. Such commitment fee shall
be distributed by the Administrative Agent to the Lenders pro rata in
accordance with the Lenders' respective Commitment Percentages.
(b) Term Loan Commitment Fee. The Borrowers shall pay to the
Administrative Agent, for the account of the Lenders, a non-refundable
commitment fee at a rate per annum equal to .20% of the average daily unused
portion of the Term Loan Commitment for the period commencing on the
forty-sixth day after the Closing Date through the earlier of (i) the date when
the outstanding Term Loan equals the total Term Loan Commitment and (ii) the
date ninety (90) days after the Closing Date. Such commitment fee shall be
due and payable on the date ninety (90) days after the Closing Date and shall
be distributed by the Administrative Agent to the Lenders pro rata in
accordance with the Lenders' respective Commitment Percentages.
(c) Administrative Agent's and Other Fees. In order to compensate the
Administrative Agent for structuring and syndicating the Loans and for its
obligations hereunder, the Borrowers agree to pay to the Administrative Agent,
for its account, the fees set forth in the separate fee letter agreement
executed by the Borrowers and the Administrative Agent dated April 18, 1997.
SECTION 4.4 Manner of Payment. Each payment by the Borrowers on
account of the principal of or interest on the Loans or of any fee, commission
or other amounts payable to the Lenders under this Agreement or any Note shall
be made not later than 1:00 p.m. (Charlotte time) on the date specified for
payment under this Agreement to the Administrative Agent at the Administrative
Agent's Office for the account of the Lenders (other than as set forth below)
pro rata in accordance with their respective Commitment Percentages, in
Dollars, in immediately available funds and shall be made without any set-off,
counterclaim or deduction whatsoever. Any payment received after such time
but before 2:00 p.m. (Charlotte time) on such day shall be deemed a payment on
such date for the purposes of Section 11.1, but for all other purposes shall
be deemed to have been made on the next succeeding Business Day. Any payment
received after 2:00 p.m. (Charlotte time) shall be deemed to have been made on
the next succeeding Business Day for all purposes. Upon receipt by the
Administrative Agent of each such payment, the Administrative Agent shall
distribute to each Lender at its address for notices set forth herein its pro
rata share of such payment in accordance with such Lender's Commitment
Percentage and shall wire advice of the amount of such credit to each Lender.
Each payment to the Administrative Agent of Administrative Agent's fees or
expenses shall be made for the account of the Administrative Agent and any
amount payable to any Lender under Sections 4.8, 4.9, 4.10, 4.11 or 13.2 shall
be paid to the Administrative Agent for the account of the applicable Lender.
SECTION 4.5 Crediting of Payments and Proceeds. In the event that
the Borrowers shall fail to pay any of the Obligations when due and the
Obligations have been accelerated pursuant to Section 11.2, all payments
received by the Lenders upon the Notes and the other Obligations and all net
proceeds from the enforcement of the Obligations shall be applied first to all
expenses then due and payable by the Borrowers hereunder, then to all
indemnity obligations then due and payable by the Borrowers hereunder, then to
all Administrative Agent's fees then due and payable, then to all commitment
and other fees and commissions then due and payable, then to accrued and
unpaid interest on the Notes (pro rata in accordance with all such amounts
due) and then to the principal amount of the Notes, in that order.
SECTION 4.6 Adjustments. If any Lender (a "Benefitted Lender")
shall at any time receive any payment of all or part of its Loans, or interest
thereon, or if any Lender shall at any time receive any collateral in respect
to its Loans (whether voluntarily or involuntarily, by set-off or otherwise)
in a greater proportion than any such payment to and collateral received by
any other Lender, if any, in respect of such other Lender's Loans, or interest
thereon, such Benefitted Lender shall purchase for cash from the other Lenders
such portion of each such other Lender's Loans, or shall provide such other
Lenders with the benefits of any such collateral, or the proceeds thereof, as
shall be necessary to cause such Benefitted Lender to share the excess payment
or benefits of such collateral or proceeds ratably with each of the Lenders;
provided, that if all or any portion of such excess payment or benefits is
thereafter recovered from such Benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned to the extent of such
recovery, but without interest. The Borrowers agree that, to the fullest
extent allowed by law, each Lender so purchasing a portion of another Lender's
Loans may exercise all rights of payment (including, without limitation,
rights of set-off) with respect to such portion as fully as if such Lender
were the direct holder of such portion.
SECTION 4.7 Nature of Obligations of Lenders Regarding Loans;
Assumption by the Administrative Agent. The obligations of the Lenders under
this Agreement to make the Loans are several and are not joint or joint and
several. Unless the Administrative Agent shall have received notice from a
Lender prior to a proposed borrowing date that such Lender will not make
available to the Administrative Agent such Lender's ratable portion of the
amount to be borrowed on such date (which notice shall not release such Lender
of its obligations hereunder), the Administrative Agent may assume that such
Lender has made such portion available to the Administrative Agent on the
proposed borrowing date in accordance with Section 2.2(b) and 3.2(b) and the
Administrative Agent may, in reliance upon such assumption, make available to
the Borrowers on such date a corresponding amount. If such amount is made
available to the Administrative Agent on a date after such borrowing date,
such Lender shall pay to the Administrative Agent on demand an amount, until
paid, equal to the product of (a) the amount of such Lender's Commitment
Percentage of such borrowing, times (b) the daily average Federal Funds Rate
during such period as determined by the Administrative Agent, times (c) a
fraction the numerator of which is the number of days that elapse from and
including such borrowing date to the date on which such Lender's Commitment
Percentage of such borrowing shall have become immediately available to the
Administrative Agent and the denominator of which is 360. A certificate of
the Administrative Agent with respect to any amounts owing under this Section
shall be conclusive, absent manifest error. If such Lender's Commitment
Percentage of such borrowing is not made available to the Administrative Agent
by such Lender within three (3) Business Days of such borrowing date, the
Administrative Agent shall be entitled to recover such amount made available
by the Administrative Agent with interest thereon at the rate per annum
applicable to Base Rate Loans hereunder, on demand, from the Borrowers. The
failure of any Lender to make its Commitment Percentage of any Loan available
shall not relieve it or any other Lender of its obligation, if any, hereunder
to make its Commitment Percentage of such Loan available on such borrowing
date, but no Lender shall be responsible for the failure of any other Lender
to make its Commitment Percentage of such Loan available on the borrowing date.
SECTION 4.8 Changed Circumstances.
(a) Circumstances Affecting LIBOR Rate Availability. If with respect
to any Interest Period:
(i) at least three (3) Lenders (or in any event the Required
lenders) advise the Administrative Agent that, by reason of
circumstances affecting the foreign exchange and interbank markets
generally, deposits in eurodollars, in the applicable amounts are not
being quoted via Telerate Page 3750 or offered to such Lenders for such
Interest Period, or
(ii) at least three (3) Lenders (or in any event the Required
Lenders) advise the Administrative Agent that the LIBOR Rate as
determined by the Administrative Agent will not adequately and fairly
reflect the cost to such Lenders of funding their LIBOR Rate Loans for
such Interest Period,
then the Administrative Agent shall forthwith give prompt written notice
thereof to the Borrowers and the Lenders. Thereafter, until the
Administrative Agent notifies the Borrowers that such circumstances no longer
exist, the obligation of the Lenders to make LIBOR Rate Loans and the right of
the Borrowers to convert any Loan to or continue any Loan as a LIBOR Rate Loan
shall be suspended, and the Borrowers shall repay in full (or cause to be
repaid in full) the then outstanding principal amount of each such LIBOR Rate
Loans together with accrued interest thereon, on the last day of the then
current Interest Period applicable to such LIBOR Rate Loan or convert the then
outstanding principal amount of each such LIBOR Rate Loan to a Base Rate Loan
as of the last day of such Interest Period. Unless the Borrowers notify the
Administrative Agent at least two Business Days before the date of any affected
borrowing or conversion or continuation specified in any applicable Notice of
Revolving Credit Borrowing, Notice of Term Loan Borrowing or Notice of
Conversion/Continuation that they elect not to borrow or convert or continue
Loans on the date specified therein, the Lenders shall make, convert or
continue the Loans in the amount specified by the Borrowers in the applicable
notice, but such Loans shall be made, converted or continued as Base Rate
Loans instead of LIBOR Rate Loans.
(b) Laws Affecting LIBOR Rate Availability. If, after the date
hereof, the introduction of, or any change in, any Applicable Law or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged with the interpretation
or administration thereof, or compliance by any Lender (or any of their
respective Lending Offices) with any request or directive (whether or not
having the force of law) of any such Authority, central bank or comparable
agency, shall make it unlawful or impossible for any of the Lenders (or any of
their respective Lending Offices) to honor its obligations hereunder to make
or maintain any LIBOR Rate Loan, such Lender shall promptly give notice
thereof to the Administrative Agent and the Administrative Agent shall
promptly give notice to the Borrowers and the other Lenders. Thereafter,
until such Lender notifies the Administrative Agent and the Borrowers that
such circumstances no longer exist, (i) the obligation of such Lender to make
LIBOR Rate Loans, convert Base Rate Loans into LIBOR Rate Loans or continue
LIBOR Rate Loans as LIBOR Rate Loans shall be suspended, and (ii) each LIBOR
Rate Loan of such Lender then outstanding shall be converted to a Base Rate
Loan either (A) on the last day of the then current Interest Period if such
Lender may lawfully continue to maintain and fund such Loan as a LIBOR Rate
Loan to such day or (B) immediately if such Lender shall determine that it may
not lawfully continue to maintain and fund such Loan as a LIBOR Rate Loan to
such day.
(c) Increased Costs. If, after the date hereof, the introduction of,
or any change in, any Applicable Law, or in the interpretation or
administration thereof by any Governmental Authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by any of the Lenders (or any of their respective Lending
Offices) with any request or directive (whether or not having the force of
law) of such Authority, central bank or comparable agency:
(i) shall subject any of the Lenders (or any of their
respective Lending Offices) to any tax, duty or other charge with respect to
any Note or shall change the basis of taxation of payments to any of the
Lenders (or any of their respective Lending Offices) of the principal of or
interest on any Note or any other amounts due under this Agreement in respect
thereof (except for changes in the rate of tax on the overall net income of
any of the Lenders or any of their respective Lending Offices imposed by the
jurisdiction in which such Lender is organized or is or should be qualified to
do business or such Lending Office is located); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System), special deposit, insurance or capital or similar
requirement against assets of, deposits with or for the account of, or credit
extended by any of the Lenders (or any of their respective Lending Offices),
other than any such amount included in the calculation of Eurodollar Reserve
Percentage, or shall impose on any of the Lenders (or any of their respective
Lending Offices) or the foreign exchange and interbank markets any other
condition affecting any Note;
and the result of any of the foregoing is to increase the costs to any of the
Lenders of maintaining any LIBOR Rate Loan or to reduce the yield or amount of
any sum received or receivable by any of the Lenders under this Agreement or
under the Notes in respect of a LIBOR Rate Loan, then such Lender shall
promptly notify the Administrative Agent, and the Administrative Agent shall
promptly notify the Borrowers of such fact and demand compensation therefor
and, within fifteen (15) days after such notice by the Administrative Agent,
the Borrowers shall pay to such Lender such additional amount or amounts as
will compensate such Lender or Lenders for such increased cost or reduction.
Each Lender will promptly notify the Administrative Agent of any event of
which it has knowledge which will entitle such Lender to compensation pursuant
to this Section 4.8(c) and, after receipt of such notice, the Administrative
Agent will promptly notify the Borrowers of such event; provided, that neither
any Lender nor the Administrative Agent shall incur any liability whatsoever
to any other Lender or the Borrowers in the event it fails to do so. The
amount of such compensation shall be determined, in the applicable Lender's
sole discretion, based upon the assumption that such Lender funded its
Commitment Percentage of the LIBOR Rate Loans in the London interbank market,
as applicable, and using any reasonable attribution or averaging methods which
such Lender deems appropriate and practical. A certificate of such Lender
setting forth the basis for determining such amount or amounts necessary to
compensate such Lender shall be forwarded to the Borrowers through the
Administrative Agent and shall be conclusively presumed to be correct save for
clearly demonstrable error.
(d) The Borrowers shall not be required to compensate a Lender for any
increased costs pursuant to this Section 4.8 incurred by such Lender more than
90 days prior to its request to the Administrative Agent for such compensation.
SECTION 4.9 Indemnity. The Borrowers hereby indemnify each of the
Lenders against any reasonable loss or expense (excluding any loss of margin
over the LIBOR Rate for the period after any such payment or conversion or
failure to borrow, prepay or convert) which may arise or be attributable to
each Lender's obtaining, liquidating or employing deposits or other funds
acquired to effect, fund or maintain any Loan (a) as a consequence of any
failure by the Borrowers to make any payment when due of any amount due
hereunder in connection with a LIBOR Rate Loan, (b) due to any failure of the
Borrowers to borrow on a date specified therefor in a Notice of Borrowing or
Notice of Continuation/Conversion or (c) due to any payment, prepayment or
conversion of any LIBOR Rate Loan on a date other than the last day of the
Interest Period therefor. The amount of such loss or expense shall be
determined, in good faith but otherwise in the applicable Lender's sole
discretion, based upon the assumption that such Lender funded its Commitment
Percentage of the LIBOR Rate Loans in the London interbank market, and using
any reasonable attribution or averaging methods which such Lender deems
appropriate and practical. A certificate of such Lender setting forth the
basis for determining such amount or amounts necessary to compensate such
Lender shall be forwarded to the Borrowers through the Administrative Agent
and shall be conclusively presumed to be correct save for clearly demonstrable
error.
SECTION 4.10 Capital Requirements. If, after the date hereof,
either (a) the introduction of, or any change in, or in the interpretation of,
any Applicable Law or (b) compliance with any guideline or request from any
central bank or comparable agency or other Governmental Authority (whether or
not having the force of law), has or would have the effect of reducing the
rate of return on the capital of, or has affected or would affect the amount of
capital required to be maintained by, any Lender or any corporation
controlling such Lender as a consequence of, or with reference to the
Commitments and other commitments of this type, below the rate which the
Lender or such other corporation could have achieved but for such
introduction, change or compliance, then within five (5) Business Days after
written demand by any such Lender, the Borrowers shall pay to such Lender from
time to time as specified in a reasonably detailed calculation by such Lender
additional amounts sufficient to compensate such Lender or other corporation
for such reduction. A certificate as to such amounts submitted to the
Borrowers and the Administrative Agent by such Lender, shall, in the absence
of clearly demonstrable error, be presumed to be correct and binding for all
purposes. The Borrowers will not be required to compensate a Lender for any
increased amounts to this Section 4.10 incurred by such Lender more than 90
days prior to its request to the Borrowers for such compensation.
SECTION 4.11 Taxes.
(a) Payments Free and Clear. Any and all payments by the Borrowers
hereunder or under the Notes shall be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholding, and all liabilities with respect thereto
excluding (i) taxes imposed on or measured by the overall net income of any
Lender or its Lending Office or the Administrative Agent or the Administrative
Agent's Office, as the case may be, and all franchise or similar taxes
measured by capital or net worth of such Lender or its Lending Office or the
Administrative Agent or the Administrative Agent's Office, as the case may be,
in each case imposed: (A) by the jurisdiction under the laws of which such
Lender or the Administrative Agent, as the case may be, is organized, or in
which its principal executive office is located, (B) by the jurisdiction in
which the Lending Office of such Lender or the Administrative Agent's Office,
as applicable, is located or (C) solely by reason of such Lender or the
Administrative Agent, as the case may be, doing business in the jurisdiction
imposing such tax, other than as a result of this Agreement or any Note or any
transaction contemplated hereby and (ii) in the case of each Lender, any
United States withholding tax imposed on such payments but only to the extent
that such Lender is subject to United States withholding tax at the time such
Lender first becomes a party to this Agreement (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Borrowers shall be required by
law to deduct any Taxes from or in respect of any sum payable hereunder or
under any Note or to any Lender or the Administrative Agent, (A) the sum
payable shall be increased as may be necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 4.11) such Lender or the Administrative Agent (as the case
may be) receives an amount equal to the amount such party would have received
had no such deductions been made, (B) the Borrowers shall make such
deductions, (C) the Borrowers shall pay the full amount deducted to the
relevant taxing authority or other authority in accordance with applicable
law, and (D) the Borrowers shall deliver to the Administrative Agent evidence
of such payment to the relevant taxing authority or other authority in the
manner provided in Section 4.11(e).
(b) Refunds. If any Borrower pays any additional amount under Section
4.11 (a "Tax Payment") and any Lender or Affiliate thereof effectively obtains
a refund of tax or credit against tax by reason of the Tax Payment (a "Tax
Credit") and such Tax Credit is, in the reasonable judgement of such Lender or
Affiliate, attributable to such Tax Payment, then such Lender, after actual
receipt of such Tax Credit or actual receipt of the benefits thereof, shall
promptly reimburse such Borrower for such amount as such Lender shall
reasonably determine to be the proportion of the Tax Credit as would leave
such Borrower (after that reimbursement) in no better or worse position than
it would have been if the Tax Payment had not been required; provided, that no
Lender shall be required to make any reimbursement if it reasonably believes
the making of such reimbursement would cause it to lose the benefit of the Tax
Credit or would adversely affect in any other respect its tax position.
Subject to the other terms hereof, any claim by a Lender for a Tax Credit
shall be made in a manner, order and amount as such Lender determines in its
sole and absolute discretion. Except to the extent necessary to evaluate any
Tax Credit, no Lender shall be obligated to disclose information regarding its
tax affairs or computations to any Borrower, it being understood and agreed
that in no event shall any Lender be required to disclose information
regarding its tax position that it deems to be confidential (other than with
respect to the Tax Credit).
(c) Stamp and Other Taxes. In addition to the Taxes described in
Section 4.11(a), the Borrowers shall pay any present or future stamp,
registration, recordation or documentary taxes or any other similar fees or
charges or excise or property taxes, levies of the United States or any state
or political subdivision thereof or any applicable foreign jurisdiction which
arise from any payment made hereunder or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement, the Loans, the
other Loan Documents, or the perfection of any rights or security interest in
respect thereto (hereinafter referred to as "Other Taxes").
(d) Indemnity. The Borrowers shall indemnify each Lender and the
Administrative Agent for the full amount of Taxes and Other Taxes (including,
without limitation, any Taxes and Other Taxes imposed by any jurisdiction on
amounts payable under this Section 4.11) paid by such Lender or the
Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Such indemnification shall be made within thirty (30) days from the date such
Lender or the Administrative Agent (as the case may be) makes written demand
therefor.
(e) Evidence of Payment. Within thirty (30) days after the date of
any payment of Taxes or Other Taxes, the Borrowers shall furnish to the
Administrative Agent, at its address referred to in Section 13.1, the original
or a certified copy of a receipt evidencing payment thereof or other evidence
of payment satisfactory to the Administrative Agent.
(f) Delivery of Tax Forms. Each Lender organized under the laws of a
jurisdiction other than the United States or any state thereof shall deliver
to the Borrowers, with a copy to the Administrative Agent, on the Closing Date
or concurrently with the delivery of the relevant Assignment and Acceptance,
as applicable, (i) two United States Internal Revenue Service Forms 4224 or
Forms 1001, as applicable (or successor forms) properly completed and
certifying in each case that such Lender is entitled to a complete exemption
from withholding or deduction for or on account of any United States federal
income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or
successor applicable form, as the case may be, to establish an exemption from
United States backup withholding taxes. Each such Lender further agrees to
deliver to the Borrowers, with a copy to the Administrative Agent, a Form 1001
or 4224 and Form W-8 or W-9, or successor applicable forms or manner of
certification, as the case may be, on or before the date that any such form
expires or becomes obsolete or after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Borrowers,
certifying in the case of a Form 1001 or 4224 that such Lender is entitled to
receive payments under this Agreement without deduction or withholding of any
United States federal income taxes (unless in any such case an event
(including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders such forms inapplicable or the exemption to which such
forms relate unavailable and such Lender notifies the Borrowers and the
Administrative Agent that it is not entitled to receive payments without
deduction or withholding of United States federal income taxes) and, in the
case of a Form W-8 or W-9, establishing an exemption from United States backup
withholding tax.
(g) Survival. Without prejudice to the survival of any other
agreement of the Borrowers hereunder, the agreements and obligations of the
Borrowers contained in this Section 4.11 shall survive the payment in full of
the Obligations and the termination of the Commitments.
SECTION 4.12 Change of Lending Office; Replacement Lenders. (a)
Each Lender agrees that on the occurrence of any event giving rise to the
operation of Sections 4.8(b), 4.8(c), 4.10, 4.11(a) or 4.11(c) with respect to
such Lender, it will, if requested by the Borrowers, use reasonable efforts
(subject to overall policy considerations of such Lender) to designate another
Lending Office for any Loans affected by such event; provided, that such
designation is made on such terms that such Lender and its Lending Office
suffer no economic, legal or regulatory disadvantage, with the object of
avoiding the consequence of the event giving rise to the operation of such
Section. Nothing in this Section 4.12(a) shall affect or postpone any of the
obligations of any Borrower or the rights of any Lender provided in Sections
4.8, 4.10 or 4.11.
(b) At any time within one hundred eighty (180) days after any payment
by the Borrowers of any amount pursuant to or by reason of the operation of
Sections 4.8(b), 4.8(c), 4.10, 4.11(a) or 4.11(c), the Borrowers, by writing
addressed to the Administrative Agent and each Lender that requested the
payment of such amount, may nominate or propose an Eligible Assignee that is
willing to become the assignee of the Commitment and other obligations of such
Lender (a "Replacement Lender") pursuant to Section 13.10(b), and within
fifteen (15) Business Days after receipt of such proposal from the Borrowers,
each such Lender shall execute and deliver to the Administrative Agent an
Assignment and Acceptance of its entire Commitment in favor of the proposed
Replacement Lender in accordance with Section 13.10(b) unless, prior to the
expiration of such period, the Administrative Agent shall have notified the
Borrowers and such Lender that the proposed Replacement Lender is not
reasonably acceptable to the Administrative Agent; provided, that in no event
will (i) any Lender be required to enter into an Assignment and Acceptance at
a price less than par plus accrued interest and prorated fees and other costs
due hereunder to the effective date thereof, (ii) either of the Administrative
Agent or Lenders be obligated to assist the Borrowers in identifying any
Eligible Assignees that are willing to become such a Replacement Lender or
(iii) any such assignment be required if consummation conflicts with any
Applicable Law. The assignment fee payable to the Administrative Agent in
connection with any such assignment pursuant to Section 13.10(b) shall be for
the account of the Borrowers.
SECTION 4.13 Use of Proceeds. The Borrowers shall use the proceeds
of the Loans (a) to repay in full all Debt of the Borrowers not otherwise
permitted under this Agreement, (b) to finance the RCN Investment, (c) to
finance acquisitions by the Borrowers permitted by this Agreement and (d) for
Capital Expenditures, working capital and general corporate purposes of the
Borrowers.
ARTICLE V
CLOSING; CONDITIONS OF CLOSING AND BORROWING
SECTION 5.1 Closing. The closing shall take place at the
offices of Kennedy Covington Lobdell & Hickman, L.L.P. at 10:00 a.m. on June
30, 1997, or at such other place or on such other date as the Administrative
Agent and the Borrower shall mutually agree.
SECTION 5.2 Conditions to Closing and Initial Loans. The
obligation of the Lenders to close this Agreement and to make the initial
Loans is subject to the satisfaction of each of the following conditions:
(a) Executed Loan Documents. This Agreement, the Notes, the Cable
Systems Pledge Agreement and the other Loan Documents shall have been duly
authorized, executed and delivered to the Administrative Agent by the parties
thereto, shall be in full force and effect and no Default or Event of Default
shall exist, and the Borrowers shall have delivered original counterparts
thereof to the Administrative Agent.
(b) Closing Certificates; etc.
(i) Officers's Certificate. The Administrative Agent
shall have received a certificate from the chief executive officer or chief
financial officer of Cable Systems in form and substance satisfactory to the
Administrative Agent, to the effect that all representations and warranties of
the Borrowers contained in this Agreement and the other Loan Documents are
true, correct and complete; that the Borrowers are not in violation of any of
the covenants contained in this Agreement and the other Loan Documents; that,
after giving effect to the transactions contemplated by this Agreement, no
Default or Event of Default has occurred and is continuing; and that the
Borrowers have satisfied each of the closing conditions.
(ii) Certificate of Secretary. The Administrative Agent
shall have received a certificate of the secretary or assistant secretary of
each Borrower certifying that attached thereto is a true and complete copy of
the articles of incorporation of such Borrower and all amendments thereto,
each certified as of a recent date by the appropriate Governmental Authority
in the applicable jurisdiction; that attached thereto is a true and complete
copy of the bylaws of such Borrower, each as in effect on the date of such
certification; that attached thereto is a true and complete copy of
resolutions duly adopted by the Board of Directors authorizing the borrowings
contemplated hereunder and the execution, delivery and performance of this
Agreement and the other Loan Documents to which such Borrower is a party; and
as to the incumbency and genuineness of the signature of each officer of each
Borrower executing Loan Documents to which it is a party.
(iii) Certificates of Good Standing. The Administrative
Agent shall have received long-form certificates as of a recent date of the
good standing of each Borrower under the laws of its jurisdiction of
organization and a certificate of the relevant taxing authorities of such
jurisdiction certifying that such Person has filed required tax returns with
respect to any franchise taxes and owes no delinquent franchise taxes.
(iv) Opinions of Counsel. The Administrative Agent shall
have received favorable opinions of counsel to the Borrowers addressed to the
Administrative Agent and the Lenders (A) with respect to the Borrowers, the
Loan Documents and such other matters as the Lenders shall request and (B)
with respect to FCC and other regulatory matters, each in form and substance
satisfactory to the Administrative Agent.
(v) Insurance. The Administrative Agent shall have
received a certificate of insurance in form and substance satisfactory to the
Administrative Agent.
(c) Collateral.
(i) Filings and Recordings. All Form UCC-1 financing
statements that are necessary to perfect the security interests of the Lenders
granted under the Cable Systems Pledge Agreement in the capital stock of Cable
New York (other than such security interests under any supplement to the Cable
Systems Pledge Agreement, which Form UCC-1 financing statements shall be
delivered to the Administrative Agent pursuant to Section 8.11) shall have
been delivered to the Administrative Agent for filing or recordation in all
appropriate locations and the Administrative Agent shall have received
evidence satisfactory thereto that upon such filing or recordation by the
Administrative Agent and the delivery to the Administrative Agent of the
certificates evidencing such shares of capital stock pursuant to Section 5.3
such security interests will constitute valid and perfected first priority
Liens therein subject to Liens described in Section 10.2.
(ii) Lien Search. The Borrowers shall have delivered the
results of a Lien search against Cable Systems and its Designated Subsidiaries
under the Uniform Commercial Code as in effect in the Secretary of State's
office in each state where their chief executive offices are located,
indicating that their assets are free and clear of any Lien except for the
Liens permitted by Section 10.2.
(d) Consents; Defaults.
(i) Governmental and Third Party Approvals. All necessary
approvals, authorizations and consents (other than those to be provided after
the Closing Date pursuant to Section 8.11), if any be required, of any Person
and of all Governmental Authorities and courts having jurisdiction with
respect to the transactions contemplated by this Agreement and the other Loan
Documents shall have been obtained.
(ii) No Injunction, Etc. No action, proceeding,
investigation, regulation or legislation shall have been instituted,
threatened or proposed before any Governmental Authority to enjoin, restrain,
or prohibit, or to obtain substantial damages in respect of, or which is
related to or arises out of this Agreement or the other Loan Documents or the
consummation of the transactions contemplated hereby or thereby, or which in
the Administrative Agent's good faith determination could reasonably be
expected to have a Material Adverse Effect.
(e) Financial Matters.
(i) Financial Statements. The Administrative Agent shall
have received the financial statements described in Section 6.1(n).
(ii) Financial Condition Certificate. The Borrowers shall
have delivered to the Administrative Agent a certificate, in form and
substance satisfactory to the Administrative Agent, and certified as accurate
by the chief executive officer or chief financial officer of Cable Systems,
that (A) Cable Systems and its Designated Subsidiaries, taken as a whole, are
Solvent, (B) each Borrower's payables are current and not past due, (C)
attached thereto is a pro forma balance sheet of Cable Systems and its
Designated Subsidiaries setting forth on a pro forma basis the financial
condition of Cable Systems and its Designated Subsidiaries on a Combined basis
as of that date, reflecting on a pro forma basis the effect of the
transactions contemplated herein, including all fees and expenses in
connection therewith, and evidencing compliance on a pro forma basis with the
covenants contained in Article IX hereof, (D) attached thereto are the
financial projections (including without limitation pro forma budgets for
Capital Expenditures) previously delivered to the Administrative Agent
representing the good faith opinions of the Borrowers and senior management
thereof as to the projected results contained therein and (E) attached thereto
is a calculation of the Applicable Margin pursuant to Section 4.1(c).
(iii) Payment at Closing; Fee Letters. There shall have
been paid by the Borrowers to the Administrative Agent and the Lenders the
fees set forth or referenced in Section 4.3 and any other accrued and unpaid
fees or commissions due hereunder (including, without limitation, legal fees
and expenses), and to any other Person such amount as may be due thereto in
connection with the transactions contemplated hereby, including all taxes,
fees and other charges in connection with the execution, delivery, recording,
filing and registration of any of the Loan Documents.
(f) Miscellaneous.
(i) Notices of Borrowing. The Administrative Agent shall
have received a Notice of Revolving Credit Borrowing and Notice of Term Loan
Borrowing from the Borrowers in accordance with Section 2.2(a) and Section 3.2
with respect to any Loans to be made on the Closing Date, and a Notice of
Account Designation specifying the account or accounts to which the proceeds
of any loans made after the Closing Date are to be disbursed.
(ii) Proceedings and Documents. All opinions, certificates
and other instruments and all proceedings in connection with the transactions
contemplated by this Agreement shall be satisfactory in form and substance to
the Lenders. The Lenders shall have received copies of all other instruments
and other evidence as the Administrative Agent may reasonably request, in form
and substance satisfactory to the Lenders, with respect to the transactions
contemplated by this Agreement and the taking of all actions in connection
therewith.
(iii) Due Diligence and Other Documents. The Borrowers
shall have delivered to the Administrative Agent such other documents,
certificates and opinions as the Administrative Agent reasonably requests
certified by a secretary or assistant secretary of Cable Systems as a true and
correct copy thereof.
SECTION 5.3 Additional Conditions to the Initial Loans. The
obligations of the Lenders to make the initial Loans are subject to the
satisfaction of the additional condition that the Administrative Agent shall
have received original stock certificates evidencing the capital stock of
Cable New York required to be pledged pursuant to the Cable Systems Pledge
Agreement, together with an appropriate undated stock power for each stock
certificate duly executed in blank by the registered owner thereof.
SECTION 5.4 Conditions to All Loans. The obligations of the
Lenders to make any Loan is subject to the satisfaction of the following
conditions precedent on the relevant borrowing date:
(a) Continuation of Representations and Warranties. The
representations and warranties contained in Article VI shall be true and
correct on and as of such borrowing date with the same effect as if made on
and as of such date (except where such representation or warranty is
specifically made as of an earlier date in which case it shall remain true and
correct as of such earlier date).
(b) No Existing Default. No Default or Event of Default shall
have occurred and be continuing hereunder on the borrowing date with respect
to such Loan or after giving effect to the Loans to be made on such date.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE BORROWERS
SECTION 6.1 Representations and Warranties. To induce the
Administrative Agent to enter into this Agreement and the Lenders to make the
Loans, the Borrowers hereby jointly and severally represent and warrant to the
Administrative Agent and Lenders that:
(a) Organization; Power; Qualification. Each of Cable Systems and its
Designated Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation,
has the power and authority to own its properties and to carry on its business
as now being and hereafter proposed to be conducted and is duly qualified and
authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business requires such qualification and
authorization, except where the failure to obtain such qualification and
authorization could not reasonably be expected to have a Material Adverse
Effect. The jurisdictions in which Cable Systems and its Designated
Subsidiaries are organized and qualified to do business on the date hereof are
described on Schedule 6.1(a).
(b) Ownership. Each Subsidiary of Cable Systems on the date hereof is
listed on Schedule 6.1(b). The capitalization of Cable Systems and its
Designated Subsidiaries on the date hereof consists of the number of shares,
authorized, issued and outstanding, of such classes and series, with or
without par value, described on Schedule 6.1(b). All outstanding shares have
been duly authorized and validly issued and are fully paid and nonassessable.
The shareholders of the Designated Subsidiaries and the number of shares owned
by each on the date hereof are described on Schedule 6.1(b). As of the date
hereof, there are no outstanding stock purchase warrants, subscriptions,
options, securities, instruments or other rights of any type or nature
whatsoever, which are convertible into, exchangeable for or otherwise provide
for or permit the issuance of capital stock of Cable Systems or its Designated
Subsidiaries, except as described on Schedule 6.1(b).
(c) Authorization of Agreement, Loan Documents and Borrowing. Each of
Cable Systems and its Designated Subsidiaries has the right, power and
authority and has taken all necessary corporate and other action to authorize
the execution, delivery and performance of this Agreement and each of the
other Loan Documents to which it is a party in accordance with their
respective terms. This Agreement and each of the other Loan Documents have
been duly executed and delivered by the duly authorized officers of Cable
Systems and each of its Designated Subsidiaries party thereto, and each such
document constitutes the legal, valid and binding obligation of Cable Systems
and its Designated Subsidiaries party thereto, enforceable in accordance with
its terms, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar state or federal laws from
time to time in effect which affect the enforcement of creditors' rights in
general and the availability of equitable remedies.
(d) Compliance of Agreement, Loan Documents and Borrowing with Laws,
Etc. Except as set forth on Schedule 6.1(d), the execution, delivery and
performance by Cable Systems and its Designated Subsidiaries of the Loan
Documents to which each such Person is a party, in accordance with their
respective terms, the borrowings hereunder and the transactions contemplated
by this Agreement do not and will not, by the passage of time, the giving of
notice or otherwise, (i) require any Governmental Approval or violate any
Applicable Law relating to Cable Systems or any of its Designated Subsidiaries
(except as contemplated by Section 19 of each Pledge Agreement), (ii) conflict
with, result in a breach of or constitute a default under the articles of
incorporation, bylaws or other organizational documents of Cable Systems or
any of its Designated Subsidiaries or any indenture, agreement or other
instrument to which such Person is a party or by which any of its properties
may be bound or any Governmental Approval relating to such Person, or (iii)
result in or require the creation or imposition of any Lien upon or with
respect to any property now owned or hereafter acquired by such Person other
than Liens arising under the Loan Documents.
(e) Compliance with Law; Governmental Approvals. Each of Cable
Systems and its Designated Subsidiaries (i) has all Governmental Approvals
required by any Applicable Law for it to conduct its business, each of which
is in full force and effect, is final and not subject to review on appeal and
is not the subject of any pending or, to the best of its knowledge, threatened
attack by direct or collateral proceeding and (ii) is in compliance with each
Governmental Approval applicable to it and in compliance with all other
Applicable Laws relating to it or any of its respective properties, except in
each case with respect to subclauses (i) and (ii) where the failure to do so
could not reasonably be expected to have a Material Adverse Effect.
(f) Tax Returns and Payments. Each of Cable Systems and its Designated
Subsidiaries has duly filed or caused to be filed all federal, state, local
and other tax returns required by Applicable Law to be filed, and has paid, or
made adequate provision for the payment of, all federal, state, local and
other taxes, assessments and governmental charges or levies upon it and its
property, income, profits and assets which are due and payable, except where
the failure to so file or cause to be filed such return or pay such taxes
could not reasonably be expected to have a Material Adverse Effect. No
Governmental Authority has asserted any Lien or other claim against Cable
Systems or any of its Designated Subsidiaries with respect to unpaid taxes
which has not been discharged or resolved; provided, that Cable Systems or
such Designated Subsidiary may contest such Lien or other claim in good faith
so long as adequate reserves are maintained in accordance with GAAP. The
charges, accruals and reserves on the books of Cable Systems and any of its
Designated Subsidiaries in respect of federal, state, local and other taxes
for all Fiscal Years and portions thereof since the organization of Cable
Systems and any of its Designated Subsidiaries are in the judgment of Cable
Systems adequate.
(g) Intellectual Property Matters. Except where the failure to own or
possess such intellectual property rights could not reasonably be expected to
have a Material Adverse Effect, each of Cable Systems and its Designated
Subsidiaries owns or possesses rights to use all franchises, licenses,
copyrights, copyright applications, patents, patent rights or licenses, patent
applications, trademarks, trademark rights, trade names, trade name rights,
copyrights and rights with respect to the foregoing which are required to
conduct its business. Except to the extent any revocation, termination or
infringement could not reasonably be expected to have a Material Adverse
Effect, no event has occurred which permits, or after notice or lapse of time
or both would permit, the revocation or termination of any such rights, and
neither Cable Systems nor any of its Designated Subsidiaries is liable to any
Person for infringement under Applicable Law with respect to any such rights
as a result of its business operations.
(h) Environmental Matters. Except for matters that could not
reasonably be expected to have a Material Adverse Effect:
(i) The properties and operations of Cable Systems and its
Designated Subsidiaries are in compliance, and to the best of their knowledge
have been in compliance, with all applicable Environmental Laws;
(ii) Neither Cable Systems nor any of its Designated
Subsidiaries has received any notice of violation, alleged violation,
non-compliance, liability or potential liability regarding environmental
matters or compliance with Environmental Laws with regard to any of their
properties or the operations conducted in connection therewith, nor does Cable
Systems or any of its Designated Subsidiaries have knowledge or reason to
believe that any such notice will be received or is being threatened;
(iii) Hazardous Materials have not been transported or
disposed of by Cable Systems and its Designated Subsidiaries in violation of,
or in a manner or to a location which could reasonably be expected to give
rise to liability under, Environmental Laws, nor have any Hazardous Materials
been generated, treated, stored or disposed of at, on or under any of such
properties in violation of, or in a manner that could reasonably be expected
to give rise to liability under, any applicable Environmental Laws;
(iv) No judicial proceedings or governmental or
administrative action is pending, or, to the knowledge of the Borrowers,
threatened, under any Environmental Law to which Cable Systems or any of its
Designated Subsidiaries is named as a party with respect to such properties or
operations conducted in connection therewith, nor are there any consent
decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding under any
Environmental Law with respect to such properties or such operations; and
(v) None of Cable Systems or its Designated Subsidiaries
have released, and to the best of the Borrowers's knowledge, there is no
threat of release by Cable Systems or any of its Designated Subsidiaries, of
Hazardous Materials at or from such properties, in violation of or in amounts
or in a manner that could reasonably be expected to give rise to liability
under Environmental Laws.
(i) ERISA.
(i) As of the date hereof, no Borrower or any ERISA
Affiliate maintains or contributes to, or has any obligation under, any
Employee Benefit Plans other than those identified on Schedule 6.1(i);
(ii) Each Borrower and each ERISA Affiliate are in
compliance with all applicable provisions of ERISA and the regulations and
published interpretations thereunder with respect to all Employee Benefit
Plans except for any required amendments for which the remedial amendment
period as defined in Section 401(b) of the Code has not yet expired. Each
Employee Benefit Plan that is intended to be qualified under Section 401(a) of
the Code has been determined by the Internal Revenue Service to be so
qualified, and each trust related to such plan has been determined to be
exempt under Section 501(a) of the Code. No liability has been incurred by
any Borrower or any ERISA Affiliate which remains unsatisfied for any taxes or
penalties with respect to any Employee Benefit Plan or any Multiemployer Plan;
(iii) No Pension Plan has been terminated under Sections
4041(e) or 4042 of ERISA, nor has any accumulated funding deficiency (as
defined in Section 412 of the Code) been incurred (without regard to any
waiver granted under Section 412 of the Code), nor has any funding waiver from
the Internal Revenue Service been received or requested with respect to any
Pension Plan, nor has any Borrower or any ERISA Affiliate failed to make any
contributions or to pay any amounts due and owing as required by Section 412
of the Code, Section 302 of ERISA or the terms of any Pension Plan prior to
the due dates of such contributions under Section 412 of the Code or Section
302 of ERISA, nor has there been any event requiring any disclosure under
Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension Plan;
(iv) No Borrower or any ERISA Affiliate has: (A) engaged
in a nonexempt prohibited transaction described in Section 406 of the ERISA or
Section 4975 of the Code, (B) incurred any liability to the PBGC which remains
outstanding other than the payment of premiums and there are no premium
payments which are due and unpaid, (C) failed to make a required contribution
or payment to a Multiemployer Plan, or (D) failed to make a required
installment or other required payment under Section 412 of the Code;
(v) No Termination Event has occurred or is reasonably
expected to occur; and
(vi) No proceeding, claim, lawsuit and/or investigation is
existing or, to the best knowledge of the Borrowers after due inquiry,
threatened concerning or involving any (A) employee welfare benefit plan (as
defined in Section 3(1) of ERISA) currently maintained or contributed to by
the Borrowers or any ERISA Affiliate, (B) Pension Plan or (C) Multiemployer
Plan.
(j) Margin Stock. Neither Cable Systems nor any of its Designated
Subsidiaries is engaged principally or as one of its activities in the
business of extending credit for the purpose of "purchasing" or "carrying" any
"margin stock" (as each such term is defined or used in Regulations G and U of
the Board of Governors of the Federal Reserve System). No part of the
proceeds of any of the Loans or Letters of Credit will be used for purchasing
or carrying margin stock or for any purpose which violates, or which would be
inconsistent with, the provisions of Regulation G, T, U or X of such Board of
Governors.
(k) Government Regulation. Neither Cable Systems nor any of its
Designated Subsidiaries is an "investment company" or a company "controlled"
by an "investment company" (as each such term is defined or used in the
Investment Company Act of 1940, as amended) and neither Cable Systems nor any
of its Designated Subsidiaries is, or after giving effect to any Loan will be,
subject to regulation under the Public Utility Holding Company Act of 1935 or
the Interstate Commerce Act, each as amended.
(l) Material Contracts. Schedule 6.1(l) sets forth a complete and
accurate list of all Material Contracts of Cable Systems and its Designated
Subsidiaries in effect as of the Closing Date not listed on any other Schedule
hereto; other than as set forth in Schedule 6.1(l), each such Material
Contract is, as of the date hereof, in full force and effect in accordance
with the terms thereof. Cable Systems and its Designated Subsidiaries have
delivered to the Administrative Agent a true and complete copy of each
Material Contract requested thereby and required to be listed on Schedule
6.1(l).
(m) Employee Relations. As of the date hereof, each of Cable Systems
and any of its Designated Subsidiaries has a stable work force in place and is
not, except as set forth on Schedule 6.1(m), party to any collective
bargaining agreement nor has any labor union been recognized as the
representative of its employees. As of the date hereof, Cable Systems knows
of no pending, threatened or contemplated strikes, work stoppage or other
collective labor disputes involving its employees or those of its Designated
Subsidiaries.
(n) Financial Statements. The (i) unaudited Combined balance sheet of
Cable Systems and its Designated Subsidiaries as of December 31, 1996 and
March 31, 1997 and the related statements of income and retained earnings and
cash flows for the fiscal periods then ended and (ii) audited consolidated
balance sheet of Cable Systems and its Subsidiaries as of December 31, 1996
and related statements of revenue and retained earnings, copies of which have
been furnished to the Administrative Agent and each Lender, are in all
material respects complete and correct and fairly present the assets,
liabilities and financial position of Cable Systems and its Designated
Subsidiaries or Subsidiaries, as the case may be, as at such dates, and the
results of the operations and changes of financial position for the periods
then ended. All such financial statements, including the related schedules
and notes thereto, have been prepared in accordance with GAAP (except that
such unaudited statements may not contain notes required by GAAP). Cable
Systems and its Designated Subsidiaries, on a Combined basis, have no Debt,
obligation or other unusual forward or long-term commitment which is not
fairly reflected in the foregoing financial statements or in the notes thereto.
(o) No Material Adverse Change. Since December 31, 1996, there has
been no material adverse change in the properties, business, operations, or
financial condition of Cable Systems and its Designated Subsidiaries and no
event has occurred or condition arisen that could reasonably be expected to
have a Material Adverse Effect; provided, that the consummation of the
Reorganization shall not constitute such a material adverse change or Material
Adverse Effect.
(p) Solvency. As of the Closing Date and after giving effect to each
Loan made hereunder, Cable Systems and its Designated Subsidiaries, taken as a
whole, will be Solvent.
(q) Titles to Properties. Each of Cable Systems and its Designated
Subsidiaries has such title to the real property owned by it as is necessary
or desirable to the conduct of its business and valid and legal title to all
of its personal property and assets, including, but not limited to, those
reflected on the balance sheets of Cable Systems and its Designated
Subsidiaries delivered pursuant to Section 6.1(n), except those which have
been disposed of by Cable Systems and its Designated Subsidiaries subsequent
to such date which dispositions have been in the ordinary course of business
or as otherwise expressly permitted hereunder, and except where the failure to
obtain such titles could not reasonably be expected to have a Material Adverse
Effect.
(r) Liens. None of the properties and assets of Cable Systems or any
of its Designated Subsidiaries is subject to any Lien, except Liens permitted
pursuant to Section 10.2.
(s) Debt and Guaranty Obligations. Schedule 6.1(s) is a complete and
correct listing of all Debt of Cable Systems and its Designated Subsidiaries
in excess of $1,000,000, as of the date hereof.
(t) Litigation. Except as set forth on Schedule 6.1(t), there are no
actions, suits or proceedings pending nor, to the knowledge of the Borrowers,
threatened against or in any other way relating adversely to or affecting
Cable Systems or any of its Designated Subsidiaries or any of their respective
properties in any court or before any arbitrator of any kind or before or by
any Governmental Authority that could reasonably be expected to have a
Material Adverse Effect.
(u) FCC and PUC Regulatory Matters.
(i) Schedule 6.1(u) hereto sets forth, as of the date hereof, a
true and complete list of the following information for each FCC License, PUC
Authorization and CATV Franchise issued to Cable Systems or any of its
Designated Subsidiaries: (A) for all FCC Licenses and PUC Authorizations, the
name of the licensee, the type of service and the expiration dates; and (B)
for each CATV Franchise, the geographic area covered by such CATV Franchise,
the services that may be provided thereunder and the expiration date, if any.
Such FCC Licenses, PUC Authorizations and CATV Franchises constitute all of
the Governmental Approvals required to be issued by the FCC and any PUC under
Applicable Law for Cable Systems and its Designated Subsidiaries to own and
operate their respective CATV Systems and other business operations, as of the
date hereof.
(ii) Compliance. Except for matters that could not reasonably be
expected to have a Material Adverse Effect, (A) neither Cable Systems nor any
of its Designated Subsidiaries is in material violation of any duty or
obligation required by the Communications Act of 1934, as amended, or any FCC
or PUC law, rule or regulation applicable to the operation of any portion of
any of its business operations or CATV Systems; (B) the FCC Licenses, PUC
Authorizations and CATV Franchises specified on Schedule 6.1(u) hereto are
valid and in full force and effect without conditions except for such
conditions as are generally applicable to holders of such Governmental
Approvals; (C) no event has occurred and is continuing which could reasonably
be expected to (1) result in the imposition of a material forfeiture or the
revocation, termination or adverse modification of any FCC License, PUC
Authorization or CATV Franchise of Cable Systems or any of its Designated
Subsidiaries, (2) materially and adversely affect any rights of Cable Systems
or any of its Designated Subsidiaries thereunder or (3) cause a material
disruption of Cable Systems' or any Designated Subsidiary's ownership or
operation of its CATV Systems; and (D) Cable Systems has no reason to believe
and has no knowledge that the FCC Licenses, PUC Authorizations or any CATV
Franchise thereof or of its Designated Subsidiaries will not be renewed in the
ordinary course.
(iii) Condition of Systems. Except for matters that could not
reasonably be expected to have a Material Adverse Effect, (A) all of the CATV
Systems owned, leased, managed or operated by Cable Systems and its Designated
Subsidiaries are in good repair, working order and condition and are and will
be in compliance with all terms and conditions of the FCC Licenses, PUC
Authorizations and CATV Franchises thereof and all standards or rules imposed
by Applicable Law and any Governmental Authority or as imposed under any
agreements with telephone companies and customers; and (B) there is not issued
or outstanding or, to the best knowledge of the Borrowers, threatened, any
notice of any hearing, violation or complaint against Cable Systems or any of
its Designated Subsidiaries with respect to the operation of any material
portion of its CATV Systems or other business operations.
(iv) Fees. Except where the failure to pay such fees and charges
could not reasonably be expected to have a Material Adverse Effect, Cable
Systems and each of its Designated Subsidiaries has paid all franchise,
license or other fees and charges which have become due pursuant to any
Governmental Approval in respect of its CATV Systems and business operations
and has made appropriate provision as is required by GAAP for any such fees
and charges which have accrued.
(v) Absence of Defaults. No event has occurred or is continuing which
constitutes a Default or an Event of Default, or which constitutes, or which
with the passage of time or giving of notice or both would constitute, a
default by Cable Systems or any of its Designated Subsidiaries under any
Material Contract or judgment, decree or order (except where such default
could not reasonably be expected to have a Material Adverse Effect) by which
Cable Systems or any of its Designated Subsidiaries or any of their respective
properties may be bound; provided, that the representation and warranty in
this clause (v) shall not be incorrect solely on account of any such event
relating to a Material Contract if Cable Systems or a Designated Subsidiary is
contesting the claimed default in good faith so long as adequate reserves are
maintained in accordance with GAAP.
(w) Accuracy and Completeness of Information. All written
information, reports and other papers and data produced by or on behalf of
Cable Systems or any of its Designated Subsidiaries and furnished to the
Lenders (other than any projections) were, at the time the same were so
furnished, complete and correct in all respects to the extent necessary to
give the recipient a true and accurate knowledge of the subject matter. No
document furnished or written statement made to the Administrative Agent or
the Lenders by Cable Systems or any of its Designated Subsidiaries in
connection with the negotiation, preparation or execution of this Agreement or
any of the Loan Documents contains or will contain any untrue statement of a
fact material to the creditworthiness of Cable Systems or any of its
Designated Subsidiaries or omits or will omit to state a fact necessary in
order to make the statements contained therein not misleading. All
projections provided by or on behalf of the Borrowers to the Administrative
Agent and Lenders hereunder constitute good faith estimates based on
reasonable assumptions of senior management of the Borrowers as of the date
delivered. The Borrowers are not aware of any facts which they have not
disclosed in writing to the Administrative Agent having a Material Adverse
Effect, or insofar as the Borrowers can now foresee, could reasonably be
expected to have a Material Adverse Effect.
SECTION 6.2 Survival of Representations and Warranties, Etc. All
representations and warranties set forth in this Article VI and all
representations and warranties contained in any certificate, or any of the
Loan Documents (including but not limited to any such representation or
warranty made in or in connection with any amendment thereto) shall constitute
representations and warranties made under this Agreement. All representations
and warranties made under this Agreement shall survive the Closing Date and
shall not be waived by the execution and delivery of this Agreement, any
investigation made by or on behalf of the Lenders or any borrowing hereunder.
ARTICLE VII
FINANCIAL INFORMATION AND NOTICES
Until all the principal and interest on the Loans and all fees hereunder
have been paid in full and the Commitments terminated, unless consent has been
obtained in the manner set forth in Section 13.11 hereof, Cable Systems will
furnish or cause to be furnished to the Administrative Agent and to the
Lenders at their respective addresses as set forth on Schedule 1.1(a), or such
other office as may be designated by the Administrative Agent and Lenders from
time to time:
SECTION 7.1 Financial Statements and Projections.
(a) Quarterly Financial Statements. As soon as practicable and in any
event within forty-five (45) days after the end of each fiscal quarter, an
unaudited Combined and combining balance sheet of Cable Systems and its
Designated Subsidiaries as of the close of such fiscal quarter and unaudited
Combined and combining statements of income, retained earnings and cash flows
for the fiscal quarter then ended and that portion of the Fiscal Year then
ended, all in reasonable detail setting forth in comparative form the
corresponding figures for the preceding Fiscal Year and prepared by Cable
Systems in accordance with GAAP and, if applicable, containing disclosure of
the effect on the financial position or results of operations of any change
in the application of accounting principles and practices during the period,
and certified by the chief financial officer of Cable Systems to present
fairly in all material respects the financial condition of Cable Systems and
its Designated Subsidiaries as of their respective dates and the results of
operations of Cable Systems and its Designated Subsidiaries for the respective
periods then ended, subject to normal year end adjustments.
(b) Annual Financial Statements. As soon as practicable and in any
event within ninety (90) days after the end of each Fiscal Year, an audited
Combined and combining balance sheet of Cable Systems and its Designated
Subsidiaries as of the close of such Fiscal Year and audited Combined and
combining statements of income, retained earnings and cash flows for the
Fiscal Year then ended, including the notes thereto, all in reasonable detail
setting forth in comparative form the corresponding figures for the preceding
Fiscal Year and prepared by an independent certified public accounting firm of
recognized national standing in accordance with GAAP and accompanied by a
report thereon by such certified public accountants that is not qualified with
respect to scope limitations imposed by Cable Systems or any of its Designated
Subsidiaries or with respect to accounting principles followed by Cable
Systems or any of its Designated Subsidiaries not in accordance with GAAP.
(c) Annual Budget. As soon as practicable and in any event within
forty-five (45) days after the beginning of each Fiscal Year, a budget of
Cable Systems and its Designated Subsidiaries for such Fiscal Year, as
approved by the board of directors of Cable Systems and substantially similar
in form and scope as the budget for the 1997 Fiscal Year delivered to the
Administrative Agent prior to closing.
SECTION 7.2 Officer's Compliance Certificate. At each time
financial statements are delivered pursuant to Sections 7.1 (a) or (b), a
certificate of the chief financial officer or the treasurer of Cable Systems
in the form of Exhibit E attached hereto (an "Officer's Compliance
Certificate").
SECTION 7.3 Accountants' Certificate. At each time financial
statements are delivered pursuant to Section 7.1(b), a certificate of the
independent public accountants certifying such financial statements addressed
to the Administrative Agent for the benefit of the Lenders:
(a) stating that in making the examination necessary for the
certification of such financial statements, they obtained no knowledge of any
Default or Event of Default or, if such is not the case, specifying such
Default or Event of Default and its nature and period of existence; and
(b) confirming the calculations of Cable Systems and its Designated
Subsidiaries required to establish whether or not such Persons are in
compliance with the financial covenants set forth in Article IX hereof as at
the end of each respective period.
SECTION 7.4 Other Reports.
(a) Promptly upon receipt thereof, copies of all reports, if any,
submitted to any Borrower or its Board of Directors by its independent public
accountants in connection with their auditing function, including, without
limitation, any management report and any management responses thereto;
(b) As soon as available and in any event within forty-five (45) days
after the end of the Fiscal Year of the Borrowers, an updated Schedule 6.1(u)
accompanied by a report identifying any FCC License, PUC Authorization or CATV
Franchise lost, surrendered or canceled during such period, and within ten
(10) Business Days after the receipt by Cable Systems or any of its Designated
Subsidiaries of notice that any FCC License, PUC Authorization or CATV
Franchise has been lost or canceled, copies of any such notice accompanied by
a report describing the measures undertaken by either Cable Systems or any of
its Designated Subsidiaries to prevent such loss or cancellation (and the
anticipated impact, if any, that such loss or cancellation will have upon the
business of either Cable Systems or any of its Designated Subsidiaries); and
(c) Such other information regarding the operations, business affairs
and financial condition of Cable Systems or any of its Designated Subsidiaries
as the Administrative Agent, at the request of any Lender, may reasonably
request.
SECTION 7.5 Notice of Litigation and Other Matters. Prompt (but
in no event later than ten (10) days after an officer of the Borrowers obtains
knowledge thereof) telephonic and written notice of:
(a) the commencement of all proceedings and investigations by or
before any Governmental Authority and all actions and proceedings in any court
or before any arbitrator against or involving Cable Systems or any of its
Designated Subsidiaries or any of their respective properties, assets or
businesses which in any such case could reasonably be expected to have a
Material Adverse Effect;
(b) any notice of any violation received by Cable Systems or any of
its Designated Subsidiaries from any Governmental Authority, including,
without limitation, any notice of violation of Environmental Laws, which in
any such case could reasonably be expected to have a Material Adverse Effect;
(c) any labor controversy that has resulted in, or threatens to result
in, a strike or other work action against Cable Systems or any of its
Designated Subsidiaries, where such labor controversy could reasonably be
expected to have a Material Adverse Effect;
(d) any attachment, judgment, lien, levy or order exceeding $250,000
that may be assessed against or threatened against Cable Systems or any of its
Designated Subsidiaries;
(e) any Default or Event of Default, or any event which constitutes or
which with the passage of time or giving of notice or both would constitute a
default under any Material Contract unless such default could not reasonably
be expected to have a Material Adverse Effect; provided, that the failure to
give notice with respect to any such event relating to a Material Contract
shall not constitute a Default or Event of Default hereunder if Cable Systems
or a Designated Subsidiary is contesting the claimed default in good faith so
long as adequate reserves are maintained in accordance with GAAP; and
(f) (i) any unfavorable determination letter from the Internal Revenue
Service regarding the qualification of an Employee Benefit Plan under Section
401(a) of the Code (along with a copy thereof), (ii) all notices received by
any Borrower or any ERISA Affiliate of the PBGC's intent to terminate any
Pension Plan or to have a trustee appointed to administer any Pension Plan,
(iii) all notices received by any Borrower or any ERISA Affiliate from a
Multiemployer Plan sponsor concerning the imposition or amount of withdrawal
liability pursuant to Section 4202 of ERISA and (iv) the Borrowers obtaining
knowledge or reason to know that any Borrower or any ERISA Affiliate has filed
or intends to file a notice of intent to terminate any Pension Plan under a
distress termination within the meaning of Section 4041(c) of ERISA.
SECTION 7.6 Accuracy of Information. All written information,
reports, statements and other papers and data furnished by or on behalf of the
Borrowers to the Administrative Agent or any Lender whether pursuant to this
Article VII or any other provision of this Agreement, or any of the Security
Documents, shall, at the time the same is so furnished, comply with Section
6.1(w).
ARTICLE VIII
AFFIRMATIVE COVENANTS
Until all of the principal and interest on the Loans and all fees
hereunder have been paid in full and the Commitments terminated, unless
consent has been obtained in the manner provided for in Section 13.11, Cable
Systems will, and will cause each of its Designated Subsidiaries to:
SECTION 8.1 Preservation of Corporate Existence and Related
Matters. Except as permitted by Section 10.4, preserve and maintain its
separate corporate existence and all rights, franchises, licenses and
privileges necessary to the conduct of its business, and qualify and remain
qualified as a foreign corporation and authorized to do business in each
jurisdiction, except where the failure to qualify and remain qualified as a
foreign corporation could not reasonably be expected to have a Material
Adverse Effect.
SECTION 8.2 Maintenance of Property. Protect and preserve all
properties useful in and material to its business, including copyrights,
patents, trade names and trademarks; maintain in good working order and
condition all buildings, equipment and other tangible real and personal
property; and from time to time make or cause to be made all renewals,
replacements and additions to such property necessary for the conduct of its
business, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, that the
consummation of the Reorganization shall not constitute a violation of this
Section.
SECTION 8.3 Insurance. Maintain insurance with financially sound
and reputable insurance companies against such risks and in such amounts as
are customarily maintained by similar businesses and as may be required by
Applicable Law, and on the Closing Date and from time to time thereafter
deliver to the Administrative Agent upon its request a detailed list of the
insurance then in effect, stating the names of the insurance companies, the
amounts and rates of the insurance, the dates of the expiration thereof and
the properties and risks covered thereby.
SECTION 8.4 Accounting Methods and Financial Records. Maintain a
system of accounting, and keep such books, records and accounts (which shall
be true and complete in all material respects) as may be required or as may be
necessary to permit the preparation of financial statements in accordance with
GAAP and in compliance with the regulations of any Governmental Authority
having jurisdiction over it or any of its properties.
SECTION 8.5 Payment and Performance of Obligations. Pay and
perform all Obligations under this Agreement and the other Loan Documents, and
pay or perform (a) all taxes, assessments and other governmental charges that
may be levied or assessed upon it or any of its property, and (b) all other
indebtedness, obligations and liabilities in accordance with customary trade
practices, except, in each case, when any failure to pay or perform could not
reasonably be expected to have a Material Adverse Effect; provided, that Cable
Systems or any of its Designated Subsidiaries may contest any item described
in this Section 8.5 in good faith so long as adequate reserves are maintained
with respect thereto in accordance with GAAP.
SECTION 8.6 Compliance With Laws and Approvals. Observe and
remain in compliance with all Applicable Laws and maintain in full force and
effect all Governmental Approvals, in each case applicable to the conduct of
its business, except where failure to comply with Applicable Laws or maintain
Government Approvals could not reasonably be expected to have a Material
Adverse Effect.
SECTION 8.7 Environmental Laws. In addition to and without
limiting the generality of Section 8.6, (a) comply with, and ensure such
compliance by all tenants and subtenants, if any, with, all applicable
Environmental Laws and obtain and comply with and maintain, and ensure that
all tenants and subtenants obtain and comply with and maintain, any and all
licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws, (b) conduct and complete all investigations,
studies, sampling and testing, and all remedial, removal and other actions
required under Environmental Laws, and promptly comply with all lawful orders
and directives of any Governmental Authority regarding Environmental Laws,
except where failure to so comply, obtain, maintain, conduct or complete such
actions under such clauses (a) and (b) could not reasonably be expected to
have a Material Adverse Effect, and (c) defend, indemnify and hold harmless
the Administrative Agent and the Lenders, and their respective parents,
Subsidiaries, Affiliates, employees, agents, officers and directors, from and
against any claims, demands, penalties, fines, liabilities, settlements,
damages, costs and expenses of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to the
violation of, noncompliance with or liability under any Environmental Laws
applicable to the operations of the Borrowers or the Designated Subsidiaries,
or any orders, requirements or demands of Governmental Authorities related
thereto, including, without limitation, reasonable attorney's and consultant's
fees, investigation and laboratory fees, response costs, court costs and
litigation expenses, except to the extent that any of the foregoing directly
result from the gross negligence or willful misconduct of the party seeking
indemnification therefor.
SECTION 8.8 Compliance with ERISA. In addition to and without
limiting the generality of Section 8.6, (a) comply with all applicable
material provisions of ERISA and the regulations and published interpretations
thereunder with respect to all Employee Benefit Plans, (b) not take any action
or fail to take action the result of which could be a liability to the PBGC
or to a Multiemployer Plan, (c) not participate in any prohibited transaction
that could result in any material civil penalty under ERISA or tax under the
Code, (d) operate each Employee Benefit Plan in such a manner that will not
incur any material tax liability under Section 4980B of the Code or any
material liability to any qualified beneficiary as defined in Section 4980B of
the Code and (e) furnish to the Administrative Agent upon the Administrative
Agent's request such additional information about any Employee Benefit Plan as
may be reasonably requested by the Administrative Agent.
SECTION 8.9 Compliance With Agreements. Comply in all respects
with each term, condition and provision of all leases, agreements and other
instruments entered into in the conduct of its business including, without
limitation, any Material Contract, except where failure to so comply could not
reasonably be expected to have a Material Adverse Effect; provided, that no
such failure relating to a Material Contract or other lease, agreement or
instrument shall constitute a Default or Event of Default hereunder if Cable
Systems or a Designated Subsidiary is contesting the claimed default in good
faith so long as adequate reserves are maintained in accordance with GAAP.
SECTION 8.10 Additional Subsidiaries. (a) Prior to such time as
any Subsidiary of a Borrower created or acquired after the Closing Date owns
assets in excess of $250,000 (provided that the provisions of this Section
8.10 shall not apply to RCN Telecom, whether or not it is a Subsidiary), cause
to be executed and delivered to the Administrative Agent (i) if the Borrowers
desire that such Subsidiary become a Borrower hereunder, a Joinder Agreement
executed by such Subsidiary, (ii) if such Subsidiary becomes a Borrower
pursuant to the preceding clause, favorable legal opinions addressed to the
Administrative Agent and Lenders in form and substance reasonably satisfactory
thereto with respect to such Joinder Agreement and such other documents and
closing certificates as may be reasonably requested by the Administrative
Agent consistent with the terms of Article V in order to confirm that such
Subsidiary is a Borrower hereunder, including, without limitation, replacement
Notes executed by such Subsidiary and each other Borrower then a party hereto,
(iii) a duly executed supplement substantially in the form attached as Exhibit
A to the Cable Systems Pledge Agreement or ComVideo Pledge Agreement, as
applicable, with such changes as the Administrative Agent shall reasonably
request, such that all of the capital stock or other equity interests owned by
the Borrowers is pledged to the Administrative Agent for the ratable benefit
of itself and the Lenders and (iv) favorable legal opinions addressed to the
Administrative Agent and Lenders in form and substance reasonably satisfactory
thereto with respect to such Security Document, and such other documents and
closing certificates as may be reasonably requested by the Administrative Agent
consistent with the terms of Article V in order to confirm that such
Subsidiary's stock or other equity interest has been pledged under a Pledge
Agreement;
(b) At such time as the Borrowers directly or indirectly own one
hundred percent (100%) of the outstanding equity interests of Home Link, cause
to be delivered to the Administrative Agent (i) a Joinder Agreement executed
by Home Link and (ii) favorable legal opinions addressed to the Administrative
Agent and Lenders in form and substance reasonably satisfactory thereto with
respect to such Joinder Agreement and such other documents and closing
certificates as may be reasonably requested by the Administrative Agent
consistent with the terms of Article V in order to confirm that Home Link is a
Borrower hereunder, including, without limitation, replacement Notes executed
by such Subsidiary and each other Borrower then a party hereto; and
(c) Within thirty (30) days after the Controlled Northeast Transfer,
cause to be delivered (i) the Parent Pledge Agreement and (ii) favorable legal
opinions addressed to the Administrative Agent and Lenders in form and
substance reasonably satisfactory thereto with respect to such Pledge
Agreement, and such other documents and closing certificates as may be
reasonably requested by the Administrative Agent consistent with the terms of
Article V in order to confirm that Cable Systems' stock has been pledged under
the Parent Pledge Agreement.
SECTION 8.11 Required Governmental Approvals. Obtain PUC
Authorizations for ComVideo and Home Link from the State of New Jersey within
one hundred eighty (180) days after the Closing Date in order that each such
Borrower may have its stock or other equity interests pledged pursuant to a
Pledge Agreement; provided, that upon receipt of the PUC Authorizations
required by this Section, (a) Cable Systems shall execute a supplement to the
Cable Systems Pledge Agreement such that all of the capital stock of ComVideo
it owns shall be pledged to the Administrative Agent for the ratable benefit
of itself and the Lenders, (b) ComVideo shall execute and deliver to the
Administrative Agent the ComVideo Pledge Agreement such that all of the equity
interests of Home Link shall be pledged thereunder; provided, that ComVideo
shall have no obligation to pledge its equity interest in Home Link until such
time as it owns one hundred percent (100%) of the outstanding equity interests
in Home Link and (c) the applicable Borrowers shall deliver to the
Administrative Agent (i) favorable legal opinions addressed to the
Administrative Agent and Lenders in form and substance reasonably satisfactory
thereto with respect to such Security Documents and (ii) such other documents
and closing certificates as may be reasonably requested by the Administrative
Agent consistent with the terms of Article V in order to confirm that each
such Borrower's capital stock or other equity interests have been pledged
under a Pledge Agreement.
SECTION 8.12 Conduct of Business. Engage only in the operation of
its CATV Systems and any other businesses conducted on the Closing Date and in
lines of business directly related thereto.
SECTION 8.13 Visits and Inspections. Permit representatives of the
Administrative Agent or any Lender, from time to time and, upon reasonable
notice during normal business hours, at its own expense (except the Borrowers
shall pay all such expenses when an Event of Default shall have occurred and
be continuing), to visit and inspect its properties; inspect, audit and make
extracts from its books, records and files, including, but not limited to,
management letters prepared by independent accountants; and discuss with its
principal officers, and its independent accountants, its business, assets,
liabilities, financial condition, results of operations and business prospects.
ARTICLE IX
FINANCIAL COVENANTS
Until all of the principal and interest under the Loans and fees
hereunder have been paid in full and the Commitments terminated, unless
consent has been obtained in the manner set forth in Section 13.11 hereof,
Cable Systems and its Designated Subsidiaries on a Combined basis will not:
SECTION 9.1. Leverage Ratio. As of the end of each fiscal quarter
during the applicable period set forth below, permit the ratio (the "Leverage
Ratio") of (a) Total Debt of Cable Systems and its Designated Subsidiaries
less all Parent Subordinated Debt, each as of such fiscal quarter end to (b)
Operating Cash Flow of Cable Systems and its Designated Subsidiaries for the
four fiscal quarter period ending on such fiscal quarter end, to exceed the
corresponding ratio set forth below:
Period Ratio
------ -----
Closing to 9/30/98 5.00 to 1.00
10/01/98 to 9/30/99 4.50 to 1.00
10/01/99 to 3/31/00 4.25 to 1.00
4/01/00 and thereafter 4.00 to 1.00
SECTION 9.2. Interest Coverage Ratio. As of the end of each fiscal
quarter during the applicable period set forth below, permit the ratio of (a)
Operating Cash Flow of Cable Systems and its Designated Subsidiaries for
the four fiscal quarter period ending on such fiscal quarter end to (b)
Interest Expense of Cable Systems and its Designated Subsidiaries for the
four fiscal quarter period ending on such fiscal quarter end, to be less
than the corresponding ratio set forth below:
Period Ratio
------ -----
Closing Date - 6/30/00 2.75 to 1.00
7/1/00 and thereafter 3.00 to 1.00
SECTION 9.3. Adjusted Fixed Charge Coverage Ratio. As of the end of
each fiscal quarter ending on and after December 31, 1997, permit the ratio of
(a) Adjusted Operating Cash Flow for Cable Systems and its Designated
Subsidiaries for the four fiscal quarter period ending on such fiscal quarter
end to (b) Fixed Charges of Cable Systems and its Designated Subsidiaries for
the four fiscal quarter period ending on such fiscal quarter end, to be less
than the corresponding ratio set forth below:
Period Ratio
------ -----
Closing Date - 12/31/00 1.00 to 1.00
01/01/01 and thereafter 1.05 to 1.00
ARTICLE X
NEGATIVE COVENANTS
Until all of the principal and interest on the Loans and all fees
hereunder have been paid in full and the Commitments terminated, unless
consent has been obtained in the manner set forth in Section 13.11 hereof,
Cable Systems will not and will not permit any of its Designated Subsidiaries
to:
SECTION 10.1 Limitations on Debt. Create, incur, assume or suffer
to exist any Debt except:
(a) the Obligations;
(b) Debt incurred in connection with a Hedging Agreement (a copy of
which agreement shall be delivered to the Administrative Agent by the
Borrowers promptly after the execution thereof);
(c) Debt existing on the Closing Date, as set forth on Schedule 6.1(s)
in the case of Debt in excess of $1,000,000, and any Debt secured by an asset
which asset is transferred to the Borrower as part of the Intergroup Asset
Transfers and the renewal and refinancing (but not the increase other than
borrowings under lines of credit up to the maximum amount described in
Schedule 5.1(s)) of any of the foregoing;
(d) Debt of Cable Systems and its Designated Subsidiaries incurred in
connection with Capital Leases, purchase money Debt of Cable Systems and its
Designated Subsidiaries and other Debt in an aggregate amount not to exceed
$10,000,000 on any date of determination (which may be secured to the extent
permitted by Sections 10.2(g) and 10.2(h));
(e) Debt of any Borrower or any Wholly-Owned Subsidiary of a Borrower
payable solely to another Borrower or Wholly-Owned Subsidiary of a Borrower;
and
(f) any Parent Subordinated Debt.
SECTION 10.2 Limitations on Liens. Create, incur, assume or suffer
to exist, any Lien on or with respect to any of its assets or properties
(including without limitation shares of capital stock or other ownership
interests), real or personal, whether now owned or hereafter acquired, except:
(a) Liens for taxes, assessments and other governmental charges or
levies (excluding any Lien imposed pursuant to any of the provisions of ERISA
or Environmental Laws) not yet due or as to which the period of grace (not to
exceed thirty (30) days), if any, related thereto has not expired;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business, (i) which are not overdue for a period of
more than thirty (30) days or (ii) which are being contested in good faith and
by appropriate proceedings;
(c) Liens consisting of deposits or pledges made in the ordinary
course of business in connection with, or to secure payment of, obligations
under workers' compensation, unemployment insurance or similar legislation;
(d) Liens constituting encumbrances in the nature of zoning
restrictions, easements and rights or restrictions of record on the use of
real property, which in the aggregate are not substantial in amount and which
do not, in any case, detract from the value of such property or impair the use
thereof in the ordinary conduct of business;
(e) Liens of the Administrative Agent for the benefit of the
Administrative Agent and the Lenders;
(f) Liens not otherwise permitted by this Section 10.2 and in
existence on the Closing Date and described on Schedule 10.2, any Liens with
respect to Debt permitted by Section 10.1(c) which Liens encumber assets that
are transferred to the Borrower or any of its Designated Subsidiaries as part
of the Intergroup Asset Transfers and any Liens on any refinanced Debt
permitted by Section 10.1(c);
(g) (i) Liens evidencing the interest of the lessor under any Capital
Lease permitted by Section 10.1(d); and (ii) Liens securing purchase money
Debt permitted under Section 10.1(d); provided, that (A) such Liens shall be
created within ninety (90) days after the acquisition of the related asset,
(B) such Liens do not at any time encumber any property other than the
property financed by such Debt, (C) the amount of Debt secured thereby is not
increased and (iv) the principal amount of Debt secured by any such Lien shall
at no time exceed seventy percent (70%) of the original purchase price of such
property at the time it was acquired; and
(h) other Liens securing Debt otherwise permitted under Section 10.1,
the principal amount of which outstanding at any one time in the aggregate
does not exceed $500,000.
SECTION 10.3 Limitations on Loans, Advances, Investments and
Acquisitions. Purchase, own, invest in or otherwise acquire, directly or
indirectly, any capital stock, interests in any partnership or joint venture
(including without limitation the creation or capitalization of any
Subsidiaries), evidence of Debt or other obligation or security, substantially
all or a portion of the business or assets of any other Person or any other
investment or interest whatsoever in any other Person, or make or permit to
exist, directly or indirectly, any loans, advances or extensions of credit to,
or any investment in cash or by delivery of property in, any Person, or enter
into, directly or indirectly, any commitment or option in respect of the
foregoing except:
(a) (i) investments existing on the Closing Date in Subsidiaries of
Cable Systems existing on the Closing Date, (ii) the other existing loans,
advances and investments described on Schedule 10.3, (iii) investments after
the Closing Date in any Borrower, (iv) investments (excluding any investment
made in Home Link pursuant to Section 10.3(f)) after the Closing Date in any
Subsidiary of Cable Systems which is not a Borrower (and after giving effect
to the applicable investment and any concurrent investment made by Cable
Systems or any of its Designated Subsidiaries pursuant to Section 10.3(e)) in
an aggregate amount not to exceed (A) $15,000,000 less (B) the aggregate
amount of the investments made by Cable Systems and its Designated
Subsidiaries pursuant to Section 10.3(e) and (v) the RCN Investment, the Notes
Capitalization and the RCN Stock Contribution.
(b) investments in (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency
thereof maturing within 120 days from the date of acquisition thereof, (ii)
commercial paper maturing no more than 120 days from the date of creation
thereof and at the time of purchase having the highest rating obtainable from
either Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. or Moody's Investors Service, Inc., (iii) certificates of
deposit maturing no more than 120 days from the date of creation thereof
issued by commercial banks incorporated under the laws of the United States of
America or any state thereof, or branches of any foreign bank registered and
licensed under the applicable laws of the United States of America or any
state thereof, each having combined capital, surplus and undivided profits of
not less than $500,000,000 and having a rating of "A" or better by a
nationally recognized rating agency, (iv) time deposits maturing no more than
30 days from the date of creation thereof with commercial banks or savings
banks or savings and loan associations each having membership either in the
FDIC or the deposits of which are insured by the FDIC and in amounts not
exceeding the maximum amounts of insurance thereunder, or (v) money market
mutual funds;
(c) investments by Cable Systems or any of its Designated Subsidiaries
in the form of acquisitions of all or substantially all of the business or
line of business (whether by the acquisition of capital stock, assets or any
combination of both) of any other Person using the capital stock of Cable
Systems, Cable Systems Holdings or any Subsidiary of Cable Systems Holdings
(other than a subsidiary of Cable Systems), as consideration for such
acquisition; provided that Cable Systems or any of its Designated Subsidiaries
may not use Disqualified Stock as consideration;
(d) investments not otherwise permitted by Section 10.3(c) by Cable
Systems or any of its Designated Subsidiaries in the form of acquisitions for
cash or property of all or substantially all of the business or a line of
business (whether by the acquisition of capital stock, assets or any
combination thereof) of any other Person, in an amount not to exceed
$12,000,000 individually for any such acquisition and $20,000,000 in the
aggregate during the term of this Agreement;
(e) the purchase of or other investment in the capital stock or other
equity interests of any other Person which investment shall not result in such
Person being a Subsidiary hereunder, in an aggregate amount (after giving
effect to such investment and any concurrent investment made by Cable Systems
and its Designated Subsidiaries pursuant to Section 10.3(a)(iv)) not to exceed
(A) $15,000,000 less (B) the aggregate amount of the investments made by Cable
Systems and its Designated Subsidiaries pursuant to Section 10.3(a)(iv); and
(f) any investment in Home Link consisting of a loan thereto; provided,
that prior to any such investment, Home Link shall have executed a promissory
note in an amount no less than such investment in favor of the applicable
Borrower and such note shall have been pledged by such Borrower to the
Administrative Agent for the ratable benefit of the Administrative Agent and
the Lenders on terms and conditions reasonably satisfactory to the
Administrative Agent and Lenders and the Borrower and Home Link shall have
delivered such additional documentation reasonably requested by the
Administrative Agent consistent with Article V confirming such pledge.
SECTION 10.4 Limitations on Mergers and Liquidation. Merge,
consolidate or enter into any similar combination with any other Person or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
dissolution) except:
(a) any Wholly-Owned Designated Subsidiaries of the Borrowers may
merge with any other Wholly-Owned Designated Subsidiaries of the Borrowers;
(b) any Wholly-Owned Designated Subsidiaries may merge into the Person
such Wholly-Owned Designated Subsidiaries was formed to acquire in connection
with an acquisition permitted by Section 10.3(c);
(c) any Wholly-Owned Designated Subsidiaries of the Borrowers may
wind-up into the Borrowers or any other Wholly-Owned Designated Subsidiaries
of the Borrowers; and
(d) Cable Systems may merge or consolidate with any Person; provided,
that Cable Systems is the surviving Person and the Borrowers are in compliance
after such merger or consolidation with all terms and covenants contained in
this Agreement and the other Loan Documents.
SECTION 10.5 Limitations on Sale of Assets. Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or
assets (including, without limitation, the sale of any receivables and
leasehold interests and any sale-leaseback or similar transaction), whether
now owned or hereafter acquired except:
(a) the sale of inventory in the ordinary course of business;
(b) the sale of assets no longer used or usable in the business of
Cable Systems or any of its Designated Subsidiaries;
(c) the transfer of assets to the Borrowers or any other Wholly-Owned
Designated Subsidiaries pursuant to Section 10.4(c);
(d) the sale or discount of accounts receivable arising in the
ordinary course of business in connection with the compromise or collection
thereof;
(e) the sale of assets that for the four fiscal quarters ending
immediately prior to such sale generated less than ten percent (10%) of the
Operating Cash Flow of Cable Systems and its Designated Subsidiaries for such
four fiscal quarter period; provided, that during the term of the Credit
Facility, aggregate sales of assets under this subsection may not exceed twenty
percent (20%) of Operating Cash Flow accumulated from the Closing Date to the
date of the most recent sale of assets without the written consent of the
Required Lenders; and provided further, that Cable Systems and its Designated
Subsidiaries will comply with Section 2.3(c) with respect to the proceeds of
any sale under this Section 10.5(e); and
(f) the RCN Stock Contribution, the Notes Capitalization, the Cable
Pennsylvania Distribution, the Internal Michigan Cable Distribution and the
Intergroup Asset Transfers.
SECTION 10.6 Limitations on Restricted Payments. Make any
Restricted Payment or make any change in its capital structure; provided that:
(a) any Borrower may pay dividends in shares of its own capital stock;
(b) any Designated Subsidiary may pay cash dividends to Cable Systems;
(c) prior to the Internal Michigan Cable Distribution, if Cable
Systems shall receive any dividend from CCSM paid pursuant to Section 10.6(c)
of the CCSM Credit Facility, Cable Systems may, and hereby agrees that it
shall, pay a cash dividend to C-TEC in an amount equal to the amount so
received from CCSM;
(d) Cable Systems may make a Restricted Payment in any fiscal quarter
so long as Cable Systems and its Designated Subsidiaries, after giving effect
to such Restricted Payment and any other Restricted Payments made during such
fiscal quarter, would be in compliance with Section 9.3 as of the immediately
preceding fiscal quarter end if all such Restricted Payments had been made on
the last day of such fiscal quarter; and
(e) Cable Systems may make the Cable Pennsylvania Distribution and the
Internal Michigan Cable Distribution and Cable Systems and its Designated
Subsidiaries may effect the Cable Notes Capitalization.
SECTION 10.7 Limitations on Exchange and Issuance of Capital Stock.
Issue, sell or otherwise dispose of any class or series of capital stock of it
that, by its terms or by the terms of any security into which it is
convertible or exchangeable, is, or upon the happening of an event or passage
of time would be, (a) convertible or exchangeable into Debt or (b) required to
be redeemed or repurchased, including at the option of the holder, in whole or
in part, or has, or upon the happening of an event or passage of time would
have, a redemption or similar payment due (other than in any case by the
giving of an optional notice of redemption by the Issuer thereof).
SECTION 10.8 Transactions with Affiliates. Directly or indirectly:
(a) make any loan or advance to, or purchase or assume any note or other
obligation to or from, any of its officers, directors, shareholders or other
Affiliates, or to or from any member of the immediate family of any of its
officers, directors, shareholders or other Affiliates, or subcontract any
operations to any of its Affiliates, or (b) enter into, or be a party to, any
transaction with any of its Affiliates (an "Affiliate Transaction"), except
pursuant to the reasonable requirements of its business and upon fair and
reasonable terms that are no less favorable to it than it would obtain in a
comparable arm's length transaction with a Person not its Affiliate, provided
that the foregoing provisions of this Section shall not prohibit: (i)
agreements with or for the benefit of employees of Cable Systems or any of its
Subsidiaries regarding bridge home loans and other loans necessitated by the
relocation of such employee, or regarding short-term hardship advances or
routine advances for business expenses in the ordinary course of business;
(ii) any Borrower making a Restricted Payment permitted by Section 10.6; (iii)
any transaction solely among the Borrowers; (iv) any borrowing or payment of
principal or interest on any Debt permitted by Section 10.1; (v) any Affiliate
Transaction pursuant to agreements or other arrangements in effect on the date
hereof or otherwise consistent with past practice (and any renewal,
replacement or modification of any such agreement or arrangement on terms that
are not materially more adverse to the Borrower in question); (vi) the
consummation of the Reorganization; (vii) any Affiliate Transaction entered
into in connection with the Reorganization and described in the information
statement, included in the related registration statement on SEC Form 10, made
available to the shareholders of C-TEC in connection with the distribution to
them of shares of stock of Cable Systems Holdings (and any renewal,
replacement or modification of the terms of any such Affiliate Transaction on
terms that are not materially more adverse to the Borrower in question);
(viii) any particular Affiliate Transaction between Cable Systems or another
Borrower and Cable Systems Holdings or one of its Subsidiaries (other than
Cable Systems or another Borrower) so long as such Affiliate Transaction
together with any current Affiliate Transaction, taken as a whole, are
pursuant to the reasonable requirements of the business of Cable Systems and
its Designated Subsidiaries and constitute fair and reasonable terms to Cable
Systems and its Designated Subsidiaries, taken as a whole; or (ix) any
Affiliate Transaction in which the amount involved does not exceed $100,000;
provided further, that in any Fiscal Year the aggregate amount paid by Cable
Systems and its Designated Subsidiaries to C-TEC, to other Subsidiaries of
C-TEC, to Cable Systems Holdings, to other Subsidiaries of Cable Systems
Holdings, to CCSM and to Subsidiaries of CCSM for the provision of
administrative and management services of substantially the same nature, scope
and timing as those prior to the date of the Distributions shall not exceed
six percent (6%) of the Combined gross revenues of Cable Systems and its
Designated Subsidiaries for such Fiscal Year.
SECTION 10.9 Certain Accounting Changes. Change its Fiscal Year
end, or make any change in its accounting practices except as required or
permitted by GAAP and in accordance with Section 13.9.
SECTION 10.10 Restrictive Agreements. Enter into any Debt which
contains any negative pledge on assets or which restricts, limits or otherwise
encumbers (a) its ability to incur Liens on or with respect to any of its
assets or properties other than the assets or properties securing such Debt or
(b) the ability of any Designated Subsidiary to make any payment to any
Borrower (in the form of dividends, intercompany advances or otherwise);
provided, that any Debt permitted to be refinanced pursuant to Section 10.1(c)
may, after any such refinancing, include terms that are not materially more
restrictive than the terms in existence on the Closing Date with respect to
such Debt.
ARTICLE XI
DEFAULT AND REMEDIES
SECTION 11.1 Events of Default. Each of the following shall
constitute an Event of Default, whatever the reason for such event and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment or order of any court or any order, rule or
regulation of any Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans. The Borrowers shall
default in any payment of principal of any Loan or Note when and as due
(whether at maturity, by reason of acceleration or otherwise).
(b) Other Payment Default. The Borrowers shall default in the payment
when and as due (whether at maturity, by reason of acceleration or otherwise)
of interest on any Loan or Note or any fees hereunder, and such default shall
continue unremedied for five (5) Business Days.
(c) Misrepresentation. Any representation or warranty made or deemed
to be made by Cable Systems or any of its Designated Subsidiaries under this
Agreement, any Loan Document or any amendment hereto or thereto, shall at any
time prove to have been incorrect or misleading in any material respect when
made or deemed made.
(d) Default in Performance of Certain Covenants. The Borrowers shall
default in the performance or observance of any covenant or agreement
contained in Section 7.5(e) or Articles IX or X (other than Sections 10.8 or
10.9) of this Agreement.
(e) Default in Performance of Other Covenants and Conditions. Cable
Systems or any of its Designated Subsidiaries shall default in the performance
or observance of any term, covenant, condition or agreement contained in this
Agreement (other than as specifically provided for in this Section 11.1) or
any other Loan Document and such default shall continue for a period of thirty
(30) days after written notice thereof has been given to the Borrowers by the
Administrative Agent.
(f) Hedging Agreement. Any termination payment shall be due by the
Borrowers under any Hedging Agreement and such amount is not paid within five
(5) Business Days of the due date thereof.
(g) Debt Cross-Default. Cable Systems or any of its Designated
Subsidiaries shall (i) default in the payment of any Debt (other than the
Notes) the aggregate outstanding amount of which Debt is in excess of
$1,000,000 beyond the period of grace if any, provided in the instrument or
agreement under which such Debt was created, or (ii) default in the observance
or performance of any other agreement or condition relating to any Debt (other
than the Notes) the aggregate outstanding amount of which Debt is in excess of
$1,000,000 or contained in any instrument or agreement evidencing, securing or
relating thereto or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit the
holder or holders of such Debt (or a trustee or agent on behalf of such holder
or holders) to cause, with the giving of notice if required, any such Debt to
become due prior to its stated maturity (any applicable grace period having
expired).
(h) Change in Control. (i) Prior to the Spinoff Date, (A) PKS shall
cease to hold, either directly or indirectly through one or more PKS Entities,
(1) C-TEC Shares constituting at least thirty percent (30%) of the number of
the Pro Forma Outstanding C-TEC Shares or (2) C-TEC Voting Shares constituting
at least thirty percent (30%) of the voting power represented by the Pro Forma
Outstanding C-TEC Voting Shares, (B) any person (other than PKS or a PKS
Entity) or group of persons (within the meaning of Section 13(d) (other than
any group comprised principally of PKS and PKS Entities)) shall have acquired
in one or more series of transactions beneficial ownership (within the meaning
of Section 13(d)) of (1) more than fifty-one percent (51%) of the outstanding
C-TEC Shares or (2) C-TEC Voting Shares constituting more than fifty-one
percent (51%) of the voting power represented by the outstanding C-TEC Voting
Shares or (C) C-TEC shall cease to hold, directly or indirectly, all of the
outstanding shares of capital stock of Cable Systems; or
(ii) After the Spinoff Date, (A) PKS shall cease to hold, either
directly or indirectly through one or more PKS Entities, (1) CSH Shares
constituting at least thirty percent (30%) of the number of the Pro Forma
Outstanding CSH Shares or (2) CSH Voting Shares constituting at least thirty
percent (30%) of the voting power represented by the Pro Forma Outstanding CSH
Voting Shares, (B) any person (other than PKS or a PKS Entity) or group of
persons (within the meaning of Section 13(d) (other than any group comprised
principally of PKS and PKS Entities)) shall have acquired in one or more
series of transactions beneficial ownership (within the meaning of Section
13(d)) of (1) more than fifty-one percent (51%) of the outstanding CSH Shares
or (2) CSH Voting Shares constituting more than fifty-one percent (51%) of the
voting power represented by the outstanding CSH Voting Shares or (C) Cable
Systems Holdings shall cease to hold, directly or indirectly, all of the
outstanding shares of capital stock of Cable Systems.
(iii) As used in Sections 11.1(h)(i) and 11.1(h)(ii):
(A) "comprised principally" means, with respect to determining
whether any group of persons (within the meaning of Section 13(d)) is
comprised principally of PKS and PKS Entities, that PKS and PKS Entities
that are members of such group beneficially own (within the meaning of
Section 13(d)) in the aggregate at least 51% of the relevant shares
beneficially owned (within the meaning of Section 13(d)) by all members
of such group (calculated in each case, however, without giving effect
to any provisions of Section 13(d) that attribute to each member of such
group ownership of such shares beneficially owned by other members of
such group on account of having shared voting power);
(B) "CSH Shares" means shares of common stock (of any class, if
there are two or more classes of common stock) of Cable Systems Holdings;
(C) "CSH Voting Shares" means any CSH Shares and any other shares
of capital stock of Cable Systems Holdings having ordinary power to vote
for the election of directors of Cable Systems Holdings;
(D) "C-TEC Shares" means shares of C-TEC Common Stock, par value
$1.00 per share, and shares of C-TEC Class B Common Stock, par value
$1.00 per share;
(E) "C-TEC Voting Shares" means any C-TEC Shares and any other
shares of capital stock of C-TEC having ordinary power to vote for the
election of directors of C-TEC.
(F) "PKS" means Peter Kiewit Sons' Inc. and its successors;
(G) "PKS Entity" means (i) any corporation of which securities
having ordinary voting power to elect a majority of the board of
directors of such corporation are held of record or through a nominee by
PKS or another PKS Entity (or some combination thereof), (ii) any
partnership if at least a majority of the value of its general
partnership interests are held of record or through a nominee by PKS or
another PKS Entity (or some combination thereof) and (iii) any limited
liability or similar company if securities or other equity interests
having ordinary voting power to elect or appoint a majority of the
managing members of such company are held of record or through a nominee
by PKS or another PKS Entity (or some combination thereof);
(H) "Pro Forma Outstanding" means as of any date of determination:
(1) with reference to C-TEC Shares and C-TEC Voting Shares,
(a) the number of such Shares outstanding on such date less (b) the
number of Shares issued after the date hereof (i) for cash, (ii) in
consideration for the acquisition of any investment (including by way of
merger) or property or the provision of services, (iii) upon the
exercise of any warrant, option, convertible security or similar
instrument issued after the date hereof for any consideration described
in the foregoing clauses (i) and (ii) or (iv) in connection with the
establishment or operation of any employee stock option plan or similar
employee benefit arrangement hereafter adopted by C-TEC or any of its
Wholly-Owned Subsidiaries; and
(2) with reference to CSH Shares and CSH Voting Shares, (a)
the number of such Shares outstanding on such date less (b) the number
of Shares issued after the Spinoff Date (i) for cash, (ii) in
consideration for the acquisition of any investment (including by way of
merger) or property or the provision of services, (iii) upon the
exercise of any warrant, option, convertible security or similar
instrument issued after the Spinoff Date for any consideration described
in the foregoing clauses (i) and (ii) or (iv) in connection with the
establishment or operation of any employee stock option plan or similar
employee benefit arrangement adopted after the Spinoff Date by Cable
Systems Holdings or any of its Wholly-Owned Subsidiaries;
(I) "Section 13(d)" means Section 13(d) of the Securities Exchange
Act of 1934, as amended, and the rules and regulations relating to such
section promulgated by the Securities and Exchange Commission; and
(J) "Spinoff Date" means the date during the consummation of the
Reorganization when Cable Systems ceases to be, directly or indirectly,
a Wholly-Owned Subsidiary of C-TEC.
(i) Voluntary Bankruptcy Proceeding. Cable Systems or any of its
Designated Subsidiaries shall (i) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking
to take advantage of any other laws, domestic or foreign, relating to
bankruptcy, insolvency, reorganization, winding up or composition for
adjustment of debts, (iii) consent to or fail to contest in a timely and
appropriate manner any petition filed against it in an involuntary case under
such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to
contest in a timely and appropriate manner, the appointment of, or the taking
of possession by, a receiver, custodian, trustee, or liquidator of itself or
of a substantial part of its property, domestic or foreign, (v) admit in
writing its inability to pay its debts as they become due, (vi) make a general
assignment for the benefit of creditors, or (vii) take any corporate action
for the purpose of authorizing any of the foregoing.
(j) Involuntary Bankruptcy Proceeding. A case or other proceeding
shall be commenced against Cable Systems or any of its Designated Subsidiaries
in any court of competent jurisdiction seeking (i) relief under the federal
bankruptcy laws (as now or hereafter in effect) or under any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization,
winding up or adjustment of debts, or (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like for Cable Systems or any of its
Designated Subsidiaries or for all or any substantial part of their respective
assets, domestic or foreign, and such case or proceeding shall continue
undismissed or unstayed for a period of sixty (60) consecutive days, or an
order granting the relief requested in such case or proceeding (including, but
not limited to, an order for relief under such federal bankruptcy laws) shall
be entered.
(k) Failure of Agreements. Any provision of this Agreement or of any
other Loan Document with respect to any material (in the reasonable judgement
thereof) rights and remedies of the Administrative Agent and Lenders hereunder
or thereunder shall for any reason cease to be valid and binding on Cable
Systems or any of its Designated Subsidiaries party thereto or any such Person
shall so state in writing, or this Agreement or any other Security Document
shall for any reason cease to create a valid and perfected first priority Lien
on, or security interest in, any of the collateral purported to be covered
thereby, in each case other than in accordance with the express terms hereof
or thereof.
(l) Termination Event. The occurrence of any of the following events:
(i) any Borrower or any ERISA Affiliate fails to make full payment when due of
all amounts which, under the provisions of any Pension Plan or Section 412 of
the Code, the Borrowers or any ERISA Affiliate is required to pay as
contributions thereto, (ii) an accumulated funding deficiency in excess of
$1,000,000 occurs or exists, whether or not waived, with respect to any
Pension Plan, (iii) a Termination Event or (iv) any Borrower or any ERISA
Affiliate as employers under one or more Multiemployer Plan makes a complete
or partial withdrawal from any such Multiemployer Plan and the plan sponsor of
such Multiemployer Plans notifies such withdrawing employer that such employer
has incurred a withdrawal liability requiring payments in an amount exceeding
$1,000,000.
(m) Judgment. A judgment or order for the payment of money which
causes the aggregate amount of all such judgments to exceed $500,000 in any
Fiscal Year shall be entered against Cable Systems or any of its Designated
Subsidiaries by any court and such judgment or order shall continue
undischarged or unstayed for a period of thirty (30) days.
(n) Related Financings. Either the C-TEC Credit Facility or the CCSM
Credit Facility does not close within sixty (60) days of the Closing Date.
SECTION 11.2 Remedies. Upon the occurrence of an Event of Default,
with the consent of the Required Lenders, the Administrative Agent may, or
upon the request of the Required Lenders, the Administrative Agent shall, by
notice to the Borrowers:
(a) Acceleration; Termination of Facilities. Declare the principal of
and interest on the Loans and the Notes at the time outstanding, and all other
amounts owed to the Lenders and to the Administrative Agent under this
Agreement or any of the other Loan Documents and all other Obligations, to be
forthwith due and payable, whereupon the same shall immediately become due and
payable without presentment, demand, protest or other notice of any kind, all
of which are expressly waived, anything in this Agreement or the other Loan
Documents to the contrary notwithstanding, and terminate the Credit Facility
and any right of the Borrowers to request borrowings thereunder; provided,
that upon the occurrence of an Event of Default specified in Section 11.1(i)
or (j), the Credit Facility shall be automatically terminated and all
Obligations shall automatically become due and payable.
(b) Rights of Collection. Exercise on behalf of the Lenders all of
its other rights and remedies under this Agreement, the other Loan Documents
and Applicable Law, in order to satisfy all of the Borrowers's Obligations.
SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc. The
enumeration of the rights and remedies of the Administrative Agent and the
Lenders set forth in this Agreement is not intended to be exhaustive and the
exercise by the Administrative Agent and the Lenders of any right or remedy
shall not preclude the exercise of any other rights or remedies, all of which
shall be cumulative, and shall be in addition to any other right or remedy
given hereunder or under the Loan Documents or that may now or hereafter exist
in law or in equity or by suit or otherwise. No delay or failure to take
action on the part of the Administrative Agent or any Lender in exercising any
right, power or privilege shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or privilege preclude
other or further exercise thereof or the exercise of any other right, power or
privilege or shall be construed to be a waiver of any Event of Default. No
course of dealing between the Borrowers, the Administrative Agent and the
Lenders or their respective agents or employees shall be effective to change,
modify or discharge any provision of this Agreement or any of the other Loan
Documents or to constitute a waiver of any Event of Default.
ARTICLE XII
THE ADMINISTRATIVE AGENT
SECTION 12.1 Appointment. Each of the Lenders hereby irrevocably
designates and appoints First Union as Administrative Agent of such Lender
under this Agreement and the other Loan Documents and each such Lender
irrevocably authorizes First Union as Administrative Agent for such Lender, to
take such action on its behalf under the provisions of this Agreement and the
other Loan Documents and to exercise such powers and perform such duties as
are expressly delegated to the Administrative Agent by the terms of this
Agreement and such other Loan Documents, together with such other powers as
are reasonably incidental thereto. Notwithstanding any provision to the
contrary elsewhere in this Agreement or such other Loan Documents, the
Administrative Agent shall not have any duties or responsibilities, except
those expressly set forth herein and therein, or any fiduciary relationship
with any Lender, and no implied covenants, functions, responsibilities,
duties, obligations or liabilities shall be read into this Agreement or the
other Loan Documents or otherwise exist against the Administrative Agent.
SECTION 12.2 Delegation of Duties. The Administrative Agent may
execute any of its respective duties under this Agreement and the other Loan
Documents by or through agents or attorneys-in-fact and shall be entitled to
advice of counsel concerning all matters pertaining to such duties. The
Administrative Agent shall not be responsible for the negligence or misconduct
of any agents or attorneys-in-fact selected by the Administrative Agent with
reasonable care.
SECTION 12.3 Exculpatory Provisions. Neither the Administrative
Agent nor any of its officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates shall be (a) liable for any
action lawfully taken or omitted to be taken by it or such Person under or in
connection with this Agreement or the other Loan Documents (except for actions
occasioned solely by its or such Person's own gross negligence or willful
misconduct), or (b) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by Cable Systems or
any of its Designated Subsidiaries or any officer thereof contained in this
Agreement or the other Loan Documents or in any certificate, report, statement
or other document referred to or provided for in, or received by the
Administrative Agent under or in connection with, this Agreement or the other
Loan Documents or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or the other Loan Documents or
for any failure of Cable Systems or any of its Designated Subsidiaries to
perform its obligations hereunder or thereunder. The Administrative Agent
shall not be under any obligation to any Lender to ascertain or to inquire as
to the observance or performance of any of the agreements contained in, or
conditions of, this Agreement, or to inspect the properties, books or records
of Cable Systems or any of its Designated Subsidiaries.
SECTION 12.4 Reliance by the Administrative Agent. The
Administrative Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrowers), independent accountants and other
experts selected by the Administrative Agent. The Administrative Agent may
deem and treat the payee of any Note as the owner thereof for all purposes
unless such Note shall have been transferred in accordance with Section 13.10
hereof. The Administrative Agent shall be fully justified in failing or
refusing to take any action under this Agreement and the other Loan Documents
unless it shall first receive such advice or concurrence of the Required
Lenders (or, when expressly required hereby or by the relevant other Loan
Document, all the Lenders) as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action except for its own gross negligence or willful
misconduct. The Administrative Agent shall in all cases be fully protected
in acting, or in refraining from acting, under this Agreement and the Notes in
accordance with a request of the Required Lenders (or, when expressly required
hereby, all the Lenders), and such request and any action taken or failure to
act pursuant thereto shall be binding upon all the Lenders and all future
holders of the Notes.
SECTION 12.5 Notice of Default. The Administrative Agent shall not
be deemed to have knowledge or notice of the occurrence of any Default or
Event of Default hereunder unless it has received notice from a Lender or the
Borrowers referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event
that the Administrative Agent receives such a notice, it shall promptly give
notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders; provided that unless and until the
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it
shall deem advisable in the best interests of the Lenders.
SECTION 12.6 Non-Reliance on the Administrative Agent and Other
Lenders. Each Lender expressly acknowledges that neither the Administrative
Agent nor any of its respective officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates has made any representations or
warranties to it and that no act by the Administrative Agent hereinafter
taken, including any review of the affairs of Cable Systems or any of its
Designated Subsidiaries, shall be deemed to constitute any representation or
warranty by the Administrative Agent to any Lender. Each Lender represents to
the Administrative Agent that it has, independently and without reliance upon
the Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of Cable Systems and its Designated
Subsidiaries and made its own decision to make its Loans hereunder and enter
into this Agreement. Each Lender also represents that it will, independently
and without reliance upon the Administrative Agent or any other Lender, and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigation as it deems necessary to inform itself as to
the business, operations, property, financial and other condition and
creditworthiness of Cable Systems and its Designated Subsidiaries. Except for
notices, reports and other documents expressly required to be furnished to the
Lenders by the Administrative Agent hereunder or by the other Loan Documents,
the Administrative Agent shall not have any duty or responsibility to provide
any Lender with any credit or other information concerning the business,
operations, property, financial and other condition or creditworthiness of
Cable Systems or any of its Designated Subsidiaries which may come into the
possession of the Administrative Agent or any of its respective officers,
directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates.
SECTION 12.7 Indemnification. The Lenders agree to indemnify the
Administrative Agent in its capacity as such and (to the extent not reimbursed
by the Borrowers and without limiting the obligation of the Borrowers to do
so), ratably according to the respective amounts of their Commitment
Percentages, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind whatsoever which may at any time (including, without
limitation, at any time following the payment of the Notes or any
Reimbursement Obligation) be imposed on, incurred by or asserted against the
Administrative Agent in any way relating to or arising out of this Agreement
or the other Loan Documents, or any documents contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby or any
action taken or omitted by the Administrative Agent under or in connection
with any of the foregoing; provided that no Lender shall be liable for the
payment of any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from the Administrative Agent's bad faith, gross negligence
or willful misconduct. The agreements in this Section 12.7 shall survive the
payment of the Notes, any Reimbursement Obligation and all other amounts
payable hereunder and the termination of this Agreement.
SECTION 12.8 The Administrative Agent in Its Individual Capacity.
The Administrative Agent and its respective Subsidiaries and Affiliates may
make loans to, accept deposits from and generally engage in any kind of
business with the Borrowers as though the Administrative Agent were not an
Administrative Agent hereunder. With respect to any Loans made or renewed by
it and any Note issued to it and with respect to any issued by it or
participated in by it, the Administrative Agent shall have the same rights and
powers under this Agreement and the other Loan Documents as any Lender and may
exercise the same as though it were not an Administrative Agent, and the terms
"Lender" and "Lenders" shall include the Administrative Agent in its
individual capacity.
SECTION 12.9 Resignation of the Administrative Agent; Successor
Administrative Agent. Subject to the appointment and acceptance of a
successor as provided below, the Administrative Agent may resign at any time
by giving notice thereof to the Lenders and the Borrowers. Upon any such
resignation, the Required Lenders shall have the right to appoint a successor
Administrative Agent, which successor shall have minimum capital and surplus
of at least $500,000,000. If no successor Administrative Agent shall have
been so appointed by the Required Lenders and shall have accepted such
appointment within thirty (30) days after the Administrative Agent's giving of
notice of resignation, then the Administrative Agent may, on behalf of the
Lenders, appoint a successor Administrative Agent, which successor shall have
minimum capital and surplus of at least $500,000,000. Upon the acceptance of
any appointment as Administrative Agent hereunder by a successor
Administrative Agent, such successor Administrative Agent shall thereupon
succeed to and become vested with all rights, powers, privileges and duties of
the retiring Administrative Agent, and the retiring Administrative Agent shall
be discharged from its duties and obligations hereunder. After any retiring
Administrative Agent's resignation hereunder as Administrative Agent, the
provisions of this Section 12.9 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting
as Administrative Agent.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.1 Notices.
(a) Method of Communication. Except as otherwise provided in this
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to
be received by a party hereto (i) on the date of delivery if delivered by hand
or sent by telecopy, (ii) on the next Business Day if sent by recognized
overnight courier service and (iii) on the third Business Day following the
date sent by certified mail, return receipt requested. A telephonic notice to
the Administrative Agent as understood by the Administrative Agent will be
deemed to be the controlling and proper notice in the event of a discrepancy
with or failure to receive a confirming written notice.
(b) Addresses for Notices. Notices to any party shall be sent to it
at the following addresses, or any other address as to which all the other
parties are notified in writing.
If to the Borrowers: C-TEC Corporation
105 Carnegie Center
Princeton, NJ 08540
Attention: Tim Stoklosa
Telephone No.: 609-734-3860
Telecopy No.: 609-734-3875
With copies to: Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attention: John Fouhey, Esq.
Telephone No.: 212-450-4000
Telecopy No.: 212-450-4800
If to First Union as First Union National Bank
Administrative Agent: One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone No.: (704) 383-0281
Telecopy No.: (704) 383-0288
If to any Lender: To the Address set forth on Schedule 1.1(a) hereto
(c) Administrative Agent's Office. The Administrative Agent hereby
designates its office located at the address set forth above, or any
subsequent office which shall have been specified for such purpose by written
notice to the Borrowers and Lenders, as the Administrative Agent's Office
referred to herein, to which payments due are to be made and at which Loans
will be disbursed.
SECTION 13.2 Expenses; Indemnity. The Borrowers will (a) pay all
reasonable out-of-pocket expenses of the Administrative Agent in connection
with: (i) the preparation, execution and delivery of this Agreement and each
other Loan Document, whenever the same shall be executed and delivered,
including without limitation all out-of-pocket syndication and due diligence
expenses and reasonable fees and disbursements of counsel (not to exceed
$60,000) for the Administrative Agent and (ii) the preparation, execution and
delivery of any waiver, amendment or consent by the Administrative Agent or
the Lenders relating to this Agreement or any other Loan Document, including
without limitation reasonable fees and disbursements of counsel for the
Administrative Agent, (b) at any time when a Default has occurred and is
continuing (or at any time thereafter with respect to any of the following
undertaken during the existence of a Default), pay all reasonable
out-of-pocket expenses of the Administrative Agent (and of the Lenders, but
only if such Default is an Event of Default) in connection with the
enforcement of any rights and remedies of the Administrative Agent and Lenders
under the Credit Facility, including consulting with appraisers, accountants,
engineers, attorneys and other Persons concerning the nature, scope or value
of any right or remedy of the Administrative Agent or any Lender hereunder or
under any other Loan Document or any factual matters in connection therewith,
which expenses shall include without limitation the reasonable fees and
disbursements of such Persons, and (c) defend, indemnify and hold harmless the
Administrative Agent and the Lenders, and their respective parents,
Subsidiaries, Affiliates, employees, agents, officers and directors, from and
against any losses, penalties, fines, liabilities, settlements, damages, costs
and expenses, suffered by any such Person in connection with any claim,
investigation, litigation or other proceeding (whether or not the
Administrative Agent or any Lender is a party thereto) and the prosecution and
defense thereof, arising out of or in any way connected with the Agreement,
any other Loan Document or the Loans, including without limitation reasonable
attorney's and consultant's fees, except to the extent that any of the
foregoing directly result from the gross negligence or willful misconduct of
the party seeking indemnification therefor.
SECTION 13.3 Set-off. In addition to any rights now or hereafter
granted under Applicable Law and not by way of limitation of any such rights,
upon and after the occurrence of any Event of Default and during the
continuance thereof, the Lenders and any assignee or participant of a Lender
in accordance with Section 13.10 are hereby authorized by the Borrowers at any
time or from time to time, without notice to the Borrowers or to any other
Person, any such notice being hereby expressly waived, to set off and to
appropriate and to apply any and all deposits (general or special, time or
demand, including, but not limited to, indebtedness evidenced by certificates
of deposit, whether matured or unmatured) and any other indebtedness at any
time held or owing by the Lenders, or any such assignee or participant to or
for the credit or the account of the Borrowers against and on account of the
Obligations irrespective of whether or not (a) the Lenders shall have made any
demand under this Agreement or any of the other Loan Documents or (b) the
Administrative Agent shall have declared any or all of the Obligations to be
due and payable as permitted by Section 11.2 and although such Obligations
shall be contingent or unmatured.
SECTION 13.4 Governing Law. This Agreement, the Notes and the
other Loan Documents, unless otherwise expressly set forth therein, shall be
governed by, construed and enforced in accordance with the laws of the State
of North Carolina, without reference to the conflicts or choice of law
principles thereof.
SECTION 13.5 Consent to Jurisdiction. The Borrowers hereby
irrevocably consent to the personal jurisdiction of the state and federal
courts located in Mecklenburg County, North Carolina, in any action, claim or
other proceeding arising out of any dispute in connection with this Agreement,
the Notes and the other Loan Documents, any rights or obligations hereunder
or thereunder, or the performance of such rights and obligations. The
Borrowers hereby irrevocably consent to the service of a summons and complaint
and other process in any action, claim or proceeding brought by the
Administrative Agent or any Lender in connection with this Agreement, the
Notes or the other Loan Documents, any rights or obligations hereunder or
thereunder, or the performance of such rights and obligations, on behalf of
itself or its property, in the manner specified in Section 13.1. Nothing in
this Section 13.5 shall affect the right of the Administrative Agent or any
Lender to serve legal process in any other manner permitted by Applicable Law
or affect the right of the Administrative Agent or any Lender to bring any
action or proceeding against the Borrowers or its properties in the courts of
any other jurisdictions.
SECTION 13.6 Binding Arbitration; Waiver of Jury Trial.
(a) Binding Arbitration. Upon demand of any party, whether made
before or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to the Notes or any
other Loan Documents ("Disputes"), between or among parties to the Notes or
any other Loan Document shall be resolved by binding arbitration as provided
herein. Institution of a judicial proceeding by a party does not waive the
right of that party to demand arbitration hereunder. Disputes may include,
without limitation, tort claims, counterclaims, claims brought as class
actions, claims arising from Loan Documents executed in the future, or claims
concerning any aspect of the past, present or future relationships arising out
of or connected with the Loan Documents. Arbitration shall be conducted under
and governed by the Commercial Financial Disputes Arbitration Rules (the
"Arbitration Rules") of the American Arbitration Association and Title 9 of
the U.S. Code. All arbitration hearings shall be conducted in Charlotte,
North Carolina. The expedited procedures set forth in Rule 51, et seq. of the
Arbitration Rules shall be applicable to claims of less than $500,000. All
applicable statutes of limitation shall apply to any Dispute. A judgment upon
the award may be entered in any court having jurisdiction. The panel from
which all arbitrators are selected shall be comprised of licensed attorneys.
The single arbitrator selected for expedited procedure shall be a retired
judge from the highest court of general jurisdiction, state or federal, of the
state where the hearing will be conducted. Notwithstanding the foregoing,
this paragraph shall not apply to any Hedging Agreement that is a Loan
Document.
(b) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE
AGENT, EACH LENDER AND THE BORROWERS HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE
OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR
THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and
sale, (ii) all rights of self help including peaceful occupation of property
and collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
SECTION 13.7 Reversal of Payments. To the extent the Borrowers
make a payment or payments to the Administrative Agent for the ratable benefit
of the Lenders or the Administrative Agent receives any payment or proceeds of
the collateral which payments or proceeds or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then, to
the extent of such payment or proceeds repaid, the Obligations or part thereof
intended to be satisfied shall be revived and continued in full force and
effect as if such payment or proceeds had not been received by the
Administrative Agent.
SECTION 13.8 Injunctive Relief; Punitive Damages.
(a) The Borrowers recognize that, in the event the Borrowers fail to
perform, observe or discharge any of its obligations or liabilities under this
Agreement, any remedy of law may prove to be inadequate relief to the Lenders.
Therefore, the Borrowers agree that the Lenders, at the Lenders' option, shall
be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.
(b) The Administrative Agent, Lenders and Borrowers hereby agree that
no such Person shall have a remedy of punitive or exemplary damages against
any other party to a Loan Document and each such Person hereby waives any
right or claim to punitive or exemplary damages that they may now have or may
arise in the future in connection with any Dispute, whether such Dispute is
resolved through arbitration or judicially.
SECTION 13.9 Accounting Matters. All financial and accounting
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by
Cable Systems or any its Designated Subsidiaries to determine compliance with
any covenant contained herein, shall, except as otherwise expressly
contemplated hereby or unless there is an express written direction by the
Administrative Agent to the contrary agreed to by the Borrowers, be performed
in accordance with GAAP as in effect from time to time.
SECTION 13.10 Successors and Assigns; Participations.
(a) Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of the Borrowers, the Administrative Agent and the
Lenders, all future holders of the Notes, and their respective successors and
assigns, except that the Borrowers shall not assign or transfer any of its
rights or obligations under this Agreement without the prior written consent
of each Lender.
(b) Assignment by Lenders. Each Lender may, with the consent of the
Administrative Agent and Cable Systems, which consents shall not be
unreasonably withheld (and which consent of Cable Systems shall not be
required during the continuance of an Event of Default), assign to one or more
Eligible Assignees all or a portion of its interests, rights and obligations
under this Agreement (including, without limitation, all or a portion of the
Loans at the time owing to it and the Notes held by it); provided that:
(i) each such assignment shall be of a constant, and not a
varying, percentage of all the assigning Lender's rights and obligations under
this Agreement;
(ii) if less than all of the assigning Lender's Commitment
is to be assigned, the Commitment so assigned shall not be less than
$5,000,000;
(iii) the parties to each such assignment shall execute and
deliver to the Administrative Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance in the form of Exhibit G attached
hereto (an "Assignment and Acceptance"), together with any Note or Notes
subject to such assignment;
(iv) such assignment shall not, without the consent of the
Borrowers, require the Borrowers to file a registration statement with the
Securities and Exchange Commission or apply to or qualify the Loans or the
Notes under the blue sky laws of any state; and
(v) the assigning Lender shall pay to the Administrative
Agent an assignment fee of $3,000 upon the execution by such Lender of the
Assignment and Acceptance; provided that no such fee shall be payable upon any
assignment by a Lender to an Affiliate thereof.
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, which effective
date shall be at least five (5) Business Days after the execution thereof, (A)
the assignee thereunder shall be a party hereto and, to the extent provided in
such Assignment and Acceptance, have the rights and obligations of a Lender
hereby and (B) the Lender thereunder shall, to the extent provided in such
assignment, be released from its obligations under this Agreement.
(c) Rights and Duties Upon Assignment. By executing and delivering an
Assignment and Acceptance, the assigning Lender thereunder and the assignee
thereunder confirm to and agree with each other and the other parties hereto
as set forth in such Assignment and Acceptance.
(d) Register. The Administrative Agent shall maintain a copy of each
Assignment and Acceptance delivered to it and a register for the recordation
of the names and addresses of the Lenders and the amount of the Loans with
respect to each Lender from time to time (the "Register"). The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrowers, the Administrative Agent and the Lenders may treat each person
whose name is recorded in the Register as a Lender hereunder for all purposes
of this Agreement. The Register shall be available for inspection by the
Borrowers or Lender at any reasonable time and from time to time upon
reasonable prior notice.
(e) Issuance of New Notes. Upon its receipt of an Assignment and
Acceptance executed by an assigning Lender and an Eligible Assignee together
with any Note or Notes subject to such assignment and the written consent to
such assignment, the Administrative Agent shall, if such Assignment and
Acceptance has been completed and is substantially in the form of Exhibit G:
(i) accept such Assignment and Acceptance;
(ii) record the information contained therein in the
Register;
(iii) give prompt notice thereof to the Lenders and the
Borrowers; and
(iv) promptly deliver a copy of such Assignment and
Acceptance to the Borrowers.
Within five (5) Business Days after receipt of notice, the Borrowers shall
execute and deliver to the Administrative Agent, in exchange for the
surrendered Note or Notes, a new Note or Notes to the order of such Eligible
Assignee in amounts equal to the Commitment assumed by it pursuant to such
Assignment and Acceptance and a new Note or Notes to the order of the
assigning Lender in an amount equal to the Commitment retained by it
hereunder. Such new Note or Notes shall be in an aggregate principal amount
equal to the aggregate principal amount of such surrendered Note or Notes,
shall be dated the effective date of such Assignment and Acceptance and shall
otherwise be in substantially the form of the assigned Notes delivered to the
assigning Lender. Each surrendered Note or Notes shall be canceled and
returned to the Borrowers.
(f) Participations. Each Lender may sell participations to one or
more banks or other entities in all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Loans and the Notes held by it); provided that:
(i) such Lender's obligations under this Agreement
(including, without limitation, its Commitment) shall remain unchanged;
(ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations;
(iii) such Lender shall remain the holder of the Notes held
by it for all purposes of this Agreement;
(iv) the Borrowers, the Administrative Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement;
(v) such Lender shall not permit such participant the
right to approve any waivers, amendments or other modifications to this
Agreement or any other Loan Document other than waivers, amendments or
modifications which would reduce the principal of or the interest rate on any
Loan or Reimbursement Obligation, extend the term or increase the amount of
the Commitment, reduce the amount of any fees to which such participant is
entitled, extend any scheduled payment date for principal of any Loan or,
except as expressly contemplated hereby or thereby, release substantially all
of the Collateral; and
(vi) any such disposition shall not, without the consent of
the Borrowers, require the Borrowers to file a registration statement with the
Securities and Exchange Commission to apply to qualify the Loans or the Notes
under the blue sky law of any state.
(g) Disclosure of Information; Confidentiality. The Administrative
Agent and the Lenders shall hold all non-public information with respect to
the Borrowers obtained pursuant to the Loan Documents on a need-to-know basis
for making and administering the credit basis in accordance with their
customary procedures for handling confidential information; provided, that the
Administrative Agent may disclose information relating to this Agreement to
Gold Sheets and other similar bank trade publications, such information to
consist of deal terms and other information customarily found in such
publications. Any Lender may, in connection with any assignment, proposed
assignment, participation or proposed participation pursuant to this Section
13.10, disclose to the assignee, participant, proposed assignee or proposed
participant, any information relating to the Borrowers furnished to such
Lender by or on behalf of the Borrowers; provided, that prior to any such
disclosure, each such assignee, proposed assignee, participant or proposed
participant shall agree with the Borrowers or such Lender to preserve the
confidentiality of any confidential information relating to the Borrowers
received from such Lender.
(h) Certain Pledges or Assignments. Nothing herein shall prohibit any
Lender from pledging or assigning any Note to any Federal Reserve Bank in
accordance with Applicable Law.
SECTION 13.11 Amendments, Waivers and Consents. Except as set forth
below, any term, covenant, agreement or condition of this Agreement or any of
the other Loan Documents may be amended or waived by the Lenders, and any
consent given by the Lenders, if, but only if, such amendment, waiver or
consent is in writing signed by the Required Lenders (or by the Administrative
Agent with the consent of the Required Lenders) and delivered to the
Administrative Agent and, in the case of an amendment, signed by the
Borrowers; provided, that no amendment, waiver or consent shall (a) increase
the amount or extend the time of the obligation of the Lenders to make Loans
(including without limitation pursuant to Section 2.6), (b) extend the
originally scheduled time or times of payment of the principal of any Loan or
the time or times of payment of interest on any Loan, (c) reduce the rate of
interest or fees payable on any Loan, (d) permit any subordination of the
principal or interest on any Loan, (e) release any Security Document (other
than as specifically permitted in this Agreement or the applicable Security
Document), (f) amend the provisions of this Section 13.11 or the definition of
Required Lenders, (g) amend the provisions of Section 4.4 providing that all
payments to the Lenders shall be pro rata in accordance with their respective
Commitment Percentages or (h) amend the several nature of the obligations of
the Lenders under this Agreement, without the prior written consent of each
Lender. In addition, no amendment, waiver or consent to the provisions of
Article XII shall be made without the written consent of the Administrative
Agent.
SECTION 13.12 Performance of Duties. The Borrowers's obligations
under this Agreement and each of the Loan Documents shall be performed by the
Borrowers at its sole cost and expense.
SECTION 13.13 All Powers Coupled with Interest. All powers of
attorney and other authorizations granted to the Lenders, the Administrative
Agent and any Persons designated by the Administrative Agent or any Lender
pursuant to any provisions of this Agreement or any of the other Loan
Documents shall be deemed coupled with an interest and shall be irrevocable so
long as any of the Obligations remain unpaid or unsatisfied or the Credit
Facility has not been terminated.
SECTION 13.14 Survival of Indemnities. Notwithstanding any
termination of this Agreement, the indemnities to which the Administrative
Agent and the Lenders are entitled under the provisions of this Article XIII
and any other provision of this Agreement and the Loan Documents shall
continue in full force and effect and shall protect the Administrative Agent
and the Lenders against events arising after such termination as well as
before.
SECTION 13.15 Titles and Captions. Titles and captions of Articles,
Sections and subsections in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement.
SECTION 13.16 Severability of Provisions. Any provision of this
Agreement or any other Loan Document which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remainder of such provision or the remaining provisions hereof or thereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 13.17 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and shall be binding upon all parties, their successors and assigns, and all
of which taken together shall constitute one and the same agreement.
SECTION 13.18 Term of Agreement. This Agreement shall remain in
effect from the Closing Date through and including the date upon which all
Obligations shall have been indefeasibly and irrevocably paid and satisfied in
full. No termination of this Agreement shall affect the rights and
obligations of the parties hereto arising prior to such termination.
SECTION 13.19 Cable Systems as Agent for Borrowers; Obligations
Joint and Several; Contribution.
(a) The Borrowers hereby irrevocably appoint and authorize Cable
Systems (i) to provide the Administrative Agent with all notices with respect
to Loans obtained for the benefit of any Borrower and all other notices and
instructions under this Agreement and (ii) to take such action on behalf of
the Borrowers as Cable Systems deems appropriate on its behalf to obtain Loans
and to exercise such other powers as are reasonably incidental thereto to
carry out the purposes of this Agreement.
(b) All of the Borrowers shall be jointly and severally liable for the
Obligations, however incurred. References to the Borrowers with respect to
the Obligations or any portion thereof shall mean each Borrower on a joint and
several basis.
(c) To the extent any Borrower is required, by reason of its
Obligations hereunder, to pay to the Administrative Agent and the Lenders an
amount greater than the amount of the Loans actually made available to or for
the account of such Borrower, such Borrower shall have an enforceable right of
contribution and indemnity against the remaining Borrowers, and the remaining
Borrowers shall be jointly and severally liable to such Borrower, for
repayment of the full amount of such excess payment. Such Borrower shall be
subrogated to any and all rights of the Administrative Agent and the Lenders
against the remaining Borrowers to the extent of such excess payment. The
rights of any Borrower to contribution, subrogation and indemnity under this
Section 13.19 or under Applicable Law shall in all events and all respects be
subject and subordinate to the rights of the Administrative Agent and the
Lenders under this Agreement and subject to the prior full, final and
indefeasible payment to the Administrative Agent and the Lenders of all
Obligations.
(d) Notwithstanding anything to the contrary in this Agreement, the
amount of any Borrower's obligations under this Section 13.19 shall in all
events be limited to, but not in excess of, the maximum amount thereof not
subject to avoidance or recovery by operation of Applicable Law governing
bankruptcy, reorganization, receivership, arrangement, adjustment of debts,
relief of debtors, dissolution, insolvency, fraudulent transfers or
conveyances or other similar laws (including, without limitation, 11 U.S.C.
Section 546, Section 547, Section 548, Section 550 and other "avoidance"
provisions of Title 11 of the United States Code) applicable at any time to
such Borrower and this Agreement.
[Signature pages to follow]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, all as of the day and year first
written above.
[CORPORATE SEAL] C-TEC CABLE SYSTEMS, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
-----------------------------
[CORPORATE SEAL] COMVIDEO SYSTEMS, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
-----------------------------
[CORPORATE SEAL] C-TEC CABLE SYSTEMS OF NEW YORK, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
-----------------------------
FIRST UNION NATIONAL BANK, as
Administrative Agent and Lender
By:
----------------------------------
Name:
-----------------------------
Title:
-----------------------------
SCHEDULE 1.1(a): LENDERS AND COMMITMENTS
COMMITMENT
AND COMMITMENT
LENDER PERCENTAGE
- ------ ----------
First Union National Bank $16,203,704.70
One First Union Center, TW-10 12.9629629620%
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone No.: (704) 383-0281
Telecopy No.: (704) 382-0288
Fleet National Bank $13,425,925.93
One Federal Street 10.7407407400%
MA OF D0030
Boston, Massachusetts 02110
Attention: Christine Campanelli
Telephone No.: (617) 346-4349
Telecopy No.: (617) 346-4345
CoreStates Bank, N.A. $13,425,925.93
1339 Chestnut Street 10.7407407400%
Philadelphia, Pennsylvania 19101
Attention: Elizabeth Elmore
Telephone No.: (215) 786-4321
Telecopy No.: (215) 786-7721
PNC Bank, National Association $13,425,925.93
21st Floor Mail Stop F2-F070-21-1 10.7407407400%
1600 Market Street
Philadelphia, Pennsylvania 19103
Attention: Jerry Hauser
Telephone No.: (215) 585-6468
Telecopy No.: (215) 585-6680
CIBC Wood Gundy Securities Corp. $13,425,925.93
425 Lexington Avenue 10.7407407400%
New York, New York 10017
Attention: Amy V. Kothari
Telephone No.: (212) 856-3608
Telecopy No.: (212) 856-3558
Summit Bank $12,500,000.00
512 Township Line Road 10.0000000000%
Suite 280
Blue Bell, Pennsylvania 19422
Attention: Christopher J. Annas
Telephone No.: (215) 619-4802
Telecopy No.: (215) 619-4820
ABN AMRO Bank N.V., New York Branch $12,500,000.00
500 Park Avenue 10.0000000000%
New York, New York 10022
Attention: William S. Bennett
Telephone No.: (212) 446-4282
Telecopy No.: (212) 446-4203
Banque Nationale de Paris $11,574,074.06
499 Park Avenue 9.2592592590%
New York, New York 10022
Attention: Serge Desrayaud
Telephone No.: (212) 415-9638
Telecopy No.: (212) 415-8269
The Bank of New York $ 9,259,259.26
1 Wall Street 7.4074074070%
16th Floor
New York, New York 10286
Attention: Jerome Kapelus
Telephone No.: (212) 635-8694
Telecopy No.: (212) 635-8595
Bank of Montreal, Chicago Branch $ 9,259,259.26
430 Park Avenue, 15th Floor 7.4074074070%
New York, New York 10022
Attention: Kevin Cullen
Telephone No.: (212) 605-1631
Telecopy No.: (212) 605-1648
EXHIBIT I-1
to
Credit Agreement dated as of June __, 1997,
by and among
C-TEC Cable Systems, Inc., ComVideo Systems, Inc.
and C-TEC Cable Systems of New York, Inc.
as the Borrowers,
the Lenders party thereto,
and
First Union National Bank,
as Administrative Agent
CABLE SYSTEMS PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (as amended, restated or otherwise modified, the
"Pledge Agreement"), dated as of ___________, 1997 is made by C-TEC Cable
Systems, Inc., a ____________ corporation (the "Pledgor"), in favor of First
Union National Bank, a national banking association ("First Union"), as
Administrative Agent for the ratable benefit of itself and the Lenders
delivered pursuant to the Credit Agreement dated as of _______ __, 1997 (as
amended, restated or otherwise modified, the "Credit Agreement") by and among
C-TEC Cable Systems, Inc., ComVideo Systems, Inc. and C-TEC Cable Systems of
New York, Inc. (the "Borrowers"), the Lenders who are or may become party
thereto (the "Lenders") and First Union National Bank, as Administrative Agent
(the "Administrative Agent").
STATEMENT OF PURPOSE
Pursuant to the terms of the Credit Agreement, the Lenders have agreed
to extend certain credit facilities to the Borrowers in the aggregate amount
of up to the Aggregate Commitment under the Credit Agreement.
The Pledgor is the legal and beneficial owner of the shares of Pledged
Stock (as hereinafter defined) issued by C-TEC Cable Systems of New York, Inc.
(an "Issuer," and collectively, together with any New Issuer referred to in
any Supplement substantially in the form of Exhibit A hereto which is executed
and delivered to the Administrative Agent, the "Issuers").
In connection with the transactions contemplated by the Credit Agreement
and as a condition precedent thereto, the Lenders have requested, and the
Pledgor has agreed to execute and deliver this Pledge Agreement and the
Pledged Stock (in accordance with the terms hereof) to the Administrative
Agent for the ratable benefit of the itself and the Lenders.
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into and make available Loans
pursuant to the Credit Agreement, the Pledgor hereby agrees with the
Administrative Agent for the ratable benefit of itself and the Lenders as
follows:
1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the Credit Agreement and used herein are so used as so defined, and
the following terms shall have the following meanings:
"Code" means the Uniform Commercial Code from time to time in
effect in the State of North Carolina.
"Collateral" means the Pledged Stock and all Proceeds.
"Existing Pledge" means the Pledge Agreement dated July 31, 1989
between the Borrower and Morgan Guaranty Trust Company of New York, as
Pledge Agent, as amended, and the Lien on the Pledged Stock and any
Proceeds thereof created pursuant thereto.
"Existing Pledge Debt" means the Debt secured by the Existing
Pledge.
"Pledge Agreement" means this Pledge Agreement, as amended or
modified.
"Pledged Stock" means the shares of capital stock of the Issuers
listed on Schedule I hereto, together with all stock certificates,
options or rights of any nature whatsoever that may be issued or granted
by the Issuers to the Pledgor while this Pledge Agreement is in effect.
"Proceeds" means all "proceeds" as such term is defined in Section
9-306(1) of the Code on the date hereof and, in any event, shall
include, without limitation, all dividends or other income from the
Pledged Stock, collections thereon, proceeds of sale thereof or
distributions with respect thereto.
2. Pledge and Grant of Security Interest. On or before the date of the
first borrowing under the Credit Agreement (the "Borrowing Date"), the Pledgor
will deliver to the Administrative Agent, for the ratable benefit of itself
and the Lenders, all the Pledged Stock and automatically upon doing so will
hereby grant to Administrative Agent, for the ratable benefit of itself and
the Lenders, a first priority security interest in the Collateral, as
collateral security for the prompt and complete payment and performance when
due (whether at the stated maturity, by acceleration or otherwise) of the
Obligations.
3. Stock Powers. Concurrently with the delivery to the Administrative
Agent of each certificate representing one or more shares of Pledged Stock,
the Pledgor shall deliver an undated stock power covering such certificate,
duly executed in blank by the Pledgor.
4. Representations and Warranties. To induce the Administrative Agent
and Lenders to execute the Credit Agreement and make any Loans and to accept
the security contemplated hereby, the Pledgor hereby represents and warrants
that:
(a) the Pledgor has the corporate power, authority and subject
to, at any time prior to the Borrowing Date, the Existing Pledge, legal
right to execute and deliver, to perform its obligations under, and to
grant the Lien on the Collateral pursuant to, this Pledge Agreement and
has taken all necessary corporate action to authorize its execution,
delivery and performance of, and grant of the Lien on the Collateral
pursuant to, this Pledge Agreement;
(b) this Pledge Agreement constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the availability of equitable
remedies;
(c) except as contemplated by Section 19 hereof, the execution,
delivery and performance of this Pledge Agreement will not violate any
provision of any Applicable Law or contractual obligation of the Pledgor
and will not result in the creation or imposition of any Lien on any of
the properties or revenues of the Pledgor pursuant to any Applicable Law
or contractual obligation, except as contemplated hereby;
(d) except as contemplated by Section 19 hereof, no consent or
authorization of, filing with, or other act by or in respect of, any
arbitrator or Governmental Authority and no consent of any other Person
(including, without limitation, any stockholder or creditor of the
Pledgor or any Issuer), is required in connection with the execution,
delivery, performance, validity or enforceability of this Pledge
Agreement, except that certain routine notification filings with the
FCC, any applicable PUC and any Governmental Authority that grants CATV
Franchises with respect to the Loan Documents may be required after the
Closing Date; provided, that the Existing Pledge Debt must and will be
repaid in full in order for the Borrower to create the Liens on the
Pledged Stock pursuant hereto;
(e) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of
the Pledgor, threatened by or against the Pledgor or against any of its
properties or revenues with respect to this Pledge Agreement or any of
the transactions contemplated hereby;
(f) the shares of Pledged Stock listed on Schedule I constitute
all the issued and outstanding shares of all classes of the capital
stock of the Issuers;
(g) all the shares of the Pledged Stock have been duly and
validly issued and are fully paid and nonassessable;
(h) the Pledgor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Stock listed on Schedule I,
free of any and all Liens or options in favor of, or claims of, any
other Person, except the Lien created by this Pledge Agreement subject
to, at any time prior to the Borrowing Date, the Existing Pledge; and
(i) upon (i) filing of UCC-1 financing statements with the
jurisdictions set forth on Schedule II hereto and (ii) delivery to the
Administrative Agent of the stock certificates evidencing the Pledged
Stock on or before the Borrowing Date and repayment of the Existing
Pledge Debt, the Lien granted pursuant to this Pledge Agreement will
constitute a valid, perfected first priority Lien on the Collateral to
the extent that a security interest in such Collateral can be perfected
under the Code by taking such action (and subject to the requirements of
Section 9-306 of the Code with respect to any proceeds of Collateral and
to the further requirement that additional steps described in Section
5(a) hereof may be necessary to perfect a security interest in dividends
or other distributions in kind), enforceable as such against all
creditors of the Pledgor and any Persons purporting to purchase any
Collateral from the Pledgor.
5. Certain Covenants. The Pledgor covenants and agrees with the
Administrative Agent for the ratable benefit of itself and the Lenders that,
from and after the date of this Pledge Agreement until the Obligations are
paid in full and the Commitments are terminated:
(a) If the Pledgor shall, as a result of its ownership of the
Pledged Stock, become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing
a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights, whether
in addition to, in substitution of, as a conversion of, or in exchange
for any shares of the Pledged Stock, or otherwise in respect thereof,
the Pledgor shall, subject to, at any time prior to the Borrowing Date,
the Existing Pledge, accept the same as the agent of the Administrative
Agent, hold the same in trust for the Administrative Agent and deliver
the same forthwith to the Administrative Agent in the exact form
received, duly indorsed by the Pledgor to the Administrative Agent, if
required, together with an undated stock power covering such certificate
duly executed in blank by the Pledgor, to be held by the Administrative
Agent, subject to the terms hereof, as additional collateral security
for the Obligations. In addition, any sums paid upon or in respect of
the Pledged Stock upon the liquidation or dissolution of the Issuer
shall, subject to, at any time prior to the Borrowing Date, the Existing
Pledge, be paid over to the Administrative Agent to be held by it
hereunder as additional collateral security for the Obligations, and in
case any distribution of capital shall be made on or in respect of the
Pledged Stock or any property shall be distributed upon or with respect
to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of the Issuer or pursuant to the
reorganization thereof, the property so distributed shall be delivered
to the Administrative Agent to be held by it hereunder as additional
collateral security for the Obligations. If any sums of money or
property so paid or distributed in respect of the Pledged Stock shall be
received by the Pledgor, the Pledgor shall, subject to, at any time
prior to the Borrowing Date, the Existing Pledge, until such money or
property is paid or delivered to the Administrative Agent, hold such
money or property in trust for the Administrative Agent, segregated from
other funds of the Pledgor, as additional collateral security for the
Obligations.
(b) Without the prior written consent of the Administrative
Agent, the Pledgor will not (i) vote to enable, or take any other action
to permit, the Issuer to issue any stock or other equity securities of
any nature or to issue any other securities convertible into or granting
the right to purchase or exchange for any stock or other equity
securities of any nature of such Issuer, (ii) sell, assign, transfer,
exchange, or otherwise dispose of, or grant any option with respect to,
the Collateral, or (iii) create, incur or permit to exist any Lien or
option in favor of, or any claim of any Person with respect to, any of
the Collateral, or any interest therein, except for the Lien provided
for by this Pledge Agreement and, at any time prior to the Borrowing
Date, the Existing Pledge. The Pledgor will defend the right, title and
interest of the Administrative Agent in and to the Collateral against
the claims and demands of all Persons whomsoever.
(c) At any time and from time to time, upon the written request
of the Administrative Agent, and at the sole expense of the Pledgor, the
Pledgor will promptly and duly execute and deliver such further
instruments and documents and take such further actions as the
Administrative Agent may reasonably request for the purposes of
obtaining or preserving the full benefits of this Pledge Agreement and of
the rights and powers herein granted, provided, that unless an Event of
Default shall have occurred and be continuing, the Pledgor shall not be
obligated to make any filing with, or to seek or obtain any consent or
authorization of, any Governmental Authority of the nature described in
Section 19 hereof. If any amount payable under or in connection with
any of the Collateral shall be or become evidenced by any promissory
note, other instrument or chattel paper, such note, instrument or
chattel paper shall, subject to, at any time prior to the Borrowing
Date, the Existing Pledge, be immediately delivered to the
Administrative Agent, duly endorsed in a manner satisfactory to the
Administrative Agent, to be held as Collateral pursuant to this Pledge
Agreement.
(d) The Pledgor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities with
respect to, or resulting from any delay in paying, any and all stamp,
excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any
of the transactions contemplated by this Pledge Agreement.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall
have occurred and be continuing and the Administrative Agent shall have given
notice to the Pledgor of the Administrative's Agent intent to exercise its
rights pursuant to Section 7 below, the Pledgor shall be permitted to receive
all dividends or other payments or distributions made upon or with respect to
the Pledged Stock in cash paid in accordance with the terms of the Credit
Agreement in respect of the Pledged Stock and to exercise all voting and
corporate rights with respect to the Pledged Stock; provided, that no vote
shall be cast or corporate right exercised or other action taken which, in the
Administrative Agent's judgment, exercised in a commercially reasonable
manner, would impair the Collateral or which would be inconsistent with or
result in any violation of any provision of the Credit Agreement, the Notes,
any other Loan Documents or this Pledge Agreement.
7. Rights of the Administrative Agent.
(a) If an Event of Default shall occur and be continuing on and after
the Borrowing Date and the Administrative Agent shall give notice of its
intent to exercise such rights to the Pledgor, (i) the Administrative Agent
shall have the right to receive any and all cash dividends paid in respect of
the Pledged Stock and make application thereof to the Obligations in the order
set forth in the Credit Agreement and (ii) all shares of the Pledged Stock
shall be registered in the name of the Administrative Agent or its nominee,
and the Administrative Agent or its nominee may thereafter exercise, in a
commercially reasonable manner but otherwise in its discretion, (A) all
voting, corporate and other rights pertaining to such shares of the Pledged
Stock at any meeting of shareholders of each Issuer or otherwise and (B) any
and all rights of conversion, exchange, subscription and any other rights,
privileges or options pertaining to such shares of the Pledged Stock
(including, without limitation, the right to exchange any and all of the
Pledged Stock upon the merger, consolidation, reorganization, recapitalization
or other fundamental change in the corporate structure of each Issuer, or upon
the exercise by the Pledgor or the Administrative Agent of any right,
privilege or option pertaining to such shares of the Pledged Stock, and in
connection therewith, the right to deposit and deliver any and all of the
Pledged Stock with any committee, depositary, transfer agent, registrar or
other designated agency upon such terms and conditions as it may determine),
all without liability except to account for property actually received by it,
but the Administrative Agent shall have no duty to the Pledgor to exercise any
such right, privilege or option and shall not be responsible for any failure
to do so or delay in so doing.
(b) The rights of the Administrative Agent and the Lenders hereunder
shall not be conditioned or contingent upon the pursuit by the Administrative
Agent or any Lender of any right or remedy against the Borrowers or against
any other Person which may be or become liable in respect of all or any part
of the Obligations or against any collateral security therefor, guarantee
therefor or right of offset with respect thereto. Neither the Administrative
Agent nor any Lender shall be liable for any failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so,
nor shall the Administrative Agent be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.
8. Remedies. If an Event of Default shall occur and be continuing,
with the consent of the Required Lenders, the Administrative Agent may, and
upon the request of the Required Lenders, the Administrative Agent shall,
exercise on behalf of itself and the Lenders, all rights and remedies granted
in this Pledge Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, and in addition thereto, all rights
and remedies of a secured party under the Code. Without limiting the
generality of the foregoing with regard to the scope of the Administrative
Agent's remedies, the Administrative Agent, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind
(except any notice required by law referred to below) to or upon the Pledgor,
the Issuers or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of the Administrative Agent or any Lender
or elsewhere upon such terms and conditions as it may deem advisable and at
such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. The Administrative Agent or any Lender
shall have the right upon any such public sale or sales, and, to the extent
permitted by law, upon any such private sale or sales, to purchase the whole
or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgor, which right or equity is hereby waived or released.
The Administrative Agent shall apply any Proceeds from time to time held by it
and the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of
every kind incurred in respect thereof or incidental to the care or
safekeeping of any of the Collateral or in any way relating to the Collateral
or the rights of the Administrative Agent and the Lenders hereunder,
including, without limitation, reasonable attorneys' fees and disbursements of
counsel thereto, to the payment in whole or in part of the Obligations, in the
order set forth in the Credit Agreement, and only after such application and
after the payment by the Administrative Agent of any other amount required by
any provision of law, including, without limitation, Section 9-504(1)(c) of
the Code, need the Administrative Agent account for the surplus, if any, to
the Pledgor. To the extent permitted by applicable law, the Pledgor waives
all claims, damages and demands it may acquire against the Administrative
Agent or any Lender arising out of the exercise by them of any rights
hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition.
The Pledgor further waives and agrees not to assert any rights or privileges
which it may acquire under Section 9-112 of the Code.
9. Private Sales.
(a) The Pledgor recognizes that the Administrative Agent may be unable
to effect a public sale of any or all the Pledged Stock, by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers which will be obliged to agree,
among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges and agrees that any such private sale may result in
prices and other terms less favorable than if such sale were a public sale
and, notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of
the Pledged Stock for the period of time necessary to permit the Issuer to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if such Issuer would agree to do so.
(b) The Pledgor further agrees to use its best efforts to do or cause to
be done all such other acts as may be necessary to make such sale or sales of
all or any portion of the Pledged Stock pursuant to this Section 9 valid and
binding and in compliance with any and all other Applicable Laws. The Pledgor
further agrees that a breach of any of the covenants contained in this Section
9 will cause irreparable injury to the Administrative Agent and the Lenders
not compensable in damages, that the Administrative Agent and the Lenders have
no adequate remedy at law in respect of such breach and, as a consequence,
that to the greatest extent permitted by law, each and every covenant
contained in this Section 9 shall be specifically enforceable against the
Pledgor, and to the greatest extent permitted by law the Pledgor hereby waives
and agrees not to assert any defenses against an action for specific
performance of such covenants except for a defense that no Event of Default
has occurred under the Credit Agreement.
10. No Subrogation. Notwithstanding any payment or payments made by the
Pledgor hereunder, or any setoff or application of funds of the Pledgor by the
Administrative Agent or Lender, or the receipt of any amounts by the
Administrative Agent or any Lender with respect to any of the Collateral, the
Pledgor shall not be entitled to be subrogated to any of the rights of the
Administrative Agent or any Lender against the Borrower or against any other
collateral security held by the Administrative Agent or any Lender for the
payment of the Obligations, nor shall the Pledgor seek any reimbursement from
the Borrower in respect of payments made by the Pledgor in connection with the
Collateral, or amounts realized by the Administrative Agent or any Lender in
connection with the Collateral, until all amounts owing to the Agents and
Lenders on account of the Obligations are paid in full and the Commitments are
terminated. If any amount shall be paid to the Pledgor on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full, such amount shall be held by the Pledgor in trust for the
Administrative Agent, segregated from other funds of the Pledgor, and shall,
forthwith upon receipt by the Pledgor, be turned over to the Administrative
Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor
to the Administrative Agent, if required) to be applied against the
Obligations, whether matured or unmatured, in such order as set forth in the
Credit Agreement.
11. Amendments, etc. With Respect to the Obligations. The Pledgor
shall remain obligated hereunder, and the Collateral shall remain subject to
the Lien granted hereby, notwithstanding that, without any reservation of
rights against the Pledgor, and without notice to or further assent by the
Pledgor, any demand for payment of any of the Obligations made by the
Administrative Agent or any Lender may be rescinded by the Administrative
Agent or such Lender, and any of the Obligations continued, and the
Obligations, or the liability of the Borrower or any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified accelerated, compromised, waived,
surrendered, or released by the Administrative Agent or any Lender, and the
Credit Agreement, the Notes, any other Loan Documents and any other documents
executed and delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or part, as the Lenders (or the Required
Lenders, as the case may be) may deem advisable from time to time, and any
guarantee, right of offset or other collateral security at any time held by
the Administrative Agent or any Lender for the payment of the Obligations may
be sold, exchanged, waived, surrendered or released. Neither the
Administrative Agent nor any Lender shall have any obligation to protect,
secure, perfect or insure any other Lien at any time held by it as security
for the Obligations or any property subject thereto. The Pledgor waives any
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Administrative Agent or
any Lender upon this Pledge Agreement; the Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred in
reliance upon this Pledge Agreement; and all dealings between the Borrower and
the Pledgor, on the one hand, and the Administrative Agent and the Lenders, on
the other, shall likewise be conclusively presumed to have been had or
consummated in reliance upon this Pledge Agreement. The Pledgor waives
diligence, presentment, protest, demand for payment and notice of default or
nonpayment to or upon the Borrower or the Pledgor with respect to the
Obligations.
12. Regulatory Approval. The Pledgor will, at its expense, promptly
execute and deliver, or cause the execution and delivery of, all applications,
certificates, instruments, registration statements and all other documents and
papers the Administrative Agent may, to the extent commercially reasonable,
request or as may be required by law in connection with the obtaining of any
consent, approval, registration, qualification or authorization of any
Governmental Authority or of any other Person necessary or appropriate for the
effective exercise of any rights under this Pledge Agreement, provided, that
unless an Event of Default shall have occurred and be continuing, the Pledgor
shall not be obligated to make any filing with, or to seek or obtain any
consent or authorization of, any Governmental Authority of the nature
described in Section 19 hereof. Without limiting the generality of the
foregoing, if an Event of Default shall have occurred and be continuing, the
Pledgor shall take any action which the Administrative Agent may, to the
extent commercially reasonable, request in order to transfer and assign to the
Administrative Agent, or to such one or more third parties as the
Administrative Agent may designate, or to a combination of the foregoing, each
FCC License, PUC Authorization and CATV Franchise. To enforce the provisions
of this Section, the Administrative Agent is, at any time when an Event of
Default has occurred and is continuing, empowered to request the appointment
of a receiver from any court of competent jurisdiction. Such receiver shall
be instructed to seek from the applicable Governmental Authority an
involuntary transfer of control of each such FCC License, PUC Authorization
and CATV Franchise for the purpose of seeking a bona fide purchaser to whom
control will ultimately be transferred. The Pledgor hereby agrees, so long as
such Event of Default is continuing, to authorize such an involuntary transfer
of control upon the request of the receiver so appointed and, if the Pledgor
shall refuse to authorize the transfer, its approval may be required by the
court. Upon the occurrence and continuance of an Event of Default, the
Pledgor shall further use its best efforts to assist in obtaining approval of
the applicable Governmental Authority, if required, for any action or
transactions contemplated by this Pledge Agreement including, without
limitation, the preparation, execution and filing with the applicable
Governmental Authority of the assignor's or transferor's portion of any
application or applications for consent to the assignment of any FCC License,
PUC Authorization or CATV Franchise or transfer of control necessary or
appropriate under the rules and regulations of the applicable Governmental
Authority for the approval of the transfer or assignment of any portion of the
Collateral, together with any FCC License, PUC Authorization and CATV
Franchise. The Pledgor acknowledges that the assignment or transfer of each
FCC License, PUC Authorization and CATV Franchise is integral to the
Administrative Agent's and Lenders' realization of the value of the
Collateral, that there is no adequate remedy at law for failure by the Pledgor
to comply with the provisions of this Section and that such failure would
cause irreparable injury not adequately compensable in damages, and therefore
agrees that to the greatest extent permitted by law each and every covenant
contained in this Section may be specifically enforced, and to the greatest
extent permitted by law the Pledgor hereby waives and agrees not to assert any
defenses against an action for specific performance of such covenants.
13. Limitation on Duties Regarding Collateral. The Administrative
Agent's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Code or otherwise, shall be to deal with it in the same manner as the
Administrative Agent deals with similar securities and property for its own
account. Neither the Administrative Agent, any Lender nor any of their
respective directors, officers, employees or agents shall be liable for
failure to demand, collect or realize upon any of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of the Pledgor or otherwise.
14. Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral constitute irrevocable powers
coupled with an interest.
15. Severability. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
16. Paragraph Headings. The paragraph headings used in this Pledge
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.
17. No Waiver; Cumulative Remedies. Neither the Administrative Agent
nor any Lender shall by any act (except by a written instrument pursuant to
Section 18 hereof) be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any
of the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or such Lender would otherwise
have on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.
18. Waivers and Amendments; Successors and Assigns; Governing Law.
None of the terms or provisions of this Pledge Agreement may be amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor and Administrative Agent; provided that (i) any provision of this
Pledge Agreement may be waived by the Administrative Agent in a letter or
agreement executed by the Administrative Agent or by telex or facsimile
transmission from the Administrative Agent and (ii) any consent by the
Administrative Agent to any amendment, supplement or modification hereto shall
be subject to approval thereof by the Lenders or Required Lenders, as
applicable, in accordance with Section 13.11 of the Credit Agreement. This
Pledge Agreement shall be binding upon the successors and assigns of the
Pledgor and shall inure to the benefit of itself and the Lenders and their
respective successors and assigns. This Pledge Agreement shall be governed by,
and construed and interpreted in accordance with, the laws of the State of
North Carolina.
19. Regulatory Concerns. Notwithstanding any other provision to the
contrary contained in this Agreement, the ability of the Administrative Agent
to (i) transfer record ownership of the Pledged Stock into the name of the
Administrative Agent or its nominee pursuant to Section 7 hereof, (ii) vote
and give consents, ratifications and waivers with respect to the Pledged Stock
pursuant to Section 7 hereof and (iii) sell the Pledged Stock pursuant to
Section 8 or 9 hereof is subject to the Administrative Agent or its nominee (a)
obtaining, to the extent necessary under applicable laws and regulations, the
prior approval of the FCC, any PUC or any other Governmental Authority having
jurisdiction with respect to any Issuer and its Subsidiaries and (b) making
any additional filings, reports or notifications required with respect to the
exercise by the Administrative Agent of the powers specified in clauses (i),
(ii) and (iii) of this section.
20. Notices. All notices and communications hereunder shall be given
to the addresses and otherwise in accordance with Section 13.1 of the Credit
Agreement.
21. Irrevocable Authorization and Instruction to Issuer. The Pledgor
hereby authorizes and instructs each Issuer to comply with any instruction
received by it from the Administrative Agent in writing that (a) states that
an Event of Default has occurred and (b) is otherwise in accordance with the
terms of this Pledge Agreement, without any other or further instructions from
the Pledgor, and the Pledgor agrees that the Issuers shall be fully protected
in so complying.
22. Authority of Administrative Agent. The Pledgor acknowledges that
the rights and responsibilities of the Administrative Agent under this Pledge
Agreement with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, voting
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between the
Administrative Agent and the Lenders, be governed by the Credit Agreement and
by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Administrative Agent and the Pledgor, the
Administrative Agent shall be conclusively presumed to be acting as agent for
itself and the Lenders with full and valid authority so to act or refrain from
acting, and neither the Pledgor nor any Issuer shall be under any obligation,
or entitlement, to make any inquiry respecting such authority.
23. Consent to Jurisdiction. The Pledgor hereby irrevocably consents
to the personal jurisdiction of the state and federal courts located in
Mecklenburg County, North Carolina, in any action, claim or other proceeding
arising out of any dispute in connection with this Pledge Agreement, the other
Loan Documents, any rights or obligations hereunder or thereunder, or the
performance of such rights and obligations. The Pledgor hereby irrevocably
consents to the service of a summons and complaint and other process in any
action, claim or proceeding brought by the Administrative Agent or any Lender
in connection with this Pledge Agreement, the other Loan Documents, any rights
or obligations hereunder or thereunder, or the performance of such rights and
obligations, on behalf of itself or its property, in the manner specified in
Section 20. Nothing in this Section 23 shall affect the right of the
Administrative Agent or any Lender to serve legal process in any other manner
permitted by Applicable Law or affect the right of the Administrative Agent or
any Lender to bring any action or proceeding against the Pledgors or their
properties, individually or collectively, in the courts of any other
jurisdictions.
24. Binding Arbitration; Waiver of Jury Trial.
(a) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE
AGENT, EACH LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS PLEDGE AGREEMENT OR
THEREUNDER, THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR
THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(b) Binding Arbitration. Upon demand of any party, whether made before
or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Pledge
Agreement or any other Loan Documents ("Disputes"), between or among parties
to this Agreement or any other Loan Document shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a
party does not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims concerning any aspect of the past, present or future
relationships arising out or connected with the Loan Documents. Arbitration
shall be conducted under and governed by the Commercial Financial Disputes
Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration
hearings shall be conducted in Charlotte, North Carolina. The expedited
procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be
applicable to claims of less than $500,000. All applicable statutes of
limitation shall apply to any Dispute. A judgment upon the award may be
entered in any court having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed attorneys. The single
arbitrator selected for expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted. Notwithstanding the foregoing, this paragraph
shall not apply to any Hedging Agreement that is a Loan Document.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and
sale, (ii) all rights of self help including peaceful occupation of property
and collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
25. Reorganization. Notwithstanding anything to the contrary contained
in this Agreement, no action required to be taken by the Pledgor or any Issuer
pursuant to the Reorganization shall be deemed to constitute an Event of
Default arising out of a breach of the terms of this Agreement; provided, that
if any such action conflicts with or otherwise results in any breach of any
provision of this Agreement, the Pledgor and the Issuers, or their successors
or assignees, shall execute such amendments hereto and take all the actions
reasonably requested by the Administrative Agent in order that this Agreement
shall remain enforceable in accordance with its terms against such Persons
after the Reorganization.
26. Termination of Pledge Agreement. This Pledge Agreement shall
terminate upon the date when the Obligations have been paid in full and the
Commitments have been terminated. Upon the termination of this Pledge
Agreement, the Administrative Agent will, at the expense of the Pledgor,
deliver any certificates evidencing the Pledged Stock and any other Collateral
held by it to the Pledgor and execute and deliver to the Pledgor such
documents as the Pledgor shall reasonably request to evidence the termination
of the Lien created hereby on the Collateral.
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to
be executed under seal by its duly authorized officers as of the date first
above written.
[CORPORATE SEAL] C-TEC CABLE SYSTEMS, INC.
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
ACKNOWLEDGEMENT AND CONSENT
Each Issuer referred to in the foregoing Pledge Agreement hereby
acknowledges receipt of a copy thereof and agrees to be bound thereby and to
comply with the terms thereof insofar as such terms are applicable to it.
Such Issuer agrees to notify the Administrative Agent promptly in writing of
the occurrence of any of the events described in Section 5(a) of the Pledge
Agreement with respect to its shares.
[CORPORATE SEAL] C-TEC CABLE SYSTEMS OF NEW YORK, INC.
ATTEST: By:
------------------------------------
Name:
-------------------------------
- ------------------------ Title:
Secretary ------------------------------
- --------------
SCHEDULE 1
To Pledge
Agreement
DESCRIPTION OF PLEDGED STOCK
Class of Stock No. of
Issuer Stock Certificate No. Shares
- ------ -------- --------------- ------
C-TEC Cable Systems
of New York, Inc. Common 1,000
SCHEDULE II
To Pledge
Agreement
UCC INFORMATION
Debtor Filing Jurisdiction
------ -------------------
C-TEC Cable System, Inc. Secretary of State, New Jersey
C-TEC Cable System, Inc. Mercer County, New Jersey
Exhibit A to Pledge Agreement
PLEDGE AGREEMENT SUPPLEMENT, dated as of ________________, 19__ (the
"Supplement"), made by [___________________________], a [______] corporation
(the "Pledgor"), in favor of First Union National Bank, a national banking
corporation, as Administrative Agent (in such capacity, the "Administrative
Agent"), under the Credit Agreement (as defined in the Pledge Agreement
referred to below) for the ratable benefit of itself and the Lenders (as so
defined).
Reference is hereby made to that Pledge Agreement, dated as of
____________, 1997, made by the Pledgor in favor of the Administrative Agent
(as amended, restated or otherwise modified as of the date hereof, the "Pledge
Agreement"). This Supplement supplements the Pledge Agreement, forms a part
thereof and is subject to the terms thereof. Terms defined in the Pledge
Agreement are used herein as therein defined.
The Pledgor hereby confirms and reaffirms the security interest in the
Collateral granted to the Administrative Agent for the ratable benefit of
itself and the Lenders under the Pledge Agreement, and, as additional
collateral security for the prompt and complete payment when due (whether at
stated maturity, by acceleration or otherwise) of the Obligations and in order
to induce the Lenders to make their Loans under the Credit Agreement, the
Pledgor hereby pledges, assigns and delivers to the Administrative Agent, for
the ratable benefit of the Administrative Agent and the Lenders, all of the
issued and outstanding shares of capital stock of [INSERT NAME OF NEW
SUBSIDIARY] (the "New Issuer") listed below, together with all stock
certificates, options, or rights of any nature whatsoever which may be issued
or granted by the New Issuer to the Pledgor while the Pledge Agreement, as
supplemented hereby, is in force (the "Additional Pledged Stock"; as used in
the Pledge Agreement as supplemented by this Supplement, "Pledged Stock" shall
be deemed to include the Additional Pledged Stock) and hereby grants to the
Agent, for the ratable benefit of itself and the Lenders, a first priority
security interest in the Additional Pledged Stock and all Proceeds thereof.
The Pledgor hereby represents and warrants that the representations and
warranties contained in paragraph 4 of the Pledge Agreement are true and
correct on the date of this Supplement with references therein to the "Pledged
Stock" to include the Additional Pledged Stock, with references therein to the
"Issuers" to include the New Issuer, and with references to the "Pledge
Agreement" to mean the Pledge Agreement as supplemented by this Supplement.
The Pledgor shall deliver to the Administrative Agent the
Acknowledgement and Consent attached hereto duly executed by the New Issuer.
The Additional Pledged Stock pledged hereby is as follows which stock shall be
deemed part of Schedule 1 to the Pledge Agreement:
Class of Stock No. of
Issuer Stock Certificate No. Shares
- ------ -------- --------------- ------
The Pledgor hereby agrees to deliver to the Administrative Agent each
such certificate, together with an undated stock power covering each such
certificate, duly executed in blank by the Pledgor.
The address for notices for the New Issuer is as follows:
------------------------------
------------------------------
------------------------------
Attention:
--------------------
Telephone No.:
----------------
Telecopy No.:
-----------------
IN WITNESS WHEREOF, the undersigned has caused this Supplement to be duly
executed under seal and delivered as of the date first above written.
[CORPORATE SEAL] [PLEDGOR]
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
ACKNOWLEDGEMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy of the foregoing
Supplement and the Pledge Agreement referred to therein (the "Pledge
Agreement"). The undersigned agrees for the ratable benefit of the
Administrative Agent and the Lenders as follows:
The undersigned will be bound by the terms of the Pledge Agreement and
will comply with such terms insofar as such terms are applicable to the
undersigned.
The undersigned will notify the Administrative Agent promptly in writing
of the occurrence of any of the events described in paragraph 5(a) of the
Stock Pledge Agreement with respect to its shares.
[NAME OF NEW ISSUER]
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
SUMMARY AND LOCATION OF DOCUMENT
Document #: 385624.1
Description: Cable Systems Pledge Agreement
Author: LSM
Document Type: AGT
Client: 12418
Matter: 087
Directory: F:/LSM/CLI
Date: July 8, 1997
Revised by:
EXHIBIT I-2
to
Credit Agreement dated as of June __, 1997,
by and among
C-TEC Cable Systems, Inc., ComVideo Systems, Inc.,
and C-TEC Cable Systems of New York, Inc.,
as the Borrowers,
the Lenders party thereto,
and
First Union National Bank,
as Administrative Agent
COMVIDEO PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (as amended, restated or otherwise modified, the
"Pledge Agreement"), dated as of ___________, 1997 is made by COMVIDEO
SYSTEMS, INC., a Pennsylvania corporation (the "Pledgor"), in favor of First
Union National Bank, a national banking association ("First Union"), as
Administrative Agent for the ratable benefit of itself and the Lenders
delivered pursuant to the Credit Agreement dated as of _______ __, 1997 (as
amended, restated or otherwise modified, the "Credit Agreement") by and among
C-TEC Cable Systems, Inc., ComVideo Systems, Inc. and C-TEC Cable Systems of
New York, Inc. (the "Borrowers"), the Lenders who are or may become party
thereto (the "Lenders") and First Union National Bank, as Administrative Agent
(the "Administrative Agent").
STATEMENT OF PURPOSE
Pursuant to the terms of the Credit Agreement, the Lenders have agreed
to extend certain credit facilities to the Borrowers in the aggregate amount
of up to the Aggregate Commitment under the Credit Agreement.
The Pledgor is the legal and beneficial owner of all of the Partnership
Interests (as defined below) in Home Link Communications of Princeton, L.P., a
limited partnership formed pursuant to the law of the State of New Jersey
(along with any New Issuer referred to in any Supplement in the form of
Exhibit A hereto which is executed and delivered to the Administrative Agent,
the "Issuer").
In connection with the transactions contemplated by the Credit Agreement
and as required by the terms thereof, the Lenders have requested, and the
Pledgor is executing and delivering this Pledge Agreement to the
Administrative Agent for the ratable benefit of the itself and the Lenders.
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into and make available Loans
pursuant to the Credit Agreement, the Pledgor hereby agrees with the
Administrative Agent for the ratable benefit of itself and the Lenders as
follows:
1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the Credit Agreement and used herein are so used as so defined, and
the following terms shall have the following meanings:
"Code" means the Uniform Commercial Code from time to time in effect in
the State of North Carolina.
"Collateral" means the Pledged Interests and all Proceeds of the Pledged
Interests.
"Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership establishing the Issuer dated as of October 8, 1986 and as
amended from time to time.
"Partnership Interest" means an "Interest" as defined in the Partnership
Agreement.
"Pledge Agreement" means this Pledge Agreement, as amended or modified.
"Pledged Interests" means, in each case whether now existing or
hereafter acquired, all of the Pledgor's right, title and interest in and to:
(1) its Partnership Interests in the Issuer, as general partner
or as a limited partner, and any other rights as the general
partner thereof or as holder of any ownership interest therein,
but not the Pledgor's obligations from time to time as partner or
owner of the Issuer (unless the Administrative Agent or its
designee, on behalf of the Administrative Agent and the Lenders,
shall elect to become a general partner or an owner of the Issuer
in connection with its exercise of remedies pursuant to the terms
hereof);
(2) any and all moneys due and to become due to the Pledgor now
or in the future by way of a distribution made to the Pledgor in
its capacity as a general or limited partner of the Issuer or
otherwise in respect of the Pledgor's ownership interest in the
Issuer;
(3) any other property of the Issuer to which the Pledgor now
or in the future may be entitled in its capacity as a general or
limited partner of or holder of any ownership interest in the
Issuer by way of distribution, return of capital or otherwise;
(4) any other claim or right which the Pledgor has or may in the
future acquire against the Issuer or its property in the Pledgor's
capacity as a general or limited partner thereof or holder of any
ownership interest therein;
(5) the Partnership Agreement and other organizational documents
of the Issuer;
(6) all certificates, options or rights of any nature whatsoever
that may be issued or granted by the Issuer to the Pledgor while
this Pledge Agreement is in effect; and
(7) to the extent not otherwise included, all Proceeds of any or
all of the foregoing.
"Proceeds" means all "proceeds" as such term is defined in Section
9-306(1) of the Code on the date hereof and, in any event, shall include,
without limitation, all distributions or other income from the Pledged
Interests, collections thereon, proceeds of sale thereof or distributions with
respect thereto.
2. Pledge and Grant of Security Interest. The Pledgor hereby delivers
to the Administrative Agent, for the ratable benefit of itself and the
Lenders, all the Pledged Interests and hereby grants to the Administrative
Agent, for the ratable benefit of itself and the Lenders, a first priority
security interest in the Collateral, as collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations.
3. Powers; Register of Pledge. (a) Concurrently with the delivery to
the Administrative Agent of any certificate representing any Pledged
Interests, the Pledgor shall deliver an undated power covering such
certificate, duly executed in blank by the Pledgor;
(b) Concurrently with the execution of this Pledge Agreement, the
Pledgor will send to the Issuer written instructions substantially in the form
of Exhibit B hereto and shall cause the Issuer to, and the Issuer shall,
deliver to the Administrative Agent the Transaction Statement in the form of
Exhibit C hereto, confirming that the Issuer has registered the pledge
effected by this Pledge Agreement on its books.
4. Representations and Warranties. To induce the Administrative Agent
and Lenders to execute the Credit Agreement and make any Loans and to accept
the security contemplated hereby, the Pledgor hereby represents and warrants
that:
(a) the Pledgor has the corporate power, authority and legal
right to execute and deliver, to perform its obligations under, and to
grant the Lien on the Collateral pursuant to, this Pledge Agreement and
has taken all necessary corporate action to authorize its execution,
delivery and performance of, and grant of the Lien on the Collateral
pursuant to, this Pledge Agreement;
(b) this Pledge Agreement constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the availability of equitable
remedies;
(c) except as contemplated by Section 19 hereof, the execution,
delivery and performance of this Pledge Agreement will not violate any
provision of any Applicable Law or contractual obligation of the Pledgor
and will not result in the creation or imposition of any Lien on any of
the properties or revenues of the Pledgor pursuant to any Applicable Law
or contractual obligation, except as contemplated hereby;
(d) except as contemplated by Section 19 hereof, no consent or
authorization of, filing with, or other act by or in respect of, any
arbitrator or Governmental Authority and no consent of any other Person
(including, without limitation, any partner or creditor of the Pledgor
or the Issuer), is required in connection with the execution, delivery,
performance, validity or enforceability of this Pledge Agreement, except
that certain routine notification filings with the FCC, any applicable
PUC and any Governmental Authority that grants CATV Franchises with
respect to the Loan Documents may be required after the execution and
delivery of this Agreement.
(e) the Pledged Interests listed on Schedule I constitute all
the outstanding Partnership Interests of the Issuer held by the Pledgor;
(f) all the Pledged Interests have been duly and validly issued.
(g) the Pledgor is the record and beneficial owner of, and has
good and marketable title to the Pledged Interests listed opposite the
Pledgor on Schedule I, free of any and all Liens or options in favor of,
or claims of, any other Person, except the Lien created by this Pledge
Agreement and as provided in the Partnership Agreement; and
(i) upon (i) filing of UCC-1 financing statements with the
jurisdictions set forth on Schedule II hereto and (ii) registration on
the books of the Issuer of the pledge of the Pledged Interests, the Lien
granted pursuant to this Pledge Agreement will constitute a valid,
perfected first priority Lien on the Collateral to the extent that a
security interest in such Collateral can be perfected under the Code by
taking such action (and subject to the requirements of Section 9-305 of
the Code with respect to any proceeds of Collateral) to the extent that
a security interest in such Collateral can be perfected under the Code
by taking such action (and subject to the requirements of Section 9-306
of the Code with respect to any proceeds of Collateral and to the
further requirement that additional steps described in Section 5(a)
hereof may be necessary to perfect a security interest in distributions
in kind), enforceable as such against all creditors of the Pledgor and
any Persons purporting to purchase any Collateral from the Pledgor.
5. Certain Covenants. The Pledgor covenants and agrees with the
Administrative Agent for the ratable benefit of itself and the Lenders that,
from and after the date of this Pledge Agreement until the Obligations are
paid in full and the Commitments are terminated:
(a) If the Pledgor shall, as a result of its ownership of the
Pledged Interests, become entitled to receive or shall receive any
certificate (including, without limitation, any certificate representing
a distribution in connection with any reclassification, increase or
reduction of capital or any certificate issued in connection with any
reorganization), option or rights, whether in addition to, in
substitution of, as a conversion of, or in exchange for any Pledged
Interests, or otherwise in respect thereof, such Pledgor shall accept
the same as the agent of the Administrative Agent, hold the same in
trust for the Administrative Agent and deliver the same forthwith to the
Administrative Agent in the exact form received, duly indorsed by such
Pledgor to the Administrative Agent, if required, together with an
undated power covering such certificate duly executed in blank by the
Pledgor, to be held by the Administrative Agent, subject to the terms
hereof, as additional collateral security for the Obligations. In
addition, any sums paid upon or in respect of the Pledged Interests upon
the liquidation or dissolution of the Issuer shall be paid over to the
Administrative Agent to be held by it hereunder as additional collateral
security for the Obligations, and in case any distribution of capital
shall be made on or in respect of the Pledged Interests or any property
shall be distributed upon or with respect to the Pledged Interests
pursuant to the recapitalization or reclassification of the capital of
the Issuer or pursuant to the reorganization thereof, the property so
distributed shall be delivered to the Administrative Agent to be held by
it hereunder as additional collateral security for the Obligations. If
any sums of money or property so paid or distributed in respect of the
Pledged Interests shall be received by the Pledgor, the Pledgor shall,
until such money or property is paid or delivered to the Administrative
Agent, hold such money or property in trust for the Administrative
Agent, segregated from other funds of the Pledgor, as additional
collateral security for the Obligations.
(b) Without the prior written consent of the Administrative
Agent, the Pledgor will not (i) vote to enable, or take any other action
to permit, the Issuer to issue any equity securities of any nature or to
issue any other securities convertible into or granting the right to
purchase or exchange for any equity securities of any nature of the
Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of,
or grant any option with respect to, the Collateral, or (iii) create,
incur or permit to exist any Lien or option in favor of, or any claim of
any Person with respect to, any of the Collateral, or any interest
therein, except for the Lien provided for by this Pledge Agreement. The
Pledgor will defend the right, title and interest of the Administrative
Agent in and to the Collateral against the claims and demands of all
Persons whomsoever.
(c) At any time and from time to time, upon the written request
of the Administrative Agent, and at the sole expense of the Pledgor, the
Pledgor will promptly and duly execute and deliver such further
instruments and documents and take such further actions as the
Administrative Agent may reasonably request for the purposes of
obtaining or preserving the full benefits of this Pledge Agreement and
of the rights and powers herein granted, provided, that unless an Event
of Default shall have occurred and be continuing, the Pledgor shall not
be obligated to make any filing with, or to seek or obtain any consent
or authorization of, any Governmental Authority of the nature described
in Section 19 hereof. If any amount payable under or in connection with
any of the Collateral shall be or become evidenced by any promissory
note, other instrument or chattel paper, such note, instrument or
chattel paper shall be immediately delivered to the Administrative
Agent, duly endorsed in a manner satisfactory to the Administrative
Agent, to be held as Collateral pursuant to this Pledge Agreement.
(d) The Pledgor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities with
respect to, or resulting from any delay in paying, any and all stamp,
excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any
of the transactions contemplated by this Pledge Agreement.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall
have occurred and be continuing and the Administrative Agent shall have given
notice to the Pledgor of the Administrative's Agent intent to exercise its
rights pursuant to Section 7 below, the Pledgor shall be permitted to receive
all payments or distributions made upon or with respect to the Pledged
Interests in cash paid in accordance with the terms of the Credit Agreement in
respect of the Pledged Interests and to exercise all voting and other
partnership rights with respect to the Pledged Interests; provided, that no
vote shall be cast or other partnership right exercised or other action taken
which, in the Administrative Agent's judgment, exercised in a commercially
reasonable manner, would impair the Collateral or which would be inconsistent
with or result in any violation of any provision of the Credit Agreement, the
Notes, any other Loan Documents or this Pledge Agreement.
7. Rights of the Administrative Agent.
(a) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights
to the Pledgor, (i) the Administrative Agent shall have the right to receive
any and all cash payments or distributions made in respect of the Pledged
Interests and make application thereof to the Obligations in the order set
forth in the Credit Agreement and (ii) all of the Pledged Interests shall be
registered in the name of the Administrative Agent or its nominee, and the
Administrative Agent or its nominee may thereafter exercise, in a commercially
reasonable manner but otherwise in its discretion (A) all voting and other
partnership rights pertaining to such Pledged Interests at any meeting of
partners of the Issuer or otherwise and (B) any and all rights of conversion,
exchange, subscription and any other rights, privileges or options pertaining
to such Pledged Interests (including, without limitation, the right to
exchange any and all of the Pledged Interests upon the merger, consolidation,
reorganization, recapitalization or other fundamental change in the
partnership structure of the Issuer, or upon the exercise by the Pledgor or
the Administrative Agent of any right, privilege or option pertaining to such
Pledged Interests, and in connection therewith, the right to deposit and
deliver any and all of the Pledged Interests with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms and
conditions as it may determine), all without liability except to account for
property actually received by it, but the Administrative Agent shall have no
duty to the Pledgor to exercise any such right, privilege or option and shall
not be responsible for any failure to do so or delay in so doing.
(b) The rights of the Administrative Agent and the Lenders hereunder
shall not be conditioned or contingent upon the pursuit by the Administrative
Agent or any Lender of any right or remedy against the Borrowers or against
any other Person which may be or become liable in respect of all or any part
of the Obligations or against any collateral security therefor, guarantee
therefor or right of offset with respect thereto. Neither the Administrative
Agent nor any Lender shall be liable for any failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so,
nor shall the Administrative Agent be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.
8. Remedies. If an Event of Default shall occur and be continuing,
with the consent of the Required Lenders, the Administrative Agent may, and
upon the request of the Required Lenders, the Administrative Agent shall,
exercise on behalf of itself and the Lenders, all rights and remedies granted
in this Pledge Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, and in addition thereto, all rights
and remedies of a secured party under the Code. Without limiting the
generality of the foregoing with regard to the scope of the Administrative
Agent's remedies, the Administrative Agent, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind
(except any notice required by law referred to below) to or upon the Pledgor,
the Issuer or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of the Administrative Agent or any Lender
or elsewhere upon such terms and conditions as it may deem advisable and at
such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. The Administrative Agent or any Lender
shall have the right upon any such public sale or sales, and, to the extent
permitted by law, upon any such private sale or sales, to purchase the whole
or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgor, which right or equity is hereby waived or released.
The Administrative Agent shall apply any Proceeds from time to time held by it
and the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of
every kind incurred in respect thereof or incidental to the care or
safekeeping of any of the Collateral or in any way relating to the Collateral
or the rights of the Administrative Agent and the Lenders hereunder,
including, without limitation, reasonable attorneys' fees and disbursements of
counsel thereto, to the payment in whole or in part of the Obligations, in the
order set forth in the Credit Agreement, and only after such application and
after the payment by the Administrative Agent of any other amount required by
any provision of law, including, without limitation, Section 9-504(1)(c) of
the Code, need the Administrative Agent account for the surplus, if any, to
the Pledgor. To the extent permitted by applicable law, the Pledgor waives
all claims, damages and demands it may acquire against the Administrative
Agent or any Lender arising out of the exercise by them of any rights
hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition.
The Pledgor further waives and agrees not to assert any rights or privileges
which it may acquire under Section 9-112 of the Code.
9. Private Sales.
(a) The Pledgor recognizes that the Administrative Agent may be unable
to effect a public sale of any or all the Pledged Interests, by reason of
certain prohibitions contained in the Securities Act and applicable state
securities laws or otherwise, and may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers which will be obliged
to agree, among other things, to acquire such securities for their own account
for investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges and agrees that any such private sale may result in
prices and other terms less favorable than if such sale were a public sale
and, notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of
the Pledged Interests for the period of time necessary to permit an Issuer to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if such Issuer would agree to do so.
(b) The Pledgor further agrees to use its best efforts to do or cause to
be done all such other acts as may be necessary to make such sale or sales of
all or any portion of the Pledged Interests pursuant to this Section 9 valid
and binding and in compliance with any and all other Applicable Laws. The
Pledgor further agrees that a breach of any of the covenants contained in this
Section 9 will cause irreparable injury to the Administrative Agent and the
Lenders not compensable in damages, that the Administrative Agent and the
Lenders have no adequate remedy at law in respect of such breach and, as a
consequence, that to the greatest extent permitted by law each and every
covenant contained in this Section 9 shall be specifically enforceable against
the Pledgor, and to the greatest extent permitted by law the Pledgor hereby
waives and agrees not to assert any defenses against an action for specific
performance of such covenants except for a defense that no Event of Default
has occurred under the Credit Agreement.
10. No Subrogation. Notwithstanding any payment or payments made by
the Pledgor hereunder, or any setoff or application of funds of the Pledgor by
the Administrative Agent or Lender, or the receipt of any amounts by the
Administrative Agent or any Lender with respect to any of the Collateral, the
Pledgor shall not be entitled to be subrogated to any of the rights of the
Administrative Agent or any Lender against the Borrower or against any other
collateral security held by the Administrative Agent or any Lender for the
payment of the Obligations, nor shall the Pledgor seek any reimbursement from
the Borrower in respect of payments made by the Pledgor in connection with the
Collateral, or amounts realized by the Administrative Agent or any Lender in
connection with the Collateral, until all amounts owing to the Agents and
Lenders on account of the Obligations are paid in full and the Commitments are
terminated. If any amount shall be paid to the Pledgor on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full, such amount shall be held by the Pledgor in trust for the
Administrative Agent, segregated from other funds of the Pledgor, and shall,
forthwith upon receipt by the Pledgor, be turned over to the Administrative
Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor
to the Administrative Agent, if required) to be applied against the
Obligations, whether matured or unmatured, in such order as set forth in the
Credit Agreement.
11. Amendments, etc. With Respect to the Obligations. The Pledgor
shall remain obligated hereunder, and the Collateral shall remain subject to
the Lien granted hereby, notwithstanding that, without any reservation of
rights against the Pledgor, and without notice to or further assent by the
Pledgor, any demand for payment of any of the Obligations made by the
Administrative Agent or any Lender may be rescinded by the Administrative
Agent or such Lender, and any of the Obligations continued, and the
Obligations, or the liability of the Borrower or any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified accelerated, compromised, waived,
surrendered, or released by the Administrative Agent or any Lender, and the
Credit Agreement, the Notes, any other Loan Documents and any other documents
executed and delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or part, as the Lenders (or the Required
Lenders, as the case may be) may deem advisable from time to time, and any
guarantee, right of offset or other collateral security at any time held by the
Administrative Agent or any Lender for the payment of the Obligations may be
sold, exchanged, waived, surrendered or released. Neither the Administrative
Agent nor any Lender shall have any obligation to protect, secure, perfect or
insure any other Lien at any time held by it as security for the Obligations
or any property subject thereto. The Pledgor waives any and all notice of the
creation, renewal, extension or accrual of any of the Obligations and notice
of or proof of reliance by the Administrative Agent or any Lender upon this
Pledge Agreement; the Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred in reliance upon this
Pledge Agreement; and all dealings between the Borrower and the Pledgor, on
the one hand, and the Administrative Agent and the Lenders, on the other, shall
likewise be conclusively presumed to have been had or consummated in reliance
upon this Pledge Agreement. The Pledgor waives diligence, presentment,
protest, demand for payment and notice of default or nonpayment to or upon the
Borrower or the Pledgor with respect to the Obligations.
12. Regulatory Approval. The Pledgor will, at its expense, promptly
execute and deliver, or cause the execution and delivery of, all applications,
certificates, instruments, registration statements and all other documents and
papers the Administrative Agent may, to the extent commercially reasonable,
request or as may be required by law in connection with the obtaining of any
consent, approval, registration, qualification or authorization of any
Governmental Authority or of any other Person necessary or appropriate for the
effective exercise of any rights under this Pledge Agreement, provided, that
unless an Event of Default shall have occurred and be continuing, the Pledgor
shall not be obligated to make any filing with, or to seek or obtain any
consent or authorization of, any Governmental Authority of the nature
described in Section 19 hereof. Without limiting the generality of the
foregoing, if an Event of Default shall have occurred and be continuing, the
Pledgor shall take any action which the Administrative Agent may, to the
extent commercially reasonable, request in order to transfer and assign to the
Administrative Agent, or to such one or more third parties as the
Administrative Agent may designate, or to a combination of the foregoing, each
FCC License, PUC Authorization and CATV Franchise. To enforce the provisions
of this Section, the Administrative Agent is, at any time when an Event of
Default has occurred and is continuing, empowered to request the appointment
of a receiver from any court of competent jurisdiction. Such receiver shall
be instructed to seek from the applicable Governmental Authority an
involuntary transfer of control of each such FCC License, PUC Authorization
and CATV Franchise for the purpose of seeking a bona fide purchaser to whom
control will ultimately be transferred. The Pledgor hereby agrees, so long as
such Event of Default is continuing, to authorize such an involuntary transfer
of control upon the request of the receiver so appointed and, if the Pledgor
shall refuse to authorize the transfer, its approval may be required by the
court. Upon the occurrence and continuance of an Event of Default, the
Pledgor shall further use its best efforts to assist in obtaining approval of
the applicable Governmental Authority, if required, for any action or
transactions contemplated by this Pledge Agreement including, without
limitation, the preparation, execution and filing with the applicable
Governmental Authority of the assignor's or transferor's portion of any
application or applications for consent to the assignment of any FCC License,
PUC Authorization or CATV Franchise or transfer of control necessary or
appropriate under the rules and regulations of the applicable Governmental
Authority for the approval of the transfer or assignment of any portion of the
Collateral, together with any FCC License, PUC Authorization and CATV
Franchise. The Pledgor acknowledges that the assignment or transfer of each
FCC License, PUC Authorization and CATV Franchise is integral to the
Administrative Agent's and Lenders' realization of the value of the Collateral,
that there is no adequate remedy at law for failure by the Pledgor to comply
with the provisions of this Section and that such failure would cause
irreparable injury not adequately compensable in damages, and therefore agrees
that to the greatest extent permitted by law each and every covenant contained
in this Section may be specifically enforced, and to the greatest extent
permitted by law the Pledgor hereby waives and agrees not to assert any
defenses against an action for specific performance of such covenants.
13. Limitation on Duties Regarding Collateral. The Administrative
Agent's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Code or otherwise, shall be to deal with it in the same manner as the
Administrative Agent deals with similar securities and property for its own
account. Neither the Administrative Agent, any Lender nor any of their
respective directors, officers, employees or agents shall be liable for
failure to demand, collect or realize upon any of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of the Pledgor or otherwise.
14. Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral constitute irrevocable powers
coupled with an interest.
15. Severability. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
16. Paragraph Headings. The paragraph headings used in this Pledge
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.
17. No Waiver; Cumulative Remedies. Neither the Administrative Agent
nor any Lender shall by any act (except by a written instrument pursuant to
Section 18 hereof) be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any
of the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or such Lender would otherwise
have on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.
18. Waivers and Amendments; Successors and Assigns; Governing Law.
None of the terms or provisions of this Pledge Agreement may be amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor and Administrative Agent; provided that (i) any provision of this
Pledge Agreement may be waived by the Administrative Agent in a letter or
agreement executed by the Administrative Agent or by telex or facsimile
transmission from the Administrative Agent and (ii) any consent by the
Administrative Agent to any amendment, supplement or modification hereto shall
be subject to approval thereof by the Lenders or Required Lenders, as
applicable, in accordance with Section 13.11 of the Credit Agreement. This
Pledge Agreement shall be binding upon the successors and assigns of the
Pledgor and shall inure to the benefit of itself and the Lenders and their
respective successors and assigns. This Pledge Agreement shall be governed
by, and construed and interpreted in accordance with, the laws of the State of
North Carolina.
19. Regulatory Concerns. Notwithstanding any other provision to the
contrary contained in this Agreement, the ability of the Administrative Agent
to (i) transfer record ownership of the Pledged Interests into the name of the
Administrative Agent or its nominee pursuant to Section 7 hereof, (ii) vote
and give consents, ratifications and waivers with respect to the Pledged
Interests pursuant to Section 7 hereof and (iii) sell the Pledged Interests
pursuant to Section 8 or 9 hereof is subject to the Administrative Agent or
its nominee (a) obtaining, to the extent necessary under applicable laws and
regulations, the prior approval of the FCC, any PUC or any other Governmental
Authority having jurisdiction with respect to any Issuer and its Subsidiaries
and (b) making any additional filings, reports or notifications required with
respect to the exercise by the Administrative Agent of the powers specified in
clauses (i), (ii) and (iii) of this section.
20. Notices. All notices and communications hereunder shall be given
to the addresses and otherwise in accordance with Section 13.1 of the Credit
Agreement.
21. Consents Under the Partnership Agreement. The Pledgor, in its
capacity as general and limited partner of the Issuer, hereby consents to the
Administrative Agent becoming a substituted General Partner under the
Partnership Agreement at (but only at) the notification of the Administrative
Agent, on behalf of the Lenders, in connection with the exercise by the
Administrative Agent and the Lenders of any additional documents delivered by
the Administrative Agent as required by the Partnership Agreement in
connection with the exercise by the Administrative Agent of its remedies under
any Loan Document.
22. Irrevocable Authorization and Instruction to Issuer. The Pledgor
hereby authorizes and instructs each Issuer to comply with any instruction
received by it from the Administrative Agent in writing that (a) states that
an Event of Default has occurred and (b) is otherwise in accordance with the
terms of this Pledge Agreement, without any other or further instructions from
the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected
in so complying.
23. Authority of Administrative Agent. The Pledgor acknowledges that
the rights and responsibilities of the Administrative Agent under this Pledge
Agreement with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, voting
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between the
Administrative Agent and the Lenders, be governed by the Credit Agreement and
by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Administrative Agent and the Pledgor, the
Administrative Agent shall be conclusively presumed to be acting as agent for
itself and the Lenders with full and valid authority so to act or refrain from
acting, and neither the Pledgor nor any Issuer shall be under any obligation,
or entitlement, to make any inquiry respecting such authority.
24. Consent to Jurisdiction. The Pledgor hereby irrevocably consents
to the personal jurisdiction of the state and federal courts located in
Mecklenburg County, North Carolina, in any action, claim or other proceeding
arising out of any dispute in connection with this Pledge Agreement, the other
Loan Documents, any rights or obligations hereunder or thereunder, or the
performance of such rights and obligations. The Pledgor hereby irrevocably
consents to the service of a summons and complaint and other process in any
action, claim or proceeding brought by the Administrative Agent or any Lender
in connection with this Pledge Agreement, the other Loan Documents, any rights
or obligations hereunder or thereunder, or the performance of such rights and
obligations, on behalf of itself or its property, in the manner specified in
Section 20. Nothing in this Section 24 shall affect the right of the
Administrative Agent or any Lender to serve legal process in any other manner
permitted by Applicable Law or affect the right of the Administrative Agent or
any Lender to bring any action or proceeding against the Pledgor or its
properties, individually or collectively, in the courts of any other
jurisdictions.
25. Binding Arbitration; Waiver of Jury Trial.
(a) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE
AGENT, EACH LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS PLEDGE AGREEMENT OR
THEREUNDER, THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR
THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(b) Binding Arbitration. Upon demand of any party, whether made before
or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Pledge
Agreement or any other Loan Documents ("Disputes"), between or among parties
to this Agreement or any other Loan Document shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a
party does not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims concerning any aspect of the past, present or future
relationships arising out or connected with the Loan Documents. Arbitration
shall be conducted under and governed by the Commercial Financial Disputes
Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration
hearings shall be conducted in Charlotte, North Carolina. The expedited
procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be
applicable to claims of less than $500,000. All applicable statutes of
limitation shall apply to any Dispute. A judgment upon the award may be
entered in any court having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed attorneys. The single
arbitrator selected for expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted. Notwithstanding the foregoing, this paragraph
shall not apply to any Hedging Agreement that is a Loan Document.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and
sale, (ii) all rights of self help including peaceful occupation of property
and collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
26. Reorganization. Notwithstanding anything to the contrary
contained in this Agreement, no action required to be taken by the Pledgor or
any Issuer pursuant to the Reorganization shall be deemed to constitute an
Event of Default arising out of a breach of the terms of this Agreement;
provided, that if any such action conflicts with or otherwise results in any
breach of any provision of this Agreement, the Pledgor and the Issuer, or
their successors or assignees, shall execute such amendments hereto and take
all the actions reasonably requested by the Administrative Agent in order that
this Agreement shall remain enforceable in accordance with its terms against
such Persons after the Reorganization.
27. Termination of Pledge Agreement. This Pledge Agreement shall
terminate upon the date when the Obligations have been paid in full and the
Commitments terminated. Upon the termination of this Pledge Agreement, the
Administrative Agent will, at the expense of the Pledgor, deliver any
certificates evidencing the Pledged Interests and any other Collateral held
by it to the Pledgor and execute and deliver to the Pledgor such documents as
the Pledgor shall reasonably request to evidence the termination of the Lien
created hereby on the Collateral.
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to
be executed under seal by its duly authorized officers as of the date first
above written.
[CORPORATE SEAL] COMVIDEO SYSTEMS, INC.
By:
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Name:
------------------------
Title:
-----------------------
ACKNOWLEDGEMENT AND CONSENT
The Issuer referred to in the foregoing Pledge Agreement hereby
acknowledges receipt of a copy thereof and agrees to be bound thereby and to
comply with the terms thereof insofar as such terms are applicable to it. The
Issuer agrees to notify the Administrative Agent promptly in writing of the
occurrence of any of the events described in Section 5(a) of the Pledge
Agreement with respect to its partnership interests.
HOME LINK COMMUNICATIONS OF
PRINCETON, L.P.
By: COMVIDEO SYSTEMS, INC., its
General Partner
By:
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Name:
-------------------------
Title:
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SCHEDULE 1
To Pledge
Agreement
DESCRIPTION OF PLEDGED INTERESTS OF ISSUER
Type of Percentage
Pledgor Interest Ownership
- ------- -------- ----------
SCHEDULE II
To Pledge
Agreement
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UCC INFORMATION
Debtor Filing Jurisdiction
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Exhibit A to Pledge Agreement
-----------------------------
PLEDGE AGREEMENT SUPPLEMENT, dated as of ________________, 19__ (the
"Supplement"), made by [___________________________] and
[______________________] (the "Pledgor"), in favor of First Union National
Bank, a national banking corporation, as Administrative Agent (in such
capacity, the "Administrative Agent"), under the Credit Agreement (as defined
in the Pledge Agreement referred to below) for the ratable benefit of itself
and the Lenders (as so defined).
Reference is hereby made to that Pledge Agreement, dated as of
____________, 1997, made by the Pledgor in favor of the Administrative Agent
(as amended, restated or otherwise modified as of the date hereof, the "Pledge
Agreement"). This Supplement supplements the Pledge Agreement, forms a part
thereof and is subject to the terms thereof. Terms defined in the Pledge
Agreement are used herein as therein defined.
The Pledgor hereby confirm and reaffirm the security interest in the
Collateral granted to the Administrative Agent for the ratable benefit of
itself and the Lenders under the Pledge Agreement, and, as additional
collateral security for the prompt and complete payment when due (whether at
stated maturity, by acceleration or otherwise) of the Obligations and in order
to induce the Lenders to make their Loans under the Credit Agreement, the
Pledgor hereby deliver to the Administrative Agent, for the ratable benefit of
the Administrative Agent and the Lenders, all of the issued and outstanding
partnership interests of [INSERT NAME OF NEW SUBSIDIARY] (the "New Issuer")
listed below, together with all certificates, options, or rights of any nature
whatsoever which may be issued or granted by the New Issuer to the Pledgor
while the Pledge Agreement, as supplemented hereby, is in force (the
"Additional Pledged Interests"; as used in the Pledge Agreement as
supplemented by this Supplement, "Pledged Interests" shall be deemed to
include the Additional Pledged Interests) and hereby grants to the Agent, for
the ratable benefit of itself and the Lenders, a first priority security
interest in the Additional Pledged Interests and all Proceeds thereof.
Each Pledgor hereby represents and warrants that the representations and
warranties contained in paragraph 4 of the Pledge Agreement are true and
correct on the date of this Supplement with references therein to the "Pledged
Interests" to include the Additional Pledged Interests, with references
therein to the "Issuer" to include the New Issuer, and with references to the
"Pledge Agreement" to mean the Pledge Agreement as supplemented by this
Supplement.
The Pledgor shall deliver to the Administrative Agent the Acknowledgement
and Consent attached hereto duly executed by the New Issuer. The Additional
Pledged Interests pledged hereby is as follows and shall be deemed part of
Schedule 1 to the Pledge Agreement:
Percentage
Issuer Type of Interest Ownership
- ------ ---------------- ----------
[New Issuer]
Each Pledgor hereby agrees to deliver to the Administrative Agent such
certificates and other documents and take such other action as shall be
reasonably requested by the Administrative Agent in order to effectuate the
terms hereof and the Pledge Agreement.
The address for notices for the New Issuer is as follows:
______________________________
______________________________
______________________________
Attention:____________________
Telephone No.:________________
Telecopy No.:_________________
[Signature page follows]
IN WITNESS WHEREOF, the undersigned has caused this Supplement to be duly
executed under seal and delivered as of the date first above written.
[CORPORATE SEAL] [PLEDGOR]
By:___________________________
Name:________________________
Title:_________________________
ACKNOWLEDGEMENT AND CONSENT
The undersigned hereby acknowledges receipt of a copy of the foregoing
Supplement and the Pledge Agreement referred to therein (the "Pledge
Agreement"). The undersigned agrees for the ratable benefit of the
Administrative Agent and the Lenders as follows:
The undersigned will be bound by the terms of the Pledge Agreement and
will comply with such terms insofar as such terms are applicable to the
undersigned.
The undersigned will notify the Administrative Agent promptly in writing
of the occurrence of any of the events described in paragraph 5(a) of the
Pledge Agreement with respect to its partnership interests.
[NAME OF NEW ISSUER]
By:___________________________
Name:________________________
Title:_________________________
EXHIBIT B TO
ComVideo PLEDGE AGREEMENT
-------------------------
Authorization Statement
____________ __, 1997
To: Home Link Communications of Princeton, L.P.
________________________________
________________________________
________________________________
You are hereby instructed to register the pledge of the following
uncertificated security as follows:
All general partnership, limited partnership and other ownership
interests of the undersigned in Home Link Communications of Princeton, L.P.
Pledgor Pledgee
- ------- -------
ComVideo Systems, Inc. First Union National Bank,
_____________________ as Administrative Agent
_____________________ 301 South College Street
One First Union Center, TW-19
_____________________ Charlotte, NC 28288-0735
_____________________ Attn: Syndication Agency Services
_____________________
_____________________
Very truly yours,
COMVIDEO SYSTEMS, INC.
By:___________________________
Name:_________________________
Title:________________________
______________________________
EXHIBIT C TO
PLEDGE AGREEMENT
----------------
Transaction Statement
---------------------
___________ __, 1997
To: ComVideo Systems, Inc.
______________________
______________________
______________________
______________________
______________________
______________________
and
First Union National Bank,
as Administrative Agent
301 South College Street
One First Union Center, TW-19
Charlotte, North Carolina 28288-0735
Attention: Syndication Agency Services
This statement is to advise you that a pledge of the following
uncertificated securities has been registered in the name of First Union
National Bank, as Administrative Agent:
1. Uncertificated Security: All partnership and other ownership
interests of ComVideo Systems, Inc. in Home Link Communications of
Princeton, L.P.
2. Registered Owner:
ComVideo Systems, Inc.
___________________________
___________________________
Taxpayer Identification Number: ______________
___________________________
___________________________
___________________________
___________________________
Taxpayer Identification Number: ______________
3. Registered Pledgee:
First Union National Bank,
as Administrative Agent
301 South College Street
One First Union Center, TW-19
Charlotte, North Carolina 28288-0735
Attention: _________________________
Taxpayer Identification Number: 56-0900030
4. There are no adverse claims to which the uncertificated security
is or may be subject known to Home Link Communications of
Princeton, L.P.
5. The pledge was registered on __________ __, 1997.
THIS STATEMENT IS MERELY A RECORD OF THE RIGHTS OF THE ADDRESSEES AS
OF THE TIME OF ITS ISSUANCE. DELIVERY OF THIS STATEMENT, OF ITSELF, CONFERS
NO RIGHTS ON THE RECIPIENT. THIS STATEMENT IS NEITHER A NEGOTIABLE INSTRUMENT
NOR A SECURITY.
Very truly yours,
HOME LINK COMMUNICATIONS OF PRINCETON, L.P.
By: ComVideo Systems, Inc., Its General
Partner
By:________________________________
Name:______________________________
Title:_____________________________
EXHIBIT I-3
to
Credit Agreement dated as of June __, 1997,
by and among
C-TEC Cable Systems, Inc., ComVideo Systems, Inc.
and C-TEC Cable Systems of New York, Inc.
as the Borrowers,
the Lenders party thereto,
and
First Union National Bank,
as Administrative Agent
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (as amended, restated or otherwise modified, the
"Pledge Agreement"), dated as of ___________, 1997 is made by
___________________, a _____________ corporation (the "Pledgor"), in favor of
First Union National Bank, a national banking association ("First Union"), as
Administrative Agent for the ratable benefit of itself and the Lenders
delivered pursuant to the Credit Agreement dated as of June 30, 1997 (as
amended, restated or otherwise modified, the "Credit Agreement") by and among
C-TEC Cable Systems, Inc., (the "Issuer"), ComVideo Systems, Inc. and C-TEC
Cable Systems of New York, Inc. collectively with the Issuer, the
"Borrowers"), the Lenders who are or may become party thereto (the "Lenders")
and First Union National Bank, as Administrative Agent (the "Administrative
Agent").
STATEMENT OF PURPOSE
Pursuant to the terms of the Credit Agreement, the Lenders have agreed
to extend certain credit facilities to the Borrowers in the aggregate amount
of up to the Aggregate Commitment under the Credit Agreement.
The Pledgor is the legal and beneficial owner of the shares of Pledged
Stock (as hereinafter defined) issued by the Issuer.
In connection with the transactions contemplated by the Credit
Agreement, the Lenders have requested, and the Pledgor has agreed to execute
and deliver this Pledge Agreement and the Pledged Stock (in accordance with
the terms hereof) to the Administrative Agent for the ratable benefit of the
itself and the Lenders.
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into and make available Loans
pursuant to the Credit Agreement, the Pledgor hereby agrees with the
Administrative Agent for the ratable benefit of itself and the Lenders as
follows:
1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the Credit Agreement and used herein are so used as so defined, and
the following terms shall have the following meanings:
"Code" means the Uniform Commercial Code from time to time in
effect in the State of North Carolina.
"Collateral" means the Pledged Stock and all Proceeds.
"Pledge Agreement" means this Pledge Agreement, as amended,
restated or otherwise modified.
"Pledged Stock" means the shares of capital stock of the Issuer
listed on Schedule I hereto, together with all stock certificates,
options or rights of any nature whatsoever that may be issued or granted
by the Issuer to the Pledgor while this Pledge Agreement is in effect.
"Proceeds" means all "proceeds" as such term is defined in Section
9-306(1) of the Code on the date hereof and, in any event, shall
include, without limitation, all dividends or other income from the
Pledged Stock, collections thereon, proceeds of sale thereof or
distributions with respect thereto.
2. Pledge and Grant of Security Interest. The Pledgor hereby delivers
to the Administrative Agent, for the ratable benefit of itself and the
Lenders, all the Pledged Stock and hereby grants to Administrative Agent, for
the ratable benefit of itself and the Lenders, a first priority security
interest in the Collateral, as collateral security for the prompt and complete
payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations.
3. Stock Powers. Concurrently with the delivery to the Administrative
Agent of each certificate representing one or more shares of Pledged Stock,
the Pledgor shall deliver an undated stock power covering such certificate,
duly executed in blank by the Pledgor.
4. Representations and Warranties. To induce the Administrative Agent
and Lenders to execute the Credit Agreement and make any Loans and to accept
the security contemplated hereby, the Pledgor hereby represents and warrants
that:
(a) the Pledgor has the corporate power, authority and legal
right to execute and deliver, to perform its obligations under, and to
grant the Lien on the Collateral pursuant to, this Pledge Agreement and
has taken all necessary corporate action to authorize its execution,
delivery and performance of, and grant of the Lien on the Collateral
pursuant to, this Pledge Agreement;
(b) this Pledge Agreement constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the availability of equitable
remedies;
(c) except as contemplated by Section 19 hereof, the execution,
delivery and performance of this Pledge Agreement will not violate any
provision of any Applicable Law or contractual obligation of the Pledgor
and will not result in the creation or imposition of any Lien on any of
the properties or revenues of the Pledgor pursuant to any Applicable Law
or contractual obligation, except as contemplated hereby;
(d) except as contemplated by Section 19 hereof, no consent or
authorization of, filing with, or other act by or in respect of, any
arbitrator or Governmental Authority and no consent of any other Person
(including, without limitation, any stockholder or creditor of the
Pledgor or any Issuer), is required in connection with the execution,
delivery, performance, validity or enforceability of this Pledge
Agreement, except that certain routine notification filings with the
FCC, any applicable PUC and any Governmental Authority that grants CATV
Franchises with respect to the Loan Documents may be required after the
Closing Date;
(e) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of
the Pledgor, threatened by or against the Pledgor or against any of its
properties or revenues with respect to this Pledge Agreement or any of
the transactions contemplated hereby;
(f) the shares of Pledged Stock listed on Schedule I constitute
all the issued and outstanding shares of all classes of the capital
stock of the Issuer;
(g) all the shares of the Pledged Stock have been duly and
validly issued and are fully paid and nonassessable;
(h) the Pledgor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Stock listed on Schedule I,
free of any and all Liens or options in favor of, or claims of, any
other Person, except the Lien created by this Pledge Agreement; and
(i) upon (i) filing of UCC-1 financing statements with the
jurisdictions set forth on Schedule II hereto and (ii) delivery to the
Administrative Agent of the stock certificates evidencing the Pledged
Stock, the Lien granted pursuant to this Pledge Agreement will
constitute a valid, perfected first priority Lien on the Collateral (to
the extent that such a security interest in such collateral can be
perfected under the Code by taking such action (and subject to the
requirements of Section 9-306 of the Code with respect to any proceeds
of Collateral and to the further requirement that additional steps
described in Section 5(a) hereof may be necessary to perfect a security
interest in dividends or other distributions in kind) enforceable as
such against all creditors of the Pledgor and any Persons purporting to
purchase any Collateral from the Pledgor.
5. Certain Covenants. The Pledgor covenants and agrees with the
Administrative Agent for the ratable benefit of the Administrative Agent and
the Lenders that, from and after the date of this Pledge Agreement until the
Obligations are paid in full and the Commitments are terminated:
(a) If the Pledgor shall, as a result of its ownership of the
Pledged Stock, become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing
a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights, whether
in addition to, in substitution of, as a conversion of, or in exchange
for any shares of the Pledged Stock, or otherwise in respect thereof,
the Pledgor shall accept the same as the agent of the Administrative
Agent, hold the same in trust for the Administrative Agent and deliver
the same forthwith to the Administrative Agent in the exact form
received, duly indorsed by the Pledgor to the Administrative Agent, if
required, together with an undated stock power covering such certificate
duly executed in blank by the Pledgor, to be held by the Administrative
Agent, subject to the terms hereof, as additional collateral security
for the Obligations. In addition, any sums paid upon or in respect of
the Pledged Stock upon the liquidation or dissolution of the Issuer
shall be paid over to the Administrative Agent to be held by it
hereunder as additional collateral security for the Obligations, and in
case any distribution of capital shall be made on or in respect of the
Pledged Stock or any property shall be distributed upon or with respect
to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of the Issuer or pursuant to the
reorganization thereof, the property so distributed shall be delivered
to the Administrative Agent to be held by it hereunder as additional
collateral security for the Obligations. If any sums of money or
property so paid or distributed in respect of the Pledged Stock shall be
received by the Pledgor, the Pledgor shall, until such money or property
is paid or delivered to the Administrative Agent, hold such money or
property in trust for the Administrative Agent, segregated from other
funds of the Pledgor, as additional collateral security for the
Obligations.
(b) Without the prior written consent of the Administrative
Agent, the Pledgor will not (i) vote to enable, or take any other action
to permit, the Issuer to issue any stock or other equity securities of
any nature or to issue any other securities convertible into or granting
the right to purchase or exchange for any stock or other equity
securities of any nature of the Issuer, (ii) sell, assign, transfer,
exchange, or otherwise dispose of, or grant any option with respect to,
the Collateral, or (iii) create, incur or permit to exist any Lien or
option in favor of, or any claim of any Person with respect to, any of
the Collateral, or any interest therein, except for the Lien provided
for by this Pledge Agreement. The Pledgor will defend the right, title
and interest of the Administrative Agent in and to the Collateral
against the claims and demands of all Persons whomsoever.
(c) At any time and from time to time, upon the written request
of the Administrative Agent, and at the sole expense of the Pledgor, the
Pledgor will promptly and duly execute and deliver such further
instruments and documents and take such further actions as the
Administrative Agent may reasonably request for the purposes of
obtaining or preserving the full benefits of this Pledge Agreement and
of the rights and powers herein granted provided, that unless an Event
of Default shall have occurred and be continuing, the Pledgor shall not
be obligated to make any filing with, or to seek or obtain any consent
or authorization of, any Governmental Authority of the nature described
in Section 19 hereof. If any amount payable under or in connection with
any of the Collateral shall be or become evidenced by any promissory
note, other instrument or chattel paper, such note, instrument or
chattel paper shall be immediately delivered to the Administrative
Agent, duly endorsed in a manner satisfactory to the Administrative
Agent, to be held as Collateral pursuant to this Pledge Agreement.
(d) The Pledgor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities with
respect to, or resulting from any delay in paying, any and all stamp,
excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any
of the transactions contemplated by this Pledge Agreement.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall
have occurred and be continuing and the Administrative Agent shall have given
notice to the Pledgor of the Administrative's Agent intent to exercise its
rights pursuant to Section 7 below, the Pledgor shall be permitted to receive
all dividends or other payments or distributions made upon or with respect to
the Pledged Stock in cash paid in accordance with the terms of the Credit
Agreement in respect of the Pledged Stock and to exercise all voting and
corporate rights with respect to the Pledged Stock; provided, that no vote
shall be cast or corporate right exercised or other action taken which, in the
Administrative Agent's judgment, exercised in a reasonable manner, would
impair the Collateral or which would be inconsistent with or result in any
violation of any provision of the Credit Agreement, the Notes, any other Loan
Documents or this Pledge Agreement.
7. Rights of the Administrative Agent.
(a) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights
to the Pledgor, (i) the Administrative Agent shall have the right to receive
any and all cash dividends paid in respect of the Pledged Stock and make
application thereof to the Obligations in the order set forth in the Credit
Agreement and (ii) all shares of the Pledged Stock shall be registered in the
name of the Administrative Agent or its nominee, and the Administrative Agent
or its nominee may thereafter exercise, in a commercially reasonable manner
but otherwise in its discretion, (A) all voting, corporate and other rights
pertaining to such shares of the Pledged Stock at any meeting of shareholders
of the Issuer or otherwise and (B) any and all rights of conversion, exchange,
subscription and any other rights, privileges or options pertaining to such
shares of the Pledged Stock (including, without limitation, the right to
exchange any and all of the Pledged Stock upon the merger, consolidation,
reorganization, recapitalization or other fundamental change in the corporate
structure of the Issuer, or upon the exercise by the Pledgor or the
Administrative Agent of any right, privilege or option pertaining to such
shares of the Pledged Stock, and in connection therewith, the right to deposit
and deliver any and all of the Pledged Stock with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms and
conditions as it may determine), all without liability except to account for
property actually received by it, but the Administrative Agent shall have no
duty to the Pledgor to exercise any such right, privilege or option and shall
not be responsible for any failure to do so or delay in so doing.
(b) The rights of the Administrative Agent and the Lenders hereunder
shall not be conditioned or contingent upon the pursuit by the Administrative
Agent or any Lender of any right or remedy against the Borrower or against any
other Person which may be or become liable in respect of all or any part of
the Obligations or against any collateral security therefor, guarantee
therefor or right of offset with respect thereto. Neither the Administrative
Agent nor any Lender shall be liable for any failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so,
nor shall the Administrative Agent be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.
8. Remedies. If an Event of Default shall occur and be continuing,
with the consent of the Required Lenders, the Administrative Agent may, and
upon the request of the Required Lenders, the Administrative Agent shall,
exercise on behalf of itself and the Lenders, all rights and remedies granted
in this Pledge Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, and in addition thereto, all rights
and remedies of a secured party under the Code. Without limiting the
generality of the foregoing with regard to the scope of the Administrative
Agent's remedies, the Administrative Agent, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind
(except any notice required by law referred to below) to or upon the Pledgor,
the Issuer or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of the Administrative Agent or any Lender
or elsewhere upon such terms and conditions as it may deem advisable and at
such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. The Administrative Agent or any Lender
shall have the right upon any such public sale or sales, and, to the extent
permitted by law, upon any such private sale or sales, to purchase the whole
or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgor, which right or equity is hereby waived or released.
The Administrative Agent shall apply any Proceeds from time to time held by it
and the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of
every kind incurred in respect thereof or incidental to the care or
safekeeping of any of the Collateral or in any way relating to the Collateral
or the rights of the Administrative Agent and the Lenders hereunder,
including, without limitation, reasonable attorneys' fees and disbursements of
counsel thereto, to the payment in whole or in part of the Obligations, in the
order set forth in the Credit Agreement, and only after such application and
after the payment by the Administrative Agent of any other amount required by
any provision of law, including, without limitation, Section 9-504(1)(c) of
the Code, need the Administrative Agent account for the surplus, if any, to
the Pledgor. To the extent permitted by applicable law, the Pledgor waives
all claims, damages and demands it may acquire against the Administrative
Agent or any Lender arising out of the exercise by them of any rights
hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition.
The Pledgor further waives and agrees not to assert any rights or privileges
which it may acquire under Section 9-112 of the Code.
9. Private Sales.
(a) The Pledgor recognizes that the Administrative Agent may be unable
to effect a public sale of any or all the Pledged Stock, by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers which will be obliged to agree,
among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges and agrees that any such private sale may result in
prices and other terms less favorable than if such sale were a public sale
and, notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of
the Pledged Stock for the period of time necessary to permit the Issuer to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if the Issuer would agree to do so.
(b) The Pledgor further agrees to use its best efforts to do or cause to
be done all such other acts as may be necessary to make such sale or sales of
all or any portion of the Pledged Stock pursuant to this Section 9 valid and
binding and in compliance with any and all other Applicable Laws. The Pledgor
further agrees that a breach of any of the covenants contained in this Section
9 will cause irreparable injury to the Administrative Agent and the Lenders not
compensable in damages, that the Administrative Agent and the Lenders have no
adequate remedy at law in respect of such breach and, as a consequence, that
to the greatest extent permitted by law each and every covenant contained in
this Section 9 shall be specifically enforceable against the Pledgor, and to
the greatest extent permitted by law the Pledgor hereby waives and agrees not
to assert any defenses against an action for specific performance of such
covenants except for a defense that no Event of Default has occurred under the
Credit Agreement.
10. No Subrogation. Notwithstanding any payment or payments made by
the Pledgor hereunder, or any setoff or application of funds of the Pledgor by
the Administrative Agent or Lender, or the receipt of any amounts by the
Administrative Agent or any Lender with respect to any of the Collateral, the
Pledgor shall not be entitled to be subrogated to any of the rights of the
Administrative Agent or any Lender against the Borrower or against any other
collateral security held by the Administrative Agent or any Lender for the
payment of the Obligations, nor shall the Pledgor seek any reimbursement from
the Borrower in respect of payments made by the Pledgor in connection with the
Collateral, or amounts realized by the Administrative Agent or any Lender in
connection with the Collateral, until all amounts owing to the Agents and
Lenders on account of the Obligations are paid in full and the Commitments are
terminated. If any amount shall be paid to the Pledgor on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full, such amount shall be held by the Pledgor in trust for the
Administrative Agent, segregated from other funds of the Pledgor, and shall,
forthwith upon receipt by the Pledgor, be turned over to the Administrative
Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor
to the Administrative Agent, if required) to be applied against the
Obligations, whether matured or unmatured, in such order as set forth in the
Credit Agreement.
11. Amendments, etc. With Respect to the Obligations. The Pledgor
shall remain obligated hereunder, and the Collateral shall remain subject to
the Lien granted hereby, notwithstanding that, without any reservation of
rights against the Pledgor, and without notice to or further assent by the
Pledgor, any demand for payment of any of the Obligations made by the
Administrative Agent or any Lender may be rescinded by the Administrative
Agent or such Lender, and any of the Obligations continued, and the
Obligations, or the liability of the Borrower or any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified accelerated, compromised, waived,
surrendered, or released by the Administrative Agent or any Lender, and the
Credit Agreement, the Notes, any other Loan Documents and any other documents
executed and delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or part, as the Lenders (or the Required
Lenders, as the case may be) may deem advisable from time to time, and any
guarantee, right of offset or other collateral security at any time held by the
Administrative Agent or any Lender for the payment of the Obligations may be
sold, exchanged, waived, surrendered or released. Neither the Administrative
Agent nor any Lender shall have any obligation to protect, secure, perfect or
insure any other Lien at any time held by it as security for the Obligations
or any property subject thereto. The Pledgor waives any and all notice of the
creation, renewal, extension or accrual of any of the Obligations and notice
of or proof of reliance by the Administrative Agent or any Lender upon this
Pledge Agreement; the Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred in reliance upon this
Pledge Agreement; and all dealings between the Borrower and the Pledgor, on
the one hand, and the Administrative Agent and the Lenders, on the other, shall
likewise be conclusively presumed to have been had or consummated in reliance
upon this Pledge Agreement. The Pledgor waives diligence, presentment,
protest, demand for payment and notice of default or nonpayment to or upon the
Borrower or the Pledgor with respect to the Obligations.
12. Regulatory Approval. The Pledgor will, at its expense, promptly
execute and deliver, or cause the execution and delivery of, all applications,
certificates, instruments, registration statements and all other documents and
papers the Administrative Agent may, to the extent commercially reasonable,
request or as may be required by law in connection with the obtaining of any
consent, approval, registration, qualification or authorization of any
Governmental Authority or of any other Person necessary or appropriate for the
effective exercise of any rights under this Pledge Agreement, provided, that
unless an Event of Default shall have occurred and be continuing, the Pledgor
shall not be obligated to make any filing with, or to seek or obtain any
consent or authorization of, any Governmental Authority of the nature
described in Section 19 hereof. Without limiting the generality of the
foregoing, if an Event of Default shall have occurred and be continuing, the
Pledgor shall take any action which the Administrative Agent may, to the
extent commercially reasonable, request in order to transfer and assign to the
Administrative Agent, or to such one or more third parties as the
Administrative Agent may designate, or to a combination of the foregoing, each
FCC License, PUC Authorization and CATV Franchise. To enforce the provisions
of this Section, the Administrative Agent is, at any time when an Event of
Default has occurred and is continuing, empowered to request the appointment
of a receiver from any court of competent jurisdiction. Such receiver shall
be instructed to seek from the applicable Governmental Authority an
involuntary transfer of control of each such FCC License, PUC Authorization
and CATV Franchise for the purpose of seeking a bona fide purchaser to whom
control will ultimately be transferred. The Pledgor hereby agrees, so long as
such Event of Default is continuing, to authorize such an involuntary transfer
of control upon the request of the receiver so appointed and, if the Pledgor
shall refuse to authorize the transfer, its approval may be required by the
court. Upon the occurrence and continuance of an Event of Default, the
Pledgor shall further use its best efforts to assist in obtaining approval of
the applicable Governmental Authority, if required, for any action or
transactions contemplated by this Pledge Agreement including, without
limitation, the preparation, execution and filing with the applicable
Governmental Authority of the assignor's or transferor's portion of any
application or applications for consent to the assignment of any FCC License,
PUC Authorization or CATV Franchise or transfer of control necessary or
appropriate under the rules and regulations of the applicable Governmental
Authority for the approval of the transfer or assignment of any portion of the
Collateral, together with any FCC License, PUC Authorization and CATV
Franchise. The Pledgor acknowledges that the assignment or transfer of each
FCC License, PUC Authorization and CATV Franchise is integral to the
Administrative Agent's and Lenders' realization of the value of the Collateral,
that there is no adequate remedy at law for failure by the Pledgor to comply
with the provisions of this Section and that such failure would cause
irreparable injury not adequately compensable in damages, and therefore agrees
that to the greatest extent permitted by law each and every covenant contained
in this Section may be specifically enforced, and to the greatest extent
permitted by law the Pledgor hereby waives and agrees not to assert any
defenses against an action for specific performance of such covenants.
13. Limitation on Duties Regarding Collateral. The Administrative
Agent's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Code or otherwise, shall be to deal with it in the same manner as the
Administrative Agent deals with similar securities and property for its own
account. Neither the Administrative Agent, any Lender nor any of their
respective directors, officers, employees or agents shall be liable for
failure to demand, collect or realize upon any of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of the Pledgor or otherwise.
14. Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral constitute irrevocable powers
coupled with an interest.
15. Severability. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
16. Paragraph Headings. The paragraph headings used in this Pledge
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.
17. No Waiver; Cumulative Remedies. Neither the Administrative Agent
nor any Lender shall by any act (except by a written instrument pursuant to
Section 18 hereof) be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any
of the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or such Lender would otherwise
have on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.
18. Waivers and Amendments; Successors and Assigns; Governing Law.
None of the terms or provisions of this Pledge Agreement may be amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor and Administrative Agent; provided that (i) any provision of this
Pledge Agreement may be waived by the Administrative Agent in a letter or
agreement executed by the Administrative Agent or by telex or facsimile
transmission from the Administrative Agent and (ii) any consent by the
Administrative Agent to any amendment, supplement or modification hereto shall
be subject to approval thereof by the Lenders or Required Lenders, as
applicable, in accordance with Section 13.11 of the Credit Agreement. This
Pledge Agreement shall be binding upon the successors and assigns of the
Pledgor and shall inure to the benefit of the Administrative Agent and the
Lenders and their respective successors and assigns. This Pledge Agreement
shall be governed by, and construed and interpreted in accordance with, the
laws of the State of North Carolina.
19. Regulatory Concerns. Notwithstanding any other provision to the
contrary contained in this Agreement, the ability of the Administrative Agent
to (i) transfer record ownership of the
Pledged Stock into the name of the Administrative Agent or its nominee
pursuant to Section 7 hereof, (ii) vote and give consents, ratifications and
waivers with respect to the Pledged Stock pursuant to Section 7 hereof and
(iii) sell the Pledged Stock pursuant to Section 8 or 9 hereof is subject to
the Administrative Agent or its nominee (a) obtaining, to the extent necessary
under applicable laws and regulations, the prior approval of the FCC, any PUC
or any other Governmental Authority having jurisdiction with respect to any
Issuer and its Subsidiaries and (b) making any additional filings, reports or
notifications required with respect to the exercise by the Administrative
Agent of the powers specified in clauses (i), (ii) and (iii) of this section.
20. Notices. All notices and communications hereunder shall be given
to the addresses and otherwise in accordance with Section 13.1 of the Credit
Agreement.
21. Irrevocable Authorization and Instruction to Issuer. The Pledgor
hereby authorizes and instructs the Issuer to comply with any instruction
received by it from the Administrative Agent in writing that (a) states that
an Event of Default has occurred and (b) is otherwise in accordance with the
terms of this Pledge Agreement, without any other or further instructions from
the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected
in so complying.
22. Authority of Administrative Agent. The Pledgor acknowledges that
the rights and responsibilities of the Administrative Agent under this Pledge
Agreement with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, voting
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between the
Administrative Agent and the Lenders, be governed by the Credit Agreement and
by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Administrative Agent and the Pledgor, the
Administrative Agent shall be conclusively presumed to be acting as agent for
itself and the Lenders with full and valid authority so to act or refrain from
acting, and neither the Pledgor nor any Issuer shall be under any obligation,
or entitlement, to make any inquiry respecting such authority.
23. Consent to Jurisdiction. The Pledgor hereby irrevocably consents
to the personal jurisdiction of the state and federal courts located in
Mecklenburg County, North Carolina, in any action, claim or other proceeding
arising out of any dispute in connection with this Pledge Agreement, the other
Loan Documents, any rights or obligations hereunder or thereunder, or the
performance of such rights and obligations. The Pledgor hereby irrevocably
consents to the service of a summons and complaint and other process in any
action, claim or proceeding brought by the Administrative Agent or any Lender
in connection with this Pledge Agreement, the other Loan Documents, any rights
or obligations hereunder or thereunder, or the performance of such rights and
obligations, on behalf of itself or its property, in the manner specified in
Section 20. Nothing in this Section 23 shall affect the right of the
Administrative Agent or any Lender to serve legal process in any other manner
permitted by Applicable Law or affect the right of the Administrative Agent or
any Lender to bring any action or proceeding against the Pledgors or their
properties, individually or collectively, in the courts of any other
jurisdictions.
24. Binding Arbitration; Waiver of Jury Trial.
(a) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE
AGENT, EACH LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS PLEDGE AGREEMENT OR
THEREUNDER, THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR
THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(b) Binding Arbitration. Upon demand of any party, whether made before
or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Pledge
Agreement or any other Loan Documents ("Disputes"), between or among parties
to this Agreement or any other Loan Document shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a
party does not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims concerning any aspect of the past, present or future
relationships arising out or connected with the Loan Documents. Arbitration
shall be conducted under and governed by the Commercial Financial Disputes
Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration
hearings shall be conducted in Charlotte, North Carolina. The expedited
procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be
applicable to claims of less than $500,000. All applicable statutes of
limitation shall apply to any Dispute. A judgment upon the award may be
entered in any court having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed attorneys. The single
arbitrator selected for expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted. Notwithstanding the foregoing, this paragraph
shall not apply to any Hedging Agreement that is a Loan Document.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and
sale, (ii) all rights of self help including peaceful occupation of property
and collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
25. Reorganization. Notwithstanding anything to the contrary contained
in this Agreement, no action required to be taken by the Pledgor or the Issuer
pursuant to the Reorganization shall be deemed to constitute an Event of
Default arising out of a breach of the terms of this Agreement; provided, that
if any such action conflicts with or otherwise results in any breach of any
provision of this Agreement, the Pledgor and the Issuer, or their successors
or assignees shall execute such amendments thereto and take all the actions
reasonably requested by the Administrative Agent in order that this Agreement
shall remain enforceable in accordance with its terms against such Persons
after the Reorganization.
26. Termination of Pledge Agreement. This Pledge Agreement shall
terminate upon the date when the obligations have been paid in full and the
Commitments terminated. Upon the termination of this Pledge Agreement, the
Administrative Agent will, at the expense of the Pledgor, deliver any
certificates evidencing the Pledged Stock and any other Collateral held by it
to the Pledgor and execute and deliver to the Pledgor such documents as the
Pledgor shall reasonably request to evidence the termination of the Lien
created hereby on the Collateral.
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to
be executed under seal by its duly authorized officers as of the date first
above written.
[CORPORATE SEAL] [INSERT PLEDGOR]
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
ACKNOWLEDGEMENT AND CONSENT
The Issuer referred to in the foregoing Pledge Agreement hereby
acknowledges receipt of a copy thereof and agrees to be bound thereby and to
comply with the terms thereof insofar as such terms are applicable to it. The
Issuer agrees to notify the Administrative Agent promptly in writing of the
occurrence of any of the events described in Section 5(a) of the Pledge
Agreement with respect to its shares.
[CORPORATE SEAL] C-TEC CABLE SYSTEMS, INC.
ATTEST: By:
------------------------------------
Name:
-------------------------------
- ------------------------ Title:
Secretary ------------------------------
- --------------
SCHEDULE 1
To Pledge
Agreement
DESCRIPTION OF PLEDGED STOCK
Class of Stock No. of
Issuer Stock Certificate No. Shares
- ------ -------- --------------- ------
SCHEDULE II
To Pledge
Agreement
UCC INFORMATION
Debtor Filing Jurisdiction
------ -------------------
EXHIBIT 21.1
Subsidiaries of RCN Corporation
Jurisdiction of
Incorporation
Subsidiary or Organization
- ---------- ---------------
RCN Telecom Services of Pennsylvania, Inc. PA
RCN Long Distance Company PA
RCN International Holdings, Inc. DE
RCN Telecom Services, Inc. DE
RCN Telecom Services of California, Inc. CA
RCN Telecom Services of Delaware, Inc. DE
RCN Telecom Services of Illinois, Inc. IL
RCN Telecom Services of Massachusetts, Inc. MA
RCN Telecom Services of Maryland, Inc. MD
RCN Telecom Services of Michigan, Inc. MI
RCN Telecom Services of New York, Inc. NY
FNY Holding Company, Inc. NY
Freedom New York L.L.C. DE
RCN Financial Services, Inc. DE
RCN Corporate Services, Inc. NJ
RCN Telecom Services of New Jersey, Inc. NJ
RCN Telecom Services of Virginia, Inc. VA
RCN Telecom Services of Philadelphia, Inc. PA
RCN Telecom Services of Washington, Inc. WA
RCN Operating Services, Inc. NJ
RCN-BecoCom, L.L.C. MA
RCN Telecom Services of Washington, D.C., Inc. DC
C-TEC Services, Inc. PA
C-TEC Financial Services, Inc. NV
C-TEC Cable Systems, Inc. DE
C-TEC Cable Systems of New York, Inc. PA
Com Video Systems, Inc. PA
C-TEC Cable System Services, Inc. PA
C-TEC Fiber Systems of New Jersey, Inc. NJ
Fiberfone of New York, Inc. NY
Fiberfone of Pennsylvania, Inc. PA
Fiberfone of New Jersey, Inc. NJ
Fiberfone of Michigan, Inc. MI
TEC Air, Inc. DE
/TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 40,130 61,843
<SECURITIES> 13,007 46,831
<RECEIVABLES> 13,068 11,274
<ALLOWANCES> 1,736 861
<INVENTORY> 1,117 1,140
<CURRENT-ASSETS> 86,901 142,612
<PP&E> 227,635 220,357
<DEPRECIATION> 89,948 84,529
<TOTAL-ASSETS> 645,248 628,085
<CURRENT-LIABILITIES> 56,605 57,292
<BONDS> 131,250 131,250
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 362,448 390,764
<TOTAL-LIABILITY-AND-EQUITY> 645,248 628,085
<SALES> 0 0
<TOTAL-REVENUES> 29,677 104,910
<CGS> 0 0
<TOTAL-COSTS> 36,925 114,597
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 531 1,788
<INTEREST-EXPENSE> 3,431 16,046
<INCOME-PRETAX> (16,348) (4,068)
<INCOME-TAX> (4,800) 979
<INCOME-CONTINUING> (11,444) (5,989)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,444) (5,989)
<EPS-PRIMARY> (.42) (.22)
<EPS-DILUTED> (.42) (.22)
</TABLE>
